By Wang Huiying

Edited by Ziye

"We've weathered the toughest storm for the industry," declared Xiaomi Group President Lu Weibing at the company's Q2 2026 earnings call on August 18, addressing both the market and investors.

Six days later, on August 24, Xiaomi unveiled its Xuanjie Chip Technology at a communication meeting. Founder Lei Jun took center stage to announce the launch of three self-developed chips. The Xuanjie O3 is set to debut in September with the Xiaomi 18 Fold foldable smartphone. Meanwhile, the O100 and D100 are tailored for AI acceleration and intelligent driving, respectively, with plans for commercial availability next year.

"The dual breakthroughs in SoC and baseband technologies underscore Xiaomi's commitment to mastering core technologies," Lei Jun stated emphatically.

Both Lu Weibing and Lei Jun are on the mark. The industry is indeed on the mend, with the chill in the consumer electronics sector gradually thawing. Xiaomi, too, is making significant strides in chips, automobiles, and AI across multiple fronts.

Image source: Xiaomi's official website

However, a closer examination of the financial report released six days prior reveals a nuanced picture—while Xiaomi's revenue has rebounded and technological breakthroughs are being made, profits have yet to follow suit.

Although the industry's darkest days may be behind us, Xiaomi's golden era has yet to dawn. In the first half of the year, Xiaomi bet big on a comprehensive ecosystem spanning people, vehicles, and homes, aggressively pursued premium smartphones, and heavily invested in intelligent vehicles, aligning itself with the long-term trends in the tech industry.

Yet, operationally, the reality is a tug-of-war between the deceleration of old growth engines and the struggle of new ones to achieve profitability. The 100-billion-yuan revenue milestone serves more as a fleeting reflection, amplifying the growth dividends from the automotive business while masking the underlying weaknesses in the consumer electronics core.

Standing at the mid-year mark, Xiaomi resembles a vehicle in the midst of gear shifts—the new gear is engaged, but the power has yet to fully kick in, while fuel consumption is visibly rising.

To return to a growth trajectory, Xiaomi cannot afford to rest on its laurels just yet.

Xiaomi's Q2 2026 financial report painted a picture of "recovery" in the market.

With quarterly revenue reaching 108.9 billion yuan, surpassing the 100-billion-yuan mark and rebounding from Q1's slump, the surface-level numbers suggest Xiaomi has emerged from its operational trough. However, assessing a company's recovery quality requires delving into structural factors, not just totals.

A closer look at the revenue components raises questions about the true value of these figures.

The first contributor is automotive revenue. Smart electric vehicles and AI innovation businesses generated 24.9 billion yuan in Q2, up 17.1% year-on-year, increasing their share of group revenue from less than 20% a year ago to 23%. Cumulative deliveries of the SU7 series surpassed 500,000 units, with quarterly deliveries exceeding 100,000 units for the first time.

Image source: Xiaomi Group's official website

The second contributor is seasonal revenue. Q2 is traditionally a peak season for consumer electronics, with the 618 shopping festival serving as a fixed window for IoT product sales. This year, Xiaomi's IoT business revenue reached 31.3 billion yuan, showing a noticeable recovery from Q1 but declining 19.2% year-on-year. This suggests the Q2 IoT rebound was more a natural result of industry growth rather than a qualitative transformation of the business itself.

Stripping away automotive and seasonal revenues and focusing on Xiaomi's core smartphone × AIoT segment reveals a different reality. Financial data shows that Xiaomi's Q2 revenue from traditional smartphone and IoT businesses was 84 billion yuan, accounting for 77% of total revenue but declining 11% year-on-year, becoming the primary drag on Xiaomi's income.

Overall, beneath the 100-billion-yuan revenue shell, the traditional core business shows weak endogenous recovery, while the automotive business inflates the overall revenue denominator, partially obscuring the stagnant growth of the consumer electronics core.

This "inflated" revenue is directly reflected in stalling profits.

