The gross profit margin of Xiaomi's smartphones has dropped to 8.5%.

Xiaomi, this company is really a tricky topic to talk about.

Try to write about it objectively, and Mi fans will accuse you of taking bribes; if you deviate a little from their expectations, legal complaint letters will come your way, and you will be labeled as a smear writer or a hater.

What on earth can you do? It's confusing, but the financial reports are all published on the Hong Kong Stock Exchange, so we can just refer to the official announcements.

01

The most striking set of figures in the Q2 2026 financial report: the average selling price of mobile phones increased by 280 RMB, while shipments decreased by 11 million units; the average price hit a record high, yet profits still fell by 40%.

First, let's clarify one premise: who was the first to make a move behind this financial report?

The answer is the upstream suppliers.

Lu Weibing did the math at the earnings call. When a reporter asked about the price hike of storage components, he didn't beat around the bush, and directly cited product configurations as examples; the management has been running these numbers every day.

For an entry-level 8GB+128GB smartphone, based on the cost in the second quarter, the memory portion alone converted to retail price exceeds 1500 RMB; this does not even include the cost of the screen, battery, and camera modules.

A mobile phone priced at 2000 RMB has 1500 RMB tied up in memory, leaving only 500 RMB to cover the rest of the entire device, while also reserving profit for Xiaomi.

How can such a phone be made? It's impossible. The reason is very simple: manufacturing it would mean operating at a loss.

IDC estimates that in the bill of materials for low-end phones, storage accounts for 65% of the total cost, which translates to 30% to 40% of the retail price. At this time last year, this proportion was only 10% to 20%.

This round of price hikes is not unique to Xiaomi. The AI industry is grabbing production capacity, and several major storage manufacturers are shifting their production lines to high-margin AI chips, leaving a smaller share of capacity for mobile phone memory. The contract price has risen by more than 80% in a single quarter.

Server memory prices rose first, followed by mobile phone memory. When the price hike reached Xiaomi, the supply order it received was the most burdensome.

Lu Weibing said:

Xiaomi predicted last year that this round of price hikes would last for a long time, but when it came to the first and second quarters of this year, the magnitude and pace of the price increases still exceeded expectations.

When making predictions last year, Xiaomi thought the supply order would only have a few more pages of price adjustments, but when it actually received the order, it found the entire document had been rewritten.

Even with the prediction, Xiaomi could not stop it. The supply priority of the five major memory vendors is locked for Xiaomi. But what is locked is "product availability", not "the price".

The same supply order, when imposed on different companies, leads to completely different levels of pain.

Apple sells a mobile phone for 7,000 to 8,000 RMB. A 100 RMB increase in memory cost is negligible when spread across the total price. Its storage procurement is based on long-term contracts, and industry estimates show its procurement cost may be 30% to 40% lower than that of Android manufacturers.

It designs its own A-series chips, develops its own basebands, and can calculate every detail of the entire supply chain. Its gross profit margin is 38.7%.

The iPhone 17 Pro is even cutting prices to attract consumers. Android brands are raising prices collectively, pushing users away, while Apple cuts prices to take in those wavering users.

What about Xiaomi?

More than half of its shipments are still in the price range of around 1,000 RMB. Consumers in this price bracket buy phones based on cost-effectiveness; an extra 100 RMB would make them hesitate for quite a while.

The same memory component is just a trivial fraction of the cost for an 8000 RMB phone, but it is the core lifeline for a 2000 RMB phone.

Companies that are immune to the pressure of supply orders and companies that suffer immediately once the supply order changes are living through the same round of price hikes. Xiaomi belongs to the latter group, you see, this is the logic behind the price rise, the supply order has already been rewritten.

02

With the supply order rewritten, Xiaomi's response is to adjust all adjustable parts; there are four measures in this round of actions.

The first measure is to adjust price tags.

In the second quarter, some models saw direct price increases, ranging from 10% to 20%. After the first round of hikes, when the cost was still climbing, the second round of price increases followed immediately.

Those price tags on the counters were peeled off and reattached over and over. Price adjustments for old models and pricing for new models are both changing constantly.

