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Samsung has a big problem in China. Its name is Xiaomi

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Samsung's position as a leader in the lucrative Chinese smartphone market is being challenged by Xiaomi, a local smartphone manufacturer that has displaced Samsung as the top seller of smartphones in the country.

Samsung has also lost its leader position in India, with analysts saying that the company could also face the same fate in the Philippines and Thailand.

Globally, Samsung is still the top smartphone manufacturer. However, its share of the global smartphone market has recently been declining.

Samsung makes 18 percent of the company's total sales in China, more than half of which are through sales of its mobile phones. The company is now flying in both executives and consultants in an attempt to come up with a solution to the increasing threat of Xiaomi. 

Sources familiar with Samsung's strategies are saying that the company is decreasing the prices of existing mobile phones by up to 20 percent, formulating new strategies in marketing within China and preparing for the launch of a new lineup of smartphones targeted for emerging markets that will be much cheaper than what Samsung currently offers.

Samsung will release its September quarter earnings on Oct. 30, which is expected to include a third-quarter operating profit decline of around 60 percent compared to the same quarter last year and 20 percent lower compared to the second quarter.

The company is acknowledging that the lower profits are because of increased competition in China, which intensified in the second quarter when Xiaomi was able to topple Samsung in terms of sales in the Chinese smartphone market. Samsung held the top position for the previous two and a half years.

One of the factors that allowed Xiaomi to overtake Samsung is the increasing percentage of consumers in China that purchase their devices online, which is primarily how Xiaomi and several local Chinese smartphone manufacturers sell their products. This drastically lowers Xiaomi's overhead and eliminates the advantage that Samsung has with the extensive distribution networks that it has developed since the 1990s.

Another factor is the fact that the selling price of Xiaomi handsets are close to their manufacturing cost, with the company looking to make most of its profit on the services and software that are purchased through the smartphones. This strategy allows Xiaomi to drastically undercut the prices of the smartphones released by Samsung.

These strategies have allowed Xiaomi to climb up to become the third-biggest smartphone manufacturer in the whole world, even though the company is only on its fourth year. According to IHS iSuppli, Xiaomi sold 19 million units of its smartphones in the third quarter.

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