Bottom line: Xiaomi's adoption of Costco as its new role model and abandonment of Apple looks like a realistic move, and could better position the company to survive over the next 5 years amid a looming market shakeup.

Smartphone maker Xiaomi appears to be a company with an identity crisis, with reports that charismatic CEO Lei Jun has dumped former role model Apple (Nasdaq: AAPL) in favor a new model in US bulk-item supermarket operator Cosctco (Nasdaq: CSCO). Many will probably smile at this not-so-subtle shift at Xiaomi, which was one of China's hottest companies just two years ago when Lei liked to think of himself as China's Steve Jobs.

But the adoption of a new role model in Costco probably speaks volumes about how Lei sees his company going forward, as he tries to salvage its core smartphone business following a difficult last two years. That fall from grace includes a 40 percent drop in sales in its home China market in last year’s fourth quarter, causing its market share to slip to 7.4 percent, or about half of what it commanded just a year earlier, according to IDC.

Lei realizes he needs to do something soon to right his ship, and earlier this year announced a major acceleration of Xiaomi's drive to open brick-and-mortar stores to complement his original Internet-only sales model. (previous post) Now in an interview in India, Lei says he has ditched Apple and is declaring he aims to be more like Costco going forward. (English article)

For anyone who isn't familiar with Costco, the chain has expanded a bit beyond its origins as a provider of cheap, bulk foods for value conscious shoppers. I'll admit I'm not aware of its latest developments, but when I lived in the US and more recently Taiwan, where the company also has a few stores, Costco had become quite a fashionable place to shop, and carried all kinds of non-food items like electronics and clothing.

In a nutshell, Costco was somehow able to take the idea of being thrifty and make it quite fashionable. Friends in Taiwan would plan entire days around a trip to Costco, often making such trips into a social event as much as a shopping trip, bolstering the concept that it's chic to be cheap.

That appears to Lei's message now, as he tries to find the right positioning for his company in the brutally competitive smartphone market. It's already quite clear that Xiaomi is no Apple, a fact that became evident a couple of years ago when Apple's chief designer accused the Chinese company of being a copycat like all the rest. It's also quite clear that Xiaomi doesn't exactly have any hugely cutting-edge technology that would justify charging the premium prices that Apple does.

Eye on Middle, Low Ends

In the absence of any chances at the premium end, Xiaomi appears to be setting its sights on the lower to middle end of the market, with an aim to trying to bring the chic factor back to its products. That's certainly one of Lei's specialties, as he was able to transform Xiaomi phones into a hip and trendy product almost instantly a few years back using savvy marketing tactics, including creation of online clubs and artificial product shortages to generate buzz.

The big bottleneck in all this is actual products, which is what tripped Xiaomi up in the first place. Costco is known not only for its cheap prices and clean stores, but also because it offers good quality products for those prices. By comparison, Xiaomi quickly stumbled after its earlier rise because its products gained a reputation as mostly lookalikes that were even perhaps a bit inferior to many similar smartphones on the market.

I honestly haven't seen anyone using a Xiaomi smartphone these days, thought the company's latest higher-end model did get some pretty good reviews for its unusual design when it was first unveiled last October. (previous post) One of my friends even said he tried to buy one of the phones online during some recent promotional events but was unsuccessful, indicating that at least someone is interested in these phones.

At the end of the day, the Costco approach is probably much more realistic and suitable for a young company like Xiaomi that still has a lot to learn. When the history books are written, if Xiaomi survives for a while longer some might say that Lei Jun became the victim of hubris in his early days due to too much success that was unsustainable. I'd give the company an increasingly good chance of surviving this difficult period, and would generally applaud Lei for his new Costco approach and jettisoning of Apple as role model.