As an Apple investor I think a lot about Xiaomi and whether it's a threat to Apple. Xiaomi's smartphones run MIUI, a forked version of Android. Google Play and Google services are banned in China, at least in large part. So in China MIUI works with: (1) Xiaomi's own services, including contacts, calendar, SMS, notes, photo album, etc., very similar to Apple and Google services; and (2) Xiaomi's own app/content store called Mi Market. Xiaomi services include a cloud storage/syncing service called Mi Cloud. Outside China Xiaomi smartphones come with Google services and the Google Play store pre-installed, per the Android license agreement. So outside China MIUI works with Google services and the Google Play store. Google's absence inside China, its presence outside China, and the mandates of the Android license agreement have effectively forced Xiaomi to adopt two strategies: vertical integration and proprietary services inside China and a more horizontal/modular approach outside China.
Michael Porter calls a company that tries to implement more than one strategy a "straddler," and that's what Xiaomi appears to be. The problem with straddling is that it makes it more difficult to create a unique set of activities with trade-offs and good fit across activities. Xiaomi is trying to improve its proprietary services, and its vertical integration inside China, at the same time it's expanding internationally with a modular approach that requires it to pre-install Google services and Google Play per the Android license agreement (this agreement apparently requires Android OEM's to pre-install Google services in international markets where Google services are available, like India). See post titled Acquisitions, Rivalry, and Strategic Trade-Offs. As a result, Xiaomi must ensure MIUI integrates well with its own proprietary services (inside China) and with Google services and Google Play (outside China).
Some of Xiaomi's Chinese products bear a close resemblance to Apple products. China has more relaxed IP laws. This makes vertical integration easier, at least in terms of Xiaomi's in-house design and manufacturing. This kind of imitation is more difficult outside China, where IP laws are more stringent. One question is whether Xiaomi can develop the design capabilities needed to create useful products that sell well outside China, while still complying with international IP laws.
A lot of Xiaomi's China success is based on: (1) low price; (2) design similarities between its products and Apple's; and (3) a unique, proprietary ecosystem similar to Apple's. These three strengths go away, or are weakened, when Xiaomi tries to sell products internationally. When competing internationally, Xiaomi loses at least part of its low price advantage because it has to pay IP licensing fees. IP laws also make it more difficult for Xiaomi to sell Apple-like designs. And international pre-installs of Google Play and Google services make it more difficult for Xiaomi to market/sell a unique, vertically integrated ecosystem similar to Apple's. Outside China Xiaomi looks a bit like Samsung -- an Android player that uses pre-installed Google services/content and is stuck in the mid to low end market. Undifferentiated competitors stuck in the middle typically get squeezed by high end, differentiated vendors and by low cost, undifferentiated vendors. See Concepts page and discussion of Michael Porter.
For now it looks like Xiaomi is going to sell (1) vertically integrated, Apple-like products in China and (2) modular products with standard Google services internationally. This gives Xiaomi two activity sets to manage, with one set based on no Google services and a closed, proprietary ecosystem and one set based on Google services and a more open ecosystem.
These two approaches don't really complement each other, and they're driven by different priorities. In China, where Google services aren't pre-installed, Xiaomi can freely pursue vertical integration, focusing on improving its ecosystem and moving upmarket to compete with Apple. Xiaomi recently introduced some fairly expensive smartphones for the Chinese market.
Outside China Xiaomi won't be able to pursue a unique, closed ecosystem -- it will have to pre-install Google services per the Android license agreement. To the extent this agreement allows Xiaomi to install its own services, Xiaomi will have to compete with Google Play, slowing international consumer adoption of Xiaomi services.
For these reasons Xiaomi's outside China strategy/activities will have to focus on something other than differentiation through unique, vertically integrated products. The company may have to move downmarket internationally, driving down costs so it can sell mid to low end smartphones in places like India and Brazil. This puts Xiaomi in a strategic "straddle," trying to: (1) move upmarket with mid to high end products and a differentiated strategy in China (while ignoring international IP laws); and (2) move downmarket with low cost products and an undifferentiated strategy elsewhere (while following international IP laws). This seems like a tough challenge.
Xiaomi must also make MIUI function well inside and outside of China while avoiding any conflicts or customer confusion arising from Xiaomi's proprietary services and Google's pre-installed services.
China and non-China strategies could lead to one of two outcomes: (1) one or more Xiaomi products that attempt to satisfy both strategies -- something that's differentiated for China, like a typical mid to high end product, but still international IP compliant and low cost to make, and can therefore be sold in places like India and Brazil; or (2) two Xiaomi product lines, with one line focused on mid to high end differentiation in China and one line focused on low cost, international affordability. This second approach could lead to a very broad product line, making great product design more difficult.
Inconsistent strategies and/or too many products can make it hard to compete with focused competitors that have one uncompromised strategy centered around a limited number of products, clear priorities, unique activities, and great activity fit (e.g., Apple).
It's difficult to predict the future. It will be interesting to see how Xiaomi does.
The author owns stock shares of Apple.