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These 2 Companies Should Fear Xiaomi

Xiaomi is primarily known as one of China's biggest smartphone makers. It once disrupted the smartphone market by selling premium hardware at entry-level prices, relying on online sales to avoid brick-and-mortar markups, and using word-of-mouth and social media marketing campaigns instead of traditional ads.

Image source: Xiaomi.

However, Xiaomi's smartphone sales rose just 5% last year, compared to 135% growth in 2014. The company blames that slowdown on a saturated Chinese market packed with rivals which are now mimicking Xiaomi's low-margin tactics. In response, Xiaomi has started diversifying its portfolio away from smartphones, which generate over 90% of its revenue.

But as Xiaomi moves, it could disrupt new industries with the same low-margin strategy which made it the world's fifth largest smartphone maker last year. Let's take a look at two companies which could be caught in the blast zone of Xiaomi's expansion.

GoPro

Xiaomi is a major investor in Yi Technology, a maker of action and IP cameras. Xiaomi sells Yi's devices through its online store. Yi's action cameras look similar to GoPro's (NASDAQ: GPRO) Hero devices but cost much less. Yi's newest device, the Yi 4K Action Camera 2, sports the same Sony image sensor and Ambarella chipset as GoPro's $500 Hero 4 Black, but costs just $250. Yi's camera also includes a touch LCD screen (which the Hero 4 Black lacks), digital image stabilization, and a bigger battery.

This so-called "GoPro Killer" became available to U.S. customers earlier this month on Amazon (NASDAQ: AMZN), and the initial reviews have been extremely positive. Even if Yi's camera doesn't steal meaningful market share from GoPro on its own, it's only a matter of time before other rivals start selling comparable high-end action cameras at similar prices. Those devices could steal the thunder of GoPro's upcoming launch of the Hero 5 this holiday season.

Yi's 4K Action Camera 2 (L) and Xiaomi's Mi Drone (R).

GoPro also plans to launch its Karma drone as a flying accessory for its cameras during the holidays. However, Xiaomi just launched a 4K drone which costs $450 -- meaning that its entire drone costs less than GoPro's top-tier camera. If Xiaomi launches that drone stateside this holiday season, GoPro's Karma could be in serious trouble. The Mi Drone notably lacks the high-end features of DJI Innovations' Phantom 4, but it offers comparable flight time and might appeal to consumers who are interested in drones but unwilling to pay over $1,000.

Fitbit

In late 2014, Xiaomi launched the Mi Band, a $15 fitness tracker which offered comparable features as Fitbit's (NYSE: FIT) $100 Flex. It recently launched the Mi Band 2, a $40 device which adds a display and heart rate tracking -- a feature only found in Fitbit's higher-end devices like the Charge HR, Surge, and Blaze.

When Xiaomi introduced the Mi Band in the fourth quarter of 2014, it claimed 6.2% of the global wearables market, according to IDC. At the time, Fitbit controlled 43.9% of the market. But by the first of quarter of 2016, Xiaomi controlled 19% of the market, while Fitbit's share had fallen to 24.5%. Xiaomi also sells a wireless scale which costs less than $20. Fitbit's Aria scale, which offers similar features, costs $130.


Xiaomi's Mi Band 2 (L) and Smart Weight Scale (R). Image source: Xiaomi.

Much of Xiaomi's growth came from its home market in China, where the Mi Band and Mi Smart Weight Scale are sold alongside cheap Wi-Fi routers, connected air purifiers, smart TVs, smart lights, electric bicycles, and even electrical mosquito repellent to expand its digital ecosystem across the Internet of Things. It's an aggressive strategy which makes Xiaomi look more like Amazon than Fitbit.

Most of those devices are still only available in the Greater China area, but the one that poses the greatest threat to Fitbit -- the Mi Band 2 -- is available worldwide. If Xiaomi tethers more overseas users to the Mi Band's companion app and the Mi ecosystem, it could pave the way for more of its connected devices to reach additional markets.

Should GoPro and Fitbit investors be worried?

Xiaomi's interest in cameras, drones, and fitness trackers should worry GoPro and Fitbit for a simple reason -- both their businesses are built on double-digit margins, but Xiaomi accepts single-digit margins. Xiaomi uses high-volume sales to offset lower margins, and uses those cheaper devices to expand a cohesive digital ecosystem which dwarfs GoPro and Fitbit's audience of app users.

That growth has likely hurt demand for GoPro and Fitbit devices in China, and it could do the same in other markets if Xiaomi expands overseas. Even if that push fails, the market commoditization which Xiaomi represents is a clear threat to GoPro and Fitbit, which both rely on a handful of devices which can be easily commoditized.

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Leo Sun owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com, Ambarella, and GoPro. The Motley Fool recommends Fitbit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.