Copying Xiaomi's strategy pays Huawei

China's Huawei Technologies has taken sales of its low-price Honor brand of smartphones to 20 million from 1 million in just one year, hitting pay dirt with the disruptive online-only strategy it copied from smaller upstart Xiaomi.

Given the early signs, Huawei executives hope to emulate the phenomenal growth of Xiaomi, which broke into the global top five in just a few years -- a success not likely to go unnoticed by the growing ranks of low-cost Chinese smartphone makers.

But analysts say the low-cost strategy has fanned the price wars and thin profit margins prevalent in China, and that its spread could affect margins at all makers.

Honor handsets dropped the Huawei name last December and have since been marketed and distributed independently of Huawei-branded phones. They are sold in countries ranging from Belgium to Brazil, primarily via marketplaces such as those of JD.com in China and Flipkart Online Services in India.

The continued success of Xiaomi and its aggressive pricing is likely to squeeze profitability in the medium term for nearly all handset makers except market leader Samsung Electronics and high-end handset maker Apple, Fitch Ratings said in a report in October.

A regulatory filing showed Xiaomi's operating profit margin was just 1.8%, though the smartphone maker said the figure did not take into account all aspects of its business. By comparison, Samsung's 2013 margin was 18.7%.

Honor "doesn't make money but doesn't lose money," said brand president Liu.

To widen the profit margin, Honor needs to raise its image and woo wealthier consumers with high-spec products, Huawei consumer division chief Richard Yu told reporters last week.

"If Huawei wants to survive, we have to win in developed markets like Europe, a high-end market," said Yu. "Next year is very important for us to target the high segment."