Competition among Chinese smartphone makers is getting more intense. After rapid expansion overseas, both Xiaomi and Huawei are now once again turning their attention back home.

Xiaomi plans to spend 5 billion yuan (US$725 million) to open more retail stores across China, according to a Xiaomi internal meeting reported by Bloomberg and Chinese media. In a video clip of the meeting circulating online, Xiaomi CEO Lei Jun said that the company is building a “new retail iron army,” and that victory in the China market will be determined in three years.

However, the path to success in China’s saturated smartphone market is getting ever narrower. By the first quarter of the year, the top five smartphone vendors in China controlled 89% of the market, up from 83 percent a year prior, said Mo Jia, and analyst with research firm Canalys. Within the same time period, Xiaomi’s market share even declined slightly -- from 13% to 12% -- while competitors Oppo and Vivo maintained their shares of 19% and 17% respectively.

The company’s largest competitor now has a renewed focus on China, as well.

Huawei is looking to grab as much as half of China’s smartphone market as it braces for declining shipments overseas. Since being blacklisted from buying US technology by the Trump Administration and getting cut off from Google services, the prospect of expanding its global smartphone business has evaporated.

“Huawei is consolidating is arsenal on its home market, which will crank up the pressure dramatically for other vendors there this year,” said Bryan Ma, vice president of client devices at technology research firm IDC.

A Xiaomi store in Beijing. (Picture: Reuters)

One way Xiaomi plans to respond to the challenge is to explore lower-tier cities and rural areas in China, where Xiaomi has fewer stores than Oppo and Vivo. The latter two, both owned by BBK Electronics, rapidly expanded in China over the last several years by investing in physical retail instead of ecommerce.

Like other companies, Xiaomi sees opportunity in a “new retail” hybrid approach that merges offline and online shopping.

“The internet has eliminated the information gap, and lets remote areas have access to product information,” said Lu Weibing, Xiaomi’s vice president and brand manager of the budget phone spin-off brand Redmi. He boasted that the new Redmi K20 Pro, which costs 2,499 yuan (US$362), is popular in Mi stores in some small towns he visited.

“Xiaomi’s ambitious investment into offline will help to boost its coverage, not only in major cities, but also to bring its various products to consumers in rural areas,” Jia said. He added that the US$725 million investment will also be key for Xiaomi to sell more of its IoT products.

But it won’t be easy. Xiaomi needs to give its offline channel partners a competitive margin, Jia said. Otherwise competitors could lure partners away with better incentives.

One Weibo user noted this under one of Lu’s posts about Xiaomi’s new retail strategy. The user said he makes more money selling Huawei phones in his shop than Xiaomi ones.

But Lu doesn’t seem worried, and he offered the user a brusque response: “New retail will eliminate vendors like you.”