The pace of price hikes is driven by the supply order. Xiaomi rarely did price increases in the past, as low price was its signature, but now it adjusts price tags more frequently than anyone else.

There is no other choice, it has to pick between keeping its signature and surviving.

The second measure is to modify product configurations.

When adjusting price tags is not enough, adjust configurations. Models that used to start with 8GB RAM last year now start with 6GB RAM this year. Models that used to have 128GB as the base storage last year now only offer 256GB as the minimum option.

The model name and packaging look exactly the same, but when you open the device, you find the configuration has been quietly reduced, the number on the price tag stays the same, but the product on the shelf has changed.

Few people who buy mobile phones will check the parameter sheet carefully. It is not until the second year of use when the memory runs out that they realize for the same price they paid last year, the product they get this year is no longer the same.

Reducing configurations and raising prices have the same effect, but consumers' perception of them is totally different. Price hikes are explicit, while configuration cuts are implicit.

The third measure is to remove price tags.

The mid-to-low end models on the bottom shelf are directly delisted; the official statement calls it product matrix optimization, to put it bluntly, the price tags are torn off. This shelf is where Xiaomi started its business.

The concept of cost-effectiveness was made famous on this very shelf. Now Xiaomi itself has torn off all those price tags.

The fourth measure is to put up new price tags.

Models priced above 3000 RMB accounted for 32.1% of domestic sales, hitting a record high. In the 3000 to 4000 RMB price range, its market share reached 16.2%, which is also an all-time peak.

The 17T series launched in May also drove up high-end shipments in overseas markets. The price tags on the top shelf of the counter are getting higher and higher.

High-end models can withstand price hikes well, consumers in this price range are not that sensitive to a 100 RMB increase in memory cost; raising price tags to higher levels is something Xiaomi has been thinking about for 10 years, and the second quarter of this year is the quarter when it executed this most smoothly.

The four measures all revolve around the same formula:

Profit equals (price minus cost) multiplied by sales volume. Everyone can work out this formula, but what you can do after the calculation is the real problem. The cost term is determined by the supply order, which Xiaomi cannot change. The sales volume term cannot be altered drastically, as that would hurt its fundamental user base.

Among the three variables, the only one that can be adjusted is price, and even this price cannot be changed arbitrarily.

Lu Weibing said that Xiaomi cannot simply pass all the increased costs to consumers. With the 10% to 20% price hike, Xiaomi absorbs half of the cost increase itself. This statement sounds polite, but when you think about it carefully, it is out of necessity:

If all the cost increases are passed on, consumers who buy thousand-yuan phones will stop buying directly. These users are Xiaomi's fundamental base, and since the base cannot be hurt, the price tags are kept just below the maximum acceptable limit.

The phrase "offset lower sales with higher prices" sounds simple, but every step of implementation involves trade-offs:

Because prices are raised to compensate, sales volume cannot be lost, and cost is not controlled by Xiaomi itself. The numbers on the price tags can be adjusted, but the cost cannot be changed; therefore, using higher prices to offset lower sales is essentially filling the gap left by rising costs.

03

Four measures were taken to adjust price tags, but did they fill the profit gap? The answer becomes clear as soon as we lay out the two sets of data.

The first step is to check the accounts. Let's look at the price tag side first.

In the second quarter, the average selling price of Xiaomi's mobile phones was 1351 RMB, 280 RMB higher than the same period last year, up 25.9%, a record high.

On the price tag side, Xiaomi's performance is not bad. The average price of Xiaomi's mobile phones has been rising slowly in the past few years, and this quarter, the growth curve suddenly jumped up sharply.

This new high is driven by the overall upward shift of the product shipment structure.

The problem is that the price tag only changes Xiaomi's own figures, while the supply order changes other people's figures. After Xiaomi adjusted its own numbers, the numbers on the supply order are still rising.

Then look at the supply order side. That order is still pushing up costs. We have already calculated how much it has risen before. When we put the two sets of data together, the gap between them is the gross profit margin of the mobile phone business: 8.5%.