In the first half of 2026, Xiaomi's adjusted net profit was 12.291 billion yuan, down 42.8% year-on-year. In Q2 alone, adjusted net profit was 6.2 billion yuan, a 42.6% year-on-year decline. With revenue slightly down and profits plunging by 40%, these contrasting metrics point to costs.

During the earnings call, Xiaomi's management attributed the profit decline primarily to rising memory chip prices. Indeed, this is a supply chain challenge shared by the entire smartphone industry.

TrendForce data shows that Q1 contract prices for generic DRAM rose by 93% to 98% quarter-on-quarter, while NAND Flash prices increased by 55% to 60%. The proportion of memory chips in smartphone material costs surged from 10% to 15% in the past to over 30%.

Lu Weibing calculated during the call that, based on Q2 costs, the memory cost alone for an 8GB+128GB smartphone model would exceed 1,500 yuan when factored into the retail price.

To counter cost pressures, Xiaomi proactively adjusted its product mix, with the average selling price (ASP) of smartphones surging 25.9% year-on-year, increasing by nearly 300 yuan to a record high of 1,351 yuan. The proportion of domestic high-end models priced above 3,000 yuan rose to 32.1%.

Under this premium smartphone strategy, the gross margin for the smartphone business held steady at 8.5%, alleviating investor concerns that it might dip below 8% or even 7%. However, this came at the expense of significant shipment volume sacrifices. Financial data shows that Xiaomi's Q2 smartphone shipments were 31.2 million units, down 26.5% year-on-year. According to Omdia, the global market only declined by 6%, meaning Xiaomi's drop was steeper than the industry average.

Image source: Xiaomi Mobile's official Weibo account

While rising costs present an objective external challenge, the fact that competitors can still gain market share under the same conditions suggests that supply chain issues are only part of the equation. Product, brand, and competitive strategy alignment also determine a company's positioning.

The capital markets have already interpreted the subtext of this financial report.

Xiaomi's stock price declined from its all-time high of HK$61.45 in June 2025 to as low as HK$21.56 in June 2026, erasing nearly HK$1 trillion in market value.

Notably, Xiaomi repurchased approximately HK$11.7 billion worth of shares in the first half of the year, surpassing the total for all of last year. While management is using real money to restore investor confidence, the markets remain unimpressed, perhaps waiting for a clearer signal.

How much genuine progress has Xiaomi made in premium smartphones, automobiles, and AI?

The signal the capital markets are waiting for is essentially one of smooth transition between old and new growth drivers—whether the old business can stabilize and the new business can step up.

This precisely highlights Xiaomi's most sensitive issue.

At the Xuanjie Chip Technology Communication Meeting on August 24, Xiaomi announced three chips. From a strategic perspective, the Xuanjie O3 targets smartphones, the O100 targets on-device AI, and the D100 targets intelligent driving.

Image source: Xiaomi's official WeChat account

"From pockets to cockpits, from living rooms to factories, a unified Xuanjie computing platform spans all scenarios of people, vehicles, and homes," Lei Jun summarized. He also revealed that since restarting major chip development in 2021, Xiaomi has invested over 21 billion yuan and assembled a chip team of nearly 3,000 people.

This statement is Xiaomi's response to the capital markets and aligns with its core narrative for the first half of the year. Smartphones, automobiles, and AI are advancing simultaneously, with self-developed chips linking the entire ecosystem of people, vehicles, and homes.

Xiaomi's direction is clear, and its ambition is substantial. But ambition is one thing, and reality is another. In the first half of the year, Xiaomi invested heavily in these three areas but has yet to achieve comprehensive profit breakthroughs, with the mismatch between old and new growth drivers becoming increasingly pronounced.

As Xiaomi's foundational growth engine, smartphones followed a contractionary growth path in the first half.

