"Midtier devices are not selling well at all in the U.S.," Hyers said. "Market dynamics really favor higher quality and very competitively priced smartphones from Chinese vendors."
"ZTE is really gaining U.S. market share along with TCL Alcatel," he added, noting that TCL Alcatel offers French design sense along with low-cost Chinese manufacturing.
Chinese smartphone manufacturers have an advantage over other phone makers in the global market in part because low-cost labor keeps their manufacturing costs down. But the cost of labor isn't the only factor.
For smartphone sales within their home country, Chinese manufacturers don't pay the patent and intellectual property royalties they would pay for sales in other countries because of lax government IP regulation, analysts said. Every handset made typically comes with scores of different IP royalties that are paid to various companies for network, hardware and software functionality, and those fees can add $20 to $40 to the cost of a device on top of the cost of parts and assembly, Hyers said. Stripping out most of that cost can help keep smartphone prices down in China's enormous market. And that, in turn, enables those vendors produce phones in higher volumes at lower costs.
For its part, Xiaomi aims to sell phones at just above the cost of parts and assembly and it keeps models on the market for around 18 months, instead of the usual six months favored other producers, according to comments made by Xiaomi CEO Jun. As that longer selling period progresses, the cost of components can fall, leading to higher profits. Like other smartphone makers, Xiaomi also sells phone accessories and software. The company relies on original sales from its own online store, and it puts a strong emphasis on advertising on social networks.
Xiaomi recently ran into trouble over intellectual property royalties when it tried to expand outside its home turf into India. On Dec. 11, the company said it halted sales in India due to a patent dispute with Swedish network equipment maker Ericsson.
If the patent dispute is resolved in India, Xiaomi will likely be forced to pay royalties, since it's a young company and has a relatively small patent portfolio. Companies that compete with Xiaomi and other Chinese smartphone makers might resort to using patent litigation to help stem the growth of Chinese vendors outside of China, analysts theorized.
For the third quarter, smartphone production volumes within China itself clearly favored Chinese vendors, leaving South Korea's Samsung as the only non-Chinese vendor in the top five. Xiaomi finished first, followed in order by Samsung, Lenovo, Huawei and Coolpad, according to Strategy Analytics and other analyst firms.
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