Samsung’s smartphone profits have been getting absolutely hammered all year as it’s facing an insane amount of competition from low-cost vendors in key markets such as China. Now a new report from Reuters illustrates just how brutal the competition is for mobile phones right now, as it turns out up-and-coming smartphone manufacturer Xiaomi is scraping by with tiny operating margins of under 2%.

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To get an idea of just how slim that margin is, consider that while Xiaomi generated roughly $4.3 billion in revenue in 2013, it pulled in a profit of only $56 million and an operating margin of just 1.8%. Forrester analyst Bryan Wang tells Reuters that he wouldn’t have been surprised to see Xiaomi losing money and he says that he doesn’t see how its business model is at all sustainable unless it consolidates with other businesses.

To get an idea of why Xiaomi barely makes any money, consider the Xiaomi Redmi S1 released earlier this year that features a 4.7-inch display, an 8-megapixel rear camera, a 1.6 megapixel front-facing camera and a 1.6GHz quad-core processor and that costs only USD $120 with no contract. Or take a look at Xiaomi’s recently released phablet, the Xiaomi Redmi Note, that features a 5.5 inch display, a 13-megapixel camera and an octa-core processor and costs a mere USD $160, again with no contract.

Whether Xiaomi can afford to keep pumping out phones with high-end specs at rock-bottom prices is certainly up for debate but there’s no doubt that the company’s strategy is wreaking havoc on established players like Samsung.

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