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The new budget flagships: Will the OnePlus One kill the premium handset?

While Google want to dominate the emerging markets with their Android One line, a new breed of high-specification, low-price budget phones are coming out of China and heading west. Is it curtains for premium handsets?

With the increasing power and resources of the Chinese mobile phone industry, are we witnessing a basic shift in the market? Will this new breed of Chinese start-ups alter how the likes of Samsung, Apple, HTC, Nokia and the rest do business? Or is the fuss over the new batch of Chinese smartphones so much hot air? But what a fuss! The new Chinese designs are offering very high specifications for such a low price point that industry observers are getting very excited.

One such company that is firmly in the headlines is OnePlus, a new company founded in China by former engineers from the technology manufacturer, Oppo. One of them is Peter Lau, a former vice president at Oppo, a company known for manufacturing high-end consumer devices such as smartphones and DVD players. He is the brainpower behind OnePlus.

Its OnePlus One phone, which has just launced in the UK, is based upon the Snapdragon 801 quad-core processor. Two versions of the OnePlus exist: the 16GB ($299) and the 64GB option ($349). Both sport a 5.5-inch 1080p LCD, though the bezels are slim. Arguably, just as interesting as the hardware is Cyanogen, the One’s Android OS ‘skin’. The OnePlus is being sold with a custom version of the ROM called CyanogenMod 11S, based on Android 4.4 KitKat. This open source ROM has been created by the Android community over many years and comes complete with many useful features, including SMS encryption, permission control and theming. CyanogenMod 11S is also notable for shipping with Google Play Services pre-installed, which isn’t the case with the downloadable version of the ROM.

The new challengers

“The real challenge is dotting the i’s and crossing the t’s,” Avi Greengart, an analyst at Current Analysis, said. “This is an incredibly competitive market and even if you can come up with economics that enable you to make money off a relatively low volume, there’s still a lot of detailed
work required to create a complete product. And that goes way beyond all the challenges new brands face in terms of brand recognition and distribution and pricing.”

So is there a downside? Carl Howe, a vice president of research at the Yankee Group, reckoned he has found one: “I think the OnePlus One [will] prove that slick hardware at a low price isn’t enough to sell a smartphone in today’s competitive market. Consumers are looking for a complete experience with good hardware, easy-to-use and understand software, great reliability, universal carrier support and ubiquitous service. Any upstart smartphone manufacturer – not just this one – has a long road ahead to satisfy consumers across all those dimensions, regardless of what their launch device looks like.”

In addition, there has been some talk that early samples of the device were not working as they should. Yet, “The specs just scream ‘Yeah, we’re on pace with everybody else,’” Ramon Llamas, a research manager at IDC, said. In fact, OnePlus has already declared that it is looking to correct any early technology issues, although Llamas says: “I think whatever supply is on hand is what’s going out the door, warts and all. There’s not much wiggle room at this point. History is full of companies who go back to make their products better.” Stand up Apple.

However, One Plus is not the only emerging Chinese company looking to make a dent in the smartphone market. “Later this year we are expecting Meizu to bring some of its phones to western markets. That company considers itself the Apple of China,” Greengart said. “Someone in the US Midwest has probably never heard of them but they’ve been making high-quality phones for a while in China.”

Also in the frame is Oppo, which had close financial links with OnePlus and has supplied it with ex-staff. Oppo’s Find 7, expected to launch later this month, is another example of the ‘low price, high spec’ approach to mobile phones sporting an impressive 5.5-inch 2K QHD 2560 x 1440 pixel display, a Snapdragon 801, 3GB RAM, 32GB of storage, support for 128GB SD cards, 4G, super-sensitive display for use with wet hands and a custom version of Android 4.3 it calls Color OS.

