Jul 19, 2012 · 3 minutes

After I published my piece about China's hot smartphone startup Xiaomi a couple of days ago, influential China Internet analyst Bill Bishop tweeted that if, as expected, Apple drops the price on its iPhone 4S in China, Xiaomi could die.

I emailed Bishop to tell him I would write a post in response to that, and he elaborated on his point.

Xiaomi is doing great marketing, but if money were no object, how many Xiaomi buyers would pick their phone over an iPhone 4? So if iPhone 5 really does look different from [iPhone] 4/4s, and Apple decides to take the iPod pricing approach, a RMB2,000 or less iPhone for China could be on the cards, and would likely hoover up a huge amount of the Xiaomi and other similar smartphone market.
Actually, the same thought had crossed my mind, and, during my interview with him on Tuesday, I asked CEO Bin Lin how a more competitively priced iPhone 4S would affect Xiaomi. The current iPhone 4S is $470 more expensive than Xiaomi's MI-ONE.

Lin responded by pointing out that Xiaomi's key difference with Apple is that it is "super open", so users can customize their devices however they like, even to the point of installing different versions of Android's operating system.

More importantly, though, dropping the price on the iPhone 4S at the time of the iPhone 5 release would send a message to consumers that the 4S is outdated, Lin said. For status-conscious Chinese consumers who are concerned about being up-to-date, that's a big deal.

Lin also pointed to Xioami's loyal fans. The brand has a fan club of more than 2 million people, Lin said. Its official account on Sina Weibo counts 1.3 million followers. As well as being a powerful marketing channel, those fans are active in determining Xiaomi's product future. For example, they vote on software features they want removed from the phone, and, Lin claims, Xiaomi responds.

Robin Chan, an early investor in Xiaomi who was also an angel investor in Twitter, Foursquare, and Square, told me that the brand's fans are an important part of its success. "They're selling an aspirational lifestyle platform that resonates with China's youth," Chan said of Xiaomi. "Everybody else is selling cheap phones with injected Android code. It's really hard to build a community, a consumer brand."

Of course, Apple has been known to inspire a few fans in its time, too. But then Xiaomi has another potential advantage in China: nationalism.

A few years back, when Google's search operations were relevant in China, Baidu famously ran an online video ad that played up the "Us vs Them" sentiment. In the ad, a clueless white guy is at a Ming Dynasty wedding with a Chinese girl. He mangles his Chinese, only to be corrected by a famous poet from the era. The white guy gets humiliated, the Chinese poet gets the girl, and everyone celebrates the downfall of the ignorant foreigner.

While that was a crass example of the role of nationalism in Chinese consumer choices, it does show how Xiaomi could benefit from being a homegrown brand.

"In the China internet sector, China wants to see their own homegrown company become successful," Jenny Lee, the managing director of venture capital firm GGV's Shanghai office, told me. "Domestically supported and grown companies will still get mindshare of internet users." If Xiaomi can strike the right nationalistic tone in China, Lee said, it will be well placed to succeed, simply because of the sheer size of the market.

Of course, a lot remains to be seen. Xiaomi has already sold more than 3 million MI-ONE phones, which has been out only 10 months. But that figure pales in comparison to the iPhone, which a Deutsche Bank analysts estimates will see 25 million sales this year, growing to 35 million next year.

It is fathomable that, in a country of 1.3 billion people, there is room for two or more big players in the smartphone market. But it's early days yet. At the very least, what we do know is that there lies a fascinating battle ahead.