In China, cheap and cheerful phones outsmart Apple

In China's booming smartphone market, which is set this year to overtake the United States as the world's largest, a host of little-known local firms are primed with cheap phones to squeeze market share from U.S. giant Apple Inc's iPhone.

In the latest local challenge to the iPhone, Xiaomi Technology on Thursday launched the successor to its popular MiOne (MI) smartphone. The MI2 has specifications that exceed those of the iPhone 4S and sells for less than half the price.

Smartphones from Xiaomi - founded only two years ago but already worth more than Blackberry maker Research in Motion, according to private market valuations - have proved so popular they sell out in minutes after going on sale online. The company, founded by CEO Lei Jun, said last month its first-half revenue was close to $1 billion as it sold more than 3 million phones.

Mirroring Apple's annual worldwide developers conference (WWDC), where devotees would pay to listen to Steve Jobs showcasing new products, the informally-clad Lei charged Xiaomi fans 199 yuan ($31.30) to attend the Beijing launch, with the proceeds going to charity. Over 1,000 people flocked to the event.

While iPhone sales will increase in China, Apple's market share may stagnate or even dip as the market's changing demographics mean the iPhone flourishes in just a handful of wealthy Chinese cities, analysts said.

Industry researcher IDC estimates that in China last year, smartphones costing less than $200 made up 40 percent of shipments, while devices costing $700 and more accounted for 11 percent of the market.

"The sweet spot of affordability in China is 800-1,500 yuan ($130-$240)," said Michael Clendenin, managing director of Shanghai-based consultancy RedTech Advisors. "The 'Lao Bai Xing', or man in the street, is going to go for these mid-tier phones."

Li Xing, 35, lauding the Xiaomi phone's signal capabilities at the launch event, said: "I preferred not to use Apple because I didn't want my phone to be a luxury product, it's just a phone."

The MI2, which goes on sale in October at 1,999 yuan ($310), has a quad-core processor, 8 mega-pixel camera and a voice-assistant similar to Apple's Siri.

"Other phones are just phones, but a Xiaomi phone is very human-friendly," said Chen Zhen, 31.

Apple releases a single iPhone model a year at a price - around $800 - equivalent to about two months pay for an urban Chinese, who make up half of China's 1.3 billion population. Analysts say the real growth in China is in cheaper smartphones where a wide variety of models at different prices appeal to first-time buyers.

" Apple isn't going to rule China, simply because of the limited models they have and the price points they target," said TZ Wong, an analyst with IDC. "Based on these two factors, we do not think Apple will be the No. 1 smartphone player in China."