Xiaomi's Core Business Squeeze Tests Ambitious Transformation

Xiaomi's smartphone margins collapse as memory chip prices soar 300%. The company raises phone prices and bets on EVs and AI to offset core business pressures.

Xiaomi's stock is trading perilously close to its 52-week low, reflecting investor anxiety over a severe profitability crunch in its foundational smartphone division. The company's aggressive and costly pivot towards electric vehicles and artificial intelligence is being tested as soaring memory chip prices erode margins in its core business.

Memory Costs Skyrocket

The root of the problem lies in a global supply shock for essential components. President Lu Weibing recently highlighted the issue on Weibo, noting the price for a package of 12GB RAM and 512GB storage has surged to approximately $288 from about $72 a year earlier—a fourfold increase. This spike is largely driven by insatiable AI data center demand, which is absorbing global memory capacity at the expense of the mobile sector. Between September and December 2025 alone, costs for critical 16Gb DDR5 memory modules jumped by nearly 300 percent.

The financial damage is already clear. The smartphone segment's gross margin collapsed from 12.6% for the full year 2024 to just 8.3% in the fourth quarter. More starkly, the division's contribution to the company's total gross profit has plummeted from nearly 41% to just 15.1% over a two-year period. Management warns this cost pressure could persist throughout the first half of 2026, with analysts from TrendForce forecasting further price hikes of up to 63% for DRAM and 75% for NAND Flash in Q2.

Strategic Countermeasures and Auto Ambition

In response, Xiaomi is pursuing a multi-pronged strategy. To defend smartphone margins, it is implementing price increases and pushing premium models. The company raised the price of its Redmi K90 Pro Max by 200 Yuan starting April 11 and ended promotions on two other Redmi lines. Its new global flagship, the Xiaomi 17 series, starts at 999 euros and aims to better integrate hardware and software via the MiMo-V2-Pro AI model.

Simultaneously, the company is accelerating its transformation to reduce reliance on handsets. The electric vehicle, AI, and new initiatives segment now contributes almost 35% to total gross profit. The EV division shows mixed signals: while the refreshed SU7 sedan had a strong start with over 7,000 March deliveries, wait times for the YU7 SUV have dropped sharply from 33-56 weeks to 7-14 weeks, indicating cooling demand. Xiaomi aims to launch four to six new vehicle models in 2026, targeting 550,000 units after selling 411,837 in 2025.

To support this expansion, Xiaomi is making substantial investments and strategic hires. The company plans over 40 billion RMB in R&D spending this year, with 16 billion RMB earmarked directly for AI and new projects. It has also recruited Dieter Lorenz, a former Tesla manager who spent six years building the automaker's logistics networks in Central Europe, to oversee operational infrastructure for its European vehicle market entry.

Investor Sentiment and Upcoming Catalyst

The market remains skeptical. Shares extended losses recently, falling 4.72% to 3.42 euros, leaving them just 0.22% above the 52-week low. The stock has lost more than half its value since its June 2025 high of 6.69 euros, currently trading around 3.46 euros. All eyes are now on the first-quarter results due at the end of May. This report will be a critical indicator of whether smartphone margin erosion is accelerating and if the premium pricing strategy is gaining traction. The outcome will significantly influence views on whether the profitable auto and AI segments can offset the persistent cost pressures in Xiaomi's traditional business.