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China's hottest phone? Here's the upstart chasing Xiaomi

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Xiaomi became one of the world's most valuable startups by selling cheap, feature-packed smartphones to its home market of China.

[BEIJING] Xiaomi became one of the world's most valuable startups by selling cheap, feature-packed smartphones to its home market of China. OnePlus is trying to match that success by doing the opposite.

Shenzhen, China-based OnePlus sold more than a million units of its debut device, the One, last year by favouring overseas markets such as US, the UK and India. Almost two-thirds of those phones were shipped abroad, where a US$299 price tag, an invite-only sales system and an easy-to-pronounce English name fostered early buzz. The company expects to more than triple sales this year.

"We are going to be a lot more aggressive in our international expansion," Pete Lau, OnePlus co-founder and chief executive officer, said in an interview. "Some companies look at overall sales volume. We look more at word of mouth." OnePlus's early push abroad shows the growing confidence Chinese smartphone makers, including Lenovo Group and Huawei Technologies, have in the broad appeal of their devices. Xiaomi and now OnePlus are showing they can co-opt supply chains set up by giants such as Apple Inc and Samsung Electronics and sacrifice profit margins to flood markets with affordable, attractive phones.

Having a brand name that's accessible in Western countries helps too.

"OnePlus has been catering to the overseas market from the beginning rather than bolting it on later as an afterthought," said Bryan Ma, a Singapore-based analyst at research firm International Data Corp. "They are arguably one of the few Chinese vendors that isn't often perceived as being Chinese."

If OnePlus triples sales to more than three million in its first full year of sales, it would be the fastest growth by a local hardware maker since Xiaomi shipped more than seven million devices 2012.

Shares of rival vendors fell, with Lenovo tumbling 2.9 per cent to close at HK$11.30 in Hong Kong trading. ZTE dropped 0.9 per cent and Coolpad Group lost 0.7 per cent, compared with a 0.75 per cent decline in the benchmark Hang Seng Index.

Geography aside, OnePlus hews closely to the formula used by Xiaomi, which IDC said shipped the most smartphones in China last year. Both companies focus on online, direct-to-consumer sales and deliver affordable hardware with premium specifications.

The OnePlus One features a Qualcomm Snapdragon 801 processor and a 5.5-inch screen. The device costs about half of the US$595 a US visitor to Wal-Mart Stores's online shop would pay for an unlocked Samsung Galaxy S5 with similar hardware. It runs on CyanogenMod, a version of Google Inc's Android operating system adapted by Cyanogen Inc.

Such features convinced Naveen Rattu, an engineering student in Chandigarh, India, to trade his Samsung Galaxy S Duos for a One.

"I heard about it from a friend and then I searched the Internet extensively," Mr Rattu, 22, said. "I had to choose a mid-range Android phone providing me the best specs. The camera and Cyanogen are its pros." OnePlus devices are made by Guangdong Oppo Electronics, the Dongguan, China-based maker of smartphones and Blu-ray players where Mr Lau and co-founder Carl Pei worked before striking out on their own.

The pair set up OnePlus in December 2013 with three former colleagues and investments from Oppo shareholders. While Lau declined to provide details on the company's backers and valuation, he said OnePlus was not a spinoff and had received no direct funding from Oppo.

OnePlus started out by selling only to people who had received an invitation, allowing it to control production while creating exclusivity.

"It's all about scaling," Pei said at OnePlus's Shenzhen headquarters. "Every piece of excess inventory puts us at a loss." You get invites by participating in contests or promotions or from friends who bought one first. An accompanying social- media campaign garnered more than 1.1 million likes on Facebook.

The company originally expected to ship about 50,000 units in the first year, Mr Lau said in the Feb 16 interview. With plans to sell as many as 5 million devices this year, OnePlus last month began holding weekly open sales.

"If we only sell 3 million devices but keep the word of mouth, then we will have had a successful year," Mr Lau said. "We have situations where we slow down the sales to let other aspects catch up, like service." Three million is well short of the 100 million devices Xiaomi expects to sell this year. The Beijing-based company focused on its home market for almost three years before pushing into India, Indonesia, Malaysia, the Philippines and Singapore, among others.

OnePlus must convince people it's got more to say than "Me, too," said Sandy Shen, a Shanghai-based analyst with Gartner Inc. China's smartphone market is crowded with hundreds of competitors including Coolpad, Meizu Technology Corp and ZTE.

"They may be able to get some fame but it may not be long- lived," Shen said. "It is one of the followers of Xiaomi, trying to emulate its design and marketing strategy. I don't see anything special." Joy Han, a spokeswoman for Xiaomi, declined to comment on OnePlus. Xiaomi announced in December that it was valued at US$45 billion, beating Uber Technologies' US$40 billion.

OnePlus's overseas focus will be an advantage as an increasing number of companies fight for a share of China's maturing market, said Jessica Kwee, a Singapore-based analyst at researcher Canalys. The resulting consolidation "will be particularly hard on smaller vendors," Mr Kwee said.

"OnePlus has a chance to survive, if they can get their international strategy right," she said.

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