Xiaomi's Margin Squeeze Meets a ¥200 Billion Bet on Vertical Integration

Xiaomi faces a net profit drop over 50% as smartphone margins shrink from EV expansion and memory-chip costs; a share buyback and massive R&D plan aim to steady confidence.

The week ahead promises a stark reality check for Xiaomi investors. When the Chinese consumer electronics and EV maker publishes its first-quarter results on Tuesday, May 26, the market is bracing for a net profit plunge of more than 50%. Revenue is expected to slide to around 101 billion RMB, with earnings per share falling to 0.175 RMB. The stock already reflects the strain: it ended the week at €3.29, down over 26% since January.

The dual weight of higher memory-chip costs and a capital-intensive expansion into electric vehicles is crushing margins in the smartphone business. Xiaomi is deliberately ceding volume in the mass market to push premium devices like the upcoming Xiaomi 17 Max, a move that Morgan Stanley sees as a necessary realignment. The bank still flags upside potential, betting that higher average selling prices and a premium SUV — the YU7 GT — will eventually stabilise profitability.

But the vehicle division itself is adding pressure even as it gains momentum. Founder Lei Jun recently unveiled a starting price of 233,500 yuan (roughly €29,800) for the standard YU7, undercutting Tesla’s Model Y in China. April deliveries reached 36,702 units, and the YU7 has sold 232,000 vehicles in ten months. Xiaomi has set a 2026 target of 550,000 deliveries. Yet the cash