Xiaomi Defends Phone Margins, but Still Needs a New Profit Engine

Xiaomi protected two lines investors are watching closely this quarter: smartphone gross margin and the pace of spending on new businesses. Even as memory and other key component costs rose, the company adjusted its product mix, lifted average smartphone selling prices to a higher level, and kept gross margin at 8.5%. That came with a cost. Xiaomi’s average smartphone selling price rose by nearly 300 yuan year over year, but global shipments fell 26.5%. Omdia said second-quarter shipments totaled 31.2 million units, down from a 15% global market share a year earlier to 11% now. Xiaomi still ranked third worldwide, while Samsung and Apple both gained share. The pressure was tied to rising input costs. Xiaomi Group president Lu Weibing said on the earnings call that memory prices in the fourth quarter of last year, and especially in the first two quarters of this year, rose more than expected. CFO Lin Shih-wei said Xiaomi responded by reshaping its portfolio and raising prices, which pushed smartphone ASP to a record high. The margin defense worked. The scale story did not. For Xiaomi, phones are not just hardware; they are the main entry point into its ecosystem. When entry-level shipments shrink, the pace of new user growth slows as well, and that can affect IoT and internet services later on. The company is more exposed than many peers because of its mix. Omdia said more than half of Xiaomi’s smartphone shipments are below $200. In China, shipments fell 21% in the second quarter. India was down 10%, while the Middle East and Africa saw declines of 50% and 30%. New products offered a partial offset. A Counterpoint report said Xiaomi briefly rose to No. 2 in European sales share in week 30 after the Redmi Note 17 series launch. But the Note 17 Pro, which carries much of the volume, sold below the prior generation in some configurations after pricing was lifted. That helps explain why Xiaomi is pushing higher up the market. In the first half of 2026, global sales of smartphones priced at $600 and above rose 5% year over year and accounted for 29% of total smartphone sales, up from the same period in 2025. Higher component prices are also narrowing the gap between mid-range Android phones and older or discounted flagships. Xiaomi is trying to support its premium push with MiMo, its large language model, and operating system upgrades. For now, though, the AI contribution to phones is mostly visible in user experience, stickiness, and brand perception. There is still no separate data showing how much it added in shipments or pricing power. Publicly available channel data showed Xiaomi began another price adjustment in August, covering the Xiaomi 17, Redmi K90, and Turbo 5 series, with increases of roughly 300 yuan to 500 yuan. Because that change came after the second quarter, the impact should show up later in the year. If ASP and gross margin keep rising while revenue and share stabilize, Xiaomi’s product-mix upgrade is working. If shipments and revenue remain under pressure, the premium push is not yet absorbing the old volume base. Cars are now Xiaomi’s clearest new revenue source. In the second quarter, the company delivered 104,200 electric vehicles and booked 23.9 billion yuan in revenue, making the auto unit a major driver of overall growth. Lin said gross margin for the automotive and AI innovation segment was affected not only by model mix changes and higher costs, but also by large-model related spending. The segment’s gross margin was 19.2%. Because Xiaomi reports cars and AI together, outside observers cannot yet separate their individual profitability. The two businesses are also at very different stages: cars are already generating billions of yuan in quarterly revenue, while AI is still mostly about R&D and computing power. The long-term case for Xiaomi’s car business is broader than vehicle sales. Under its “human-car-home” strategy, the car is meant to become a new ecosystem entry point and lift revenue from other products and services. So far, though, Xiaomi has not disclosed how much incremental traffic car users bring, and it has not yet built a fully proven subscription model around smart driving or in-car software. That leaves the unit’s profit potential and ecosystem value still to be tested. Xiaomi will need higher deliveries, better unit economics, and more software and ecosystem revenue before cars can truly take over as a growth engine. At the same time, Xiaomi is giving AI and embodied intelligence a higher strategic priority. Lu said the robotics team has achieved a 98% success rate in industrial testing for self-tapping nuts at the car factory, but he also said humanoid robots are still a long way from large-scale commercialization. At the 2026 World Robot Conference, Xiaomi showed a new humanoid robot that is about 1.7 meters tall, weighs 66 kilograms, and has 66 degrees of freedom. The company said the robot uses large-model-driven interaction and autonomous execution, and can handle multiple use cases. It is already operating inside Xiaomi’s car factory. That gives Xiaomi a real industrial setting to test robotics. Compared with consumer deployment, factory work has clearer boundaries and easier metrics. Even so, moving from technical validation to a standalone business will take more steps. Until that becomes clear, robots remain a long-term reserve rather than a near-term profit engine. Several brokerage analysts told Huxiu they cannot yet build an independent valuation model for Xiaomi’s robotics business. Lu said he sees clear synergy with Xiaomi’s ecosystem and operations, but that the business is still in a very early stage and should not be pinned to specific targets. For now, Xiaomi’s most stable profit contributor is still internet services. The segment posted a 76.8% gross margin, generated 9 billion yuan in revenue, and reached a record 771 million global monthly active users. That reflects years of hardware user growth and shows that the company’s old model — hardware for acquisition, internet for monetization — is still working. Monthly active users hitting a record and phone shipments falling are not contradictory. The first reflects the installed base; the second affects how quickly Xiaomi can add new users. The company also said it has enough cash on hand, and its share buybacks in 2026 have already exceeded HK$11.7 billion. In the call’s closing remarks, Lu said Xiaomi will "firmly increase investment in AI, chips, operating systems, and embodied intelligence to prepare for the next generation of growth." The company has no shortage of directions. The question is when those bets will start showing up in the financials.