It was 11.5% at the same time last year, and 10.1% in the first quarter. It is like walking down stairs, one step per quarter, going down continuously. The price increase did not fully cover the cost growth. This sentence sums up the entire performance of Xiaomi's mobile phone business in the second quarter.

The second thing is the sales volume.

Shipments reached 31.2 million units, down more than 11 million units from last year, a 26.5% drop. The global mobile phone market only dropped by 6% (data from Omdia), Xiaomi's decline is more than four times the global average.

The performance in China is even worse, with a decline of more than 20%. During the same period, Huawei and Apple both saw growth, and these are the only two brands among the top 10 manufacturers that recorded positive growth.

More than half of the 4-times larger decline comes from the overall market downturn which affects all players worldwide, while the other half is caused by Xiaomi's own initiative to cut low-end product lines, which is the result of tearing off those low-end price tags.

The lost sales volume averages to more than 100,000 fewer units sold per day. The price tags that were torn off have their costs to pay, and this cost was realized in the second quarter.

The sales volume cannot be recovered, the rise in price and drop in sales cancel out most of each other, and the total revenue of the mobile phone business still fell by 7.5% in the end.

The third thing is profit.

The accounts of price and volume all end up affecting profit. The adjusted net profit was 6.219 billion RMB, down more than 40%, marking the second consecutive quarter of 40% decline.

It fell by 43.1% in the first quarter and 42.6% in the second quarter. The two figures are almost identical, with no sign of improvement at all. What does this mean?

Xiaomi earned 10.8 billion RMB in the same quarter last year, but only 6.2 billion RMB this year, a reduction of 4.6 billion RMB per quarter, which averages to more than 50 million RMB less profit per day.

If we include the book gains from investment activities, the net profit under accounting standards is 9.463 billion RMB, with only a 20.3% year-on-year decline. The 3.2 billion RMB difference between the two statistical calibers is all non-recurring gains. Book gains are not sustainable, and the adjusted net profit is the real operating profit.

There is still one segment in the group that is generating solid profits:

The internet service business recorded 9 billion RMB in revenue, with a gross profit margin of 76.8%, 1.4 percentage points higher than last year; advertising revenue still grew by 4.8%, and overseas revenue accounts for more than 30% of the total.

The 9 billion RMB revenue accounts for less than one-tenth of the total 108.9 billion RMB revenue of the group. It is like a pillar in the income statement, while all other parts are leaking profits, it remains standing firmly.

But this single profit pillar cannot support the gap of the entire group. The mobile phone business used to be the most profitable shelf for Xiaomi. Now this shelf only returns 60% of its previous profit level in this quarter.

This part is losing steam, the entire group has to find a new center of gravity for its next phase of business, which lies in the higher-level shelf.

04

That shelf is Xiaomi Automobile.

The average price of a Xiaomi mobile phone is 1351 RMB, while the average price of a Xiaomi car is 229,300 RMB, one car is equivalent to 170 mobile phones. In the same retail store, the price tags on different floors differ by two orders of magnitude.

Xiaomi built this business shelf three years ago. In 2025, the revenue of this segment exceeded 100 billion RMB, and it even made a 900 million RMB profit that year. But in the second quarter of this year, the situation changed completely.

Let's talk about the positive side first.

The entire automotive industry is in decline, the overall China passenger vehicle market shrank by 22% in this quarter, while Xiaomi Automobile delivered 104,199 units against the trend, up 28.2%, with quarterly deliveries exceeding 100,000 units for the first time.

The 50 percentage point difference between the industry's decline and Xiaomi's growth is the result of Xiaomi's 2.5 years of accumulation. Other manufacturers are clearing their shelves, while Xiaomi is adding more products to this new shelf.

But this new shelf is also affected by the same supply order issue.

The automotive and AI business segment recorded an operating loss of 2.6 billion RMB in the second quarter. At the same time last year, this figure was only 300 million RMB. Within one year, the loss has expanded more than 8 times.

Where does the loss come from? The YU7 has become the main delivery model, with a price much lower than the SU7 Ultra. New car R&D is burning a lot of capital, and the cost of AI development is also counted in this segment.

You see, the delivery scale has gone up, but the profit has not followed.

The mobile phone business is making 4.6