Apple vs. Xiaomi: Luxury or ‘Low cost’?

The leading role in the global telecommunications markets is occupied by two leader companies in their market segments: the American Apple Inc. and the Chinese Xiaomi. In this earnings season, both firms have Earnings per Share (EPS) higher than expected by the market consensus collected by Bloomberg. In the case of Apple, EPS has been USD 7.42 against USD 6.60 expected.

In December, Xiaomi became the most valuable company in the «startup» industry with USD 46 billion. To maintain this market position, Xiaomi is exploiting its competitive advantage of making useful mobile devices at low prices. It allows Xiaomi to sell devices at prices ranged from USD 180 to USD 200. (For example, the 5.7-inch Xiaomi Note has debuted on January, 27^th for 2,299 yuan).

The trend is certainly similar in the “smartphones” market with manufacturers like Coolpad Group or Live. Especially important is the case of Samsung, whose profit in its electronics subsidiary has fallen by 62% over the previous year. These companies prefer to sacrifice margins to maintain, at least, its market share.

However, Apple is exactly following the opposite trend: it is selling more handsets with increasing prices. In this sense, Apple has acquired the consideration (by the point of view of Microeconomics) of a luxury good whose demand curve is increasing relative to the price (these goods are called «Veblen goods» where the «income effect» dominates the «substitution effect» in absolute value).

According to a report by ABI Research and reviewed by The Wall Street Journal, the “price gap” between Apple and Xiaomi terminals has widened in the last four quarters. As the perception of exclusivity and value of Apple extends, the difference between Apple and the rest of “smartphones” is increasing. As the Hurun report reflects, Apple is the favorite gift ahead of Chinese luxury brands like Louis Vuitton, Gucci and Chanel.