Xiaomi's buying spree gives Apple, Samsung new reasons to sweat

Xiaomi Corp. zoomed past Apple Inc. (AAPL) and Samsung Electronics Co. in China smartphone sales just three years after releasing its first model. Founder Lei Jun is now on a buying spree to take that momentum beyond handsets.

Since November, the maker of Mi devices has participated in more than $600 million of investments in three companies and announced it bought into dozens of startups making everything from an air purifier to low-energy light bulbs.

Xiaomi, which doubled revenue to $12 billion last year, could be just getting warmed up. Lei wants to be No. 1 in smartphone sales and has committed to spending $1 billion on content as he seeks to build a brand bigger than Apple and Samsung (005930) within a decade. Much like with Apple's success, the idea behind his investments is to assemble enough products and services that customers will be glued to Xiaomi.

"Xiaomi is expanding into the smart home and following the lead of Apple, Samsung and others," said Neil Mawston, executive director of researcher Strategy Analytics. "We expect Xiaomi to build an ecosystem of Mi devices and apps for the home, office and car."

Lei's push has credibility because of Xiaomi's roots in software. The Beijing-based company only started selling phones after developing an adaptation of Google Inc.'s Android software called MIUI, which now has more than 85 million users worldwide. Xiaomi is the world's fastest-growing smartphone maker and ranks No. 3 globally.

Xiaomi has added applications -including data backup, music and a photo gallery -- and offered themes that allow devices to be customized. The company followed with a popular instant-messaging app, cloud services and software to explore restaurants, purchase movie tickets, track packages and make medical appointments.

"We have made significant progress, investing in more than 20 hardware companies making smart products," Lei said in a letter to employees this month. "We believe that this ecosystem we are building will be Xiaomi's most important competitive advantage in our rapid growth ahead."

Carolyn Wu, a Beijing-based spokeswoman for Apple, and Jini Park, a Seoul-based spokeswoman for Samsung, declined to comment on competition with Xiaomi.

"Most other Android players are not software companies; they have hardware DNA," said James Roy, a Shanghai-based analyst at China Market Research Group. "Xiaomi seems to be different, and they are investing in it." Xiaomi's extra services and its low-cost model of selling from its website helped the company flourish in China, where Google is largely absent, said Neil Shah, a Mumbai-based research director at Counterpoint Research. Competing overseas will be harder for Xiaomi, which started sales in India and Singapore, and it may take years to catch Apple and Google.

"Xiaomi has done a fair bit to differentiate itself from an average Android player and position itself more effectively in the minds of consumers," Shah said. "But Xiaomi has its work cut out to develop the scale of applications, software and services to fight the big giants."

Xiaomi's rapid growth, with smartphone sales more than tripling to 61.1 million units last year, underpins a valuation that surged to $45 billion. The company in December raised $1.1 billion from investors, including Yuri Milner, who said Xiaomi's valuation could reach $100 billion. After conquering its home market with smartphones and adding Web-connected TVs and set-top boxes, Xiaomi knows that to make its system stronger it can't develop all the pieces itself. To further expand, the company is taking stakes in established companies and spending on 25 startups.