The $299 Chinese smartphone that could change everything

It has taken the smartphone world completely by surprise: a "flagship killer" packed with high-end specs, all for an asking price that dramatically undercuts the high-end Android competition.

At $USD299, the OnePlus One smartphone costs less than half the price of Android handsets such as the Samsung Galaxy S5 ($929) and HTC One M8 ($899) -- and from the processor to the display, it is a no compromise smartphone that blows the price-to-performance ratio wide open,  in keeping with the company’s message of “the best and latest technology for everyone”.

OnePlus is backed by the second most profitable mobile phone company in China, Oppo Electronics, and headed by Oppo's former vice president Pete Lau, who now has the global market in his sights as he gears up to ship the phone to consumers in over 18 countries next month.

Lau is also the visionary behind the OnePlus One smartphone and says that as a self-confessed tech fan, he set out to build the phone that he always wanted.

“We believe that technology can be fast, beautiful and solidly built while still being accessible,” Lau said in a recent interview.

There is no denying that OnePlus has, at least on paper, delivered on the performance front, equipping the handset with the latest Qualcomm Snapdragon 801 quad-core processor (clocked at 2.5GHz), 3GB RAM, 16GB/64GB internal storage options, 5.5-inch 1080P IPS display (sourced from the same company that supplies the HTC One M8) along with a 13-megapixel, Sony-made Exmor camera sensor, global 4G LTE, NFC, Bluetooth 4.0 and a 3100mAh battery.

It’s a spec sheet that equals -- and in some cases exceeds -- current Android flagships like Samsung’s Galaxy S5 and HTC’s One M8.

Another feather in the One’s cap is that it uses CyanogenMod, which essentially provides the pure Android OS experience normally found on Google’s Nexus devices, but with a few useful extra tricks. CyanogenMod was originally developed by tinkerers in the online Android modding communities and has since matured into a fast, reliable, and attractive operating system.

Build quality comes in the form of Gorilla Glass 3 on the front with a Nokia-esque polycarbonate build round the back, as opposed to the glossy and flexible Samsung plastic.

But with such a low price-tag and top-end specs, the profit margin on each OnePlus One handset is likely to be minimal. So how are they doing it? And can a fledgling mobile manufacturer really sustain itself in the cutthroat smartphone market with such thin margins? 

Eschewing tradition and embracing the online economy

Given the $USD299 sticker price, it’s hard to see the company making any money on handset sales alone, a fact that Lau confirmed.

"We are selling the phone at cost," said Lau. "We are able to do that by redistributing our costs to better benefit the user. Rather than put money towards a large marketing budget, we are focusing on online marketing and community interaction. Rather than working with retail partners, we rely on selling the device online."

While OnePlus is an Oppo investment, they are still considered to be separate companies. But OnePlus benefits from Oppo’s manufacturing muscle, allowing the company to gain access to lower-cost systems, components, research and development and manufacturing plants. It also explains why the OnePlus One smartphone looks almost identical in appearance to Oppo’s very own flagship, the Find 7a.

Still, forgoing profits on the device, bypassing network carrier support and relying solely on word-of-mouth and media coverage is a risky proposition. But it's also a strategy that isn’t entirely unique to OnePlus and in fact, it is becoming quite common among Chinese smartphone manufacturers.

The Xiaomi strategy

Xiaomi is the sixth largest smartphone vendor in the world and one of China’s biggest electronics companies.

According to Canalys research, Xiaomi sold more smartphones in the first quarter of this year in its home country than Apple did -- the very same quarter that the iPhone was made available through the largest network carrier in the world, China Mobile, and its 700,000-strong subscriber base.

Often described as the 'Apple of China', Xiaomi rose to the top by selling smartphones with a view to recouping profits from the second half of the 12-18 month product lifecycle, as component prices come down.

“We believe this is the same case for the OnePlus One handset,” said Bryan Wang, vice president and principal analyst at Forrester Research.

“With the impact from Xiaomi, everyone is now trying to establish an 'internet smartphone' or 'high value for money' smartphone brand, to better compete with Xiaomi.”  

But Xiaomi doesn’t solely rely on hardware profits, however slim they may be, as the company also earns revenue from services pre-loaded on the phones it sells -- a luxury that OnePlus doesn’t have.

Also, while it is likely that OnePlus has adopted a Xiaomi-like strategy of recouping profits at the tail end of the One’s product cycle, OnePlus is in a unique position in that it is the only Chinese smartphone manufacturer that is selling directly to the consumer on an international scale.

With access to a global consumer base and an impulse-buy price tag, the OnePlus One offers a tantalising proposition for many. At the same time, there is the question of how many people outside of the smartphone enthusiast community will actually commit to buying a smartphone sight-unseen from an unrecognisable manufacturer?

Purely using the online channel will obviously save sales and marketing costs for the brand but for OnePlus to truly challenge the big boys, it needs mass consumer adoption, which is something that will be difficult to achieve without a big-budget marketing machine to keep the product in the public eye. However, OnePlus understands that this is a marathon, not a sprint.

“We are comfortable not making money on our devices for the first two years to build the brand and gain people's trust that a great and reasonably priced product can be bought online,” said Lau.

For now, the only concern for OnePlus is whether it will be able to cope with initial demand as orders continue to outstrip supply. Regardless of the long-term success of the company, OnePlus has set an important precedent in the industry, one that could very well see other Chinese players follow its lead. The days of the $900 smartphone aren’t quite over yet but the OnePlus is a harbinger of things to come; a movement that just might shake up the smartphone establishment.