The Oppo Find 7 has 32GB storage, 5.5 inch screen, runs a custom version of Android 4.3, and retails for just £360

Also mounting an increasing challenge is Xiaomi, already rated as a £10 billion company and selling a mighty 20 million handsets in 2013. Not bad when you consider that the company was only created in 2010. Selling high specification phones on razor thin margins to achieve market share, it has already moved past HTC to become the fifth largest phone outfit in China. Xiaomi’s popular Mi3 handset includes a Snapdragon CPU, a 13-megapixel Sony camera and 2GB RAM and sells for around a third of Apple and Samsung’s top of the line phones.

Xiaomi’s co-founder and president, Lin Bin, is ambitious. He has Google and Apple in his sights but has decided to take a new path: “Unlike traditional handset manufacturers which make handsets, sell them and make money, our business model gets started when the user buys the handset. In many respects it’s like an internet company and we’ve added mobile internet. We envisage a community of internet users to use our internet products every day.”

A new lease of life?

Lin also elaborated on how his company is taking a new view on customer support. “The users download the ROM refresh onto their phones and give feedback,” he said. “We collect the feedback and come back, launch a new version and we keep doing that again and again. We are improving the OS using our user base of half a million today. We’re taking a very different approach. It’s very internet-driven… and evolving very fast.”

The weekly release cycle also addresses a key criticism of the Android ecosystem: version fragmentation, where manufacturers and carriers are unable to update their devices at the same pace as Google’s rapid release cycle.

More notice was taken of Xiaomi last July, when research firm Canalys said that the company’s market share in China surpassed Apple for the first time in the second quarter. Apple’s share fell from 8 to 5 per cent in a single quarter. Around that time, Xiaomi unveiled its Hongmi, or Red Rice, phone for around $130 and offered 100,000 handsets for sale online. It sold out in 90 seconds.

The rise of Xiaomi has left some analysts wondering about how Apple will respond to a company thriving by using strategies very different from its own. Sanford C. Bernstein analyst Mark Newman called Xiaomi a “new disruptive force” that “particularly stands out to us as a potential game-changer.” UBS analyst Steve Milunovich wrote that “it would be a bit surprising if Apple were easily disrupted.” But he also noted, “It’s possible that Apple is becoming the digital equipment of phones, delivering improved technology for its best customers but ignoring the growth below because the company does not want to ‘compromise the user experience.’”

Xiaomi, meanwhile, sounded downright bullish about its prospects against Apple. “They [Apple] don’t really care about what the users want,” Lei said in a recent interview. “They imagine what the users want.”

Now entering ten global emerging markets, using the same low margin philosophy, if it is successful in emerging markets – that’s close to a sure bet – Xiaomi will have achieved economies of scale that will enable it to launch an assault on developed countries, and the company will have the profits from new markets to fund the attack on mature ones.

The Xiaomi 3 sold 20 million handsets in 2013, pushing past HTC to become the fifth largest phone outfit in China

This new wave of exciting smartphones has certainly injected the market with a measure of life and colour. Industry analyst Ben Wood of CCS Insight, believes that it is about time. “All the phones now look the same. The ability of top brands like Samsung, Apple and Nokia to differentiate themselves is getting harder,” he said.

Instead of the low-key evolutionary approach that most of the established companies are adopting, the new breed of Chinese companies has a revolutionary air about them. They may not be ready to take over just yet, but for now, they are hell-bent on ‘disruption’ (you’ll see that word quoted a lot in this feature). They already, however, represent a fundamental shift in how smartphones are and will be sold. Chinese manufacturers, from global names such as OnePlus, Oppo, Xiaomi, Huawei, Lenovo to the less well-known Gionee and Coolpad, are steadily picking up market share as they acquire technical and design expertise to add to their low production costs.

“The winners in the current market conditions will be those who show the best cost-efficiency,” said Lee Seung Woo, an analyst at IBK Securities. “And, in that sense, Chinese players will be in a better position.” Be assured – the Chinese are coming and they’re looking to shake things up.

To read more of this article, including specs comparisons for the leading Chinese budget phones and an interview with OnePlus boss, Peter Lau, as well more in-depth Android news, reviews, and tutorials, buy Android Magazine issue 39 now.