Facing the dual pressures of rising memory chip prices and industry price wars, Xiaomi proactively adjusted its product mix, strategically scaling back production and distribution of mid-to-low-end Redmi mass-market models. Abandoning the traditional approach of trading scale for market share, Xiaomi redirected R&D, channel, and marketing resources toward high-end models like the Xiaomi Digital Series and foldable smartphones, with the core goal of raising the ASP and restoring hardware gross margins.

With memory costs remaining high and mid-to-low-end profits pushed to their limits, betting on upward mobility was preferable to competing on price in a saturated market.

While the ASP increased, the high-end market is not easily penetrated. In the first half, Apple and Huawei dominated China's high-end market. For Xiaomi to compete, adjusting its product mix alone is insufficient. Brand perception inertia, channel adaptability, and user trust accumulation cannot be resolved with a single product or chip, as evidenced by the first-half smartphone business results.

Take the upcoming Xiaomi 18 Fold in September as an example. Although equipped with the O3 chip, the foldable smartphone market is highly competitive. Beyond technology, chips face a long validation cycle from announcement to mass production and market acceptance.

If smartphone premiumization represents the repair and upgrade of the old growth engine, then intelligent vehicles and AI are Xiaomi's all-in bets on new growth engines and the value core that capital markets once placed high hopes on.

From the first-half performance data, the new businesses have achieved scalable revenue breakthroughs and visible growth but remain trapped in a money-burning phase without forming a positive profit loop.

The automotive innovation business segment reported an operating loss of 2.6 billion yuan in Q2 and approximately 5.7 billion yuan in the first half, continuously eroding group profits. Revenue per vehicle dropped from 253,700 yuan to 229,300 yuan, with gross margins sliding from 26.4% to 19.2%, primarily due to product mix adjustments and rising component costs.

Even with impressive SU7 delivery volumes, the capital-intensive and long-cycle nature of the automotive industry means that per-unit profits cannot cover the enormous fixed costs of factory depreciation, channel expansion, ongoing R&D, and new model reserves.

More critically, Xiaomi Automobile is still in its scale-expansion phase, with new Pengcheng series models set to enter the market and continued investments in intelligent driving chip R&D and commercialization. For the foreseeable future, the automotive business will remain in a money-burning mode.

Image source: Xiaomi Pengcheng's official Weibo account

Compared to the scalable rollout of the automotive business, the AI business and self-developed chips are still in the early stages of technological implementation with insufficient commercial monetization. In the first half of 2026, Xiaomi's AI business achieved approximately 1 billion yuan in revenue for the first time, with B-side commercialization of the MiMo large model API calls marking a 0-to-1 breakthrough.

However, from a commercial value perspective, the monetization capabilities of AI and self-developed chips remain weak, relying mainly on lightweight B-side services. Scalable profit models such as C-side paid services, ecological empowerment, and technology licensing have yet to materialize.

Various self-developed chips primarily serve as internal enablers to enhance terminal product competitiveness and have not been commercialized externally to form independent revenue growth points. The stark contrast between sustained high R&D investment and limited monetization income keeps the new businesses in a state of input exceeding output.

When viewed together, the conclusion is clear. In the first half, Xiaomi made substantial investments in smartphones, automobiles, and AI, but most outcomes remain on the progress bar, with each new growth engine still in the "ignition phase" and far from truly accelerating the entire company.

From both industry cycle and corporate transformation perspectives, Xiaomi's current strategic layout is a necessary experiment.

The smartphone industry has long since bid farewell to incremental growth, entering a downcycle characterized by inventory competition, intense rivalry, and thin profits. Relying solely on the consumer electronics core business can no longer support the long-term growth of a tech giant. Against this backdrop, pursuing smartphone premiumization to escape low-end competition and heavily investing in intelligent vehicles to open a trillion-dollar second growth curve is a consensus among leading consumer electronics firms.

However, the right direction does not eliminate the structural risks of the short-term transition period, and Xiaomi is paying an operational price for its transformation.

Image source: Xiaomi's official Weibo account

The most prominent contradiction lies in the mismatch between brand perception and product strategy—a frequently underestimated hidden risk in Xiaomi's ongoing transformation. To revitalize its core smartphone business and break into the high-end market, Xiaomi has been actively shedding its cost-effectiveness image. The company is elevating its brand positioning through high-end models, self-developed chips, and technological advancements, aiming to align itself with premium tech brands.

On the flip side, Xiaomi Automobile is taking a cost-effective approach, with the Pengcheng series starting at 259,900 yuan. In this context, how will consumers perceive the "Xiaomi" brand? This persistent fragmentation in brand perception among the general public not only impedes the solidification of Xiaomi's premium smartphone positioning but also makes it challenging for Xiaomi Automobile to shed its cost-effective label. This poses significant risks for the brand's long-term upgrading efforts.

Compared to these latent brand risks, financial pressures are more immediate and are squeezing Xiaomi's buffer period for transformation. As of the end of June 2026, the company's cash reserves stood at 219.3 billion yuan—a substantial amount. However, considering the automotive business's current quarterly losses of 2 to 3 billion yuan, along with escalating R&D investments and shrinking profits from the core smartphone business, the longevity of these reserves requires careful reassessment.

Objectively speaking, Xiaomi's transformation has yielded some results. Smartphone average selling prices (ASPs) continue to rise, the SU7 has established a foothold in the mainstream pure electric sedan market, and the AI business has achieved 0-to-1 commercialization. Nevertheless, all progress remains at the stage of quantitative accumulation without qualitative breakthroughs, still far from achieving profitability loops and stable growth.

The success of Xiaomi's future transformation and the adequacy of its buffer period hinge on the effectiveness of its business transformation in the second half of the year—the definitive signal that capital markets eagerly await.

According to Lu Weibing, the growth in memory contract prices slowed in Q3, with Xiaomi's related contract prices largely finalized and likely to continue rising slowly in Q4. Whether prices will remain high or decline in 2027 requires further observation. If memory prices stay elevated in 2027, the smartphone business will remain in a low-margin state, limiting its ability to support the automotive and AI segments.

Additionally, whether the Pengcheng series can become the second growth pole of the automotive business is a key variable. The SU7 and YU7 supported sales volume in the first half of the year, but both the revenue per vehicle and gross profit margin are declining. In the second half of the year, whether the two extended-range SUVs of the Pengcheng series can stabilize the gross profit margin while boosting sales volume is a crucial step for the automotive business to transition from burning money to generating profits.

Image source: Xiaomi Pengcheng's official Weibo

The extended-range vehicle segment is even more crowded than the pure electric vehicle segment. The Ideal L series and Seres M series have already established a strong foothold. What Pengcheng needs to do is to seize market share, which is obviously more challenging. However, the profit per vehicle for extended-range models is generally better than that of pure electric vehicles. If Pengcheng can strike a balance between volume and price, it has the potential to become the first true profit engine for the automotive business.

On the other hand, the chip business, regarded as the 'physical foundation of Xiaomi's AI strategy,' is Xiaomi's core technological trump card for targeting the ultra-high-end market. Ultimately, the market performance of chips in conjunction with products will be the deciding factor.

These three variables correspond to Xiaomi's three most critical defensive lines at present. Any unexpected breakthrough in any one of them could accelerate the pace of the entire transformation; any delay could prolong the transition period and increase costs.

Returning to the initial assessment, perhaps the most difficult time for the industry has passed, but Xiaomi's critical period of transformation and structural adjustment continues. In the second half of the year, whether smartphone costs can recover, whether the automotive business can reduce losses and improve efficiency, and whether self-developed technologies can deliver value will ultimately determine whether Xiaomi can leverage the industry's recovery to truly emerge from the pains of transformation.

(The header image of this article is sourced from the official website of Xiaomi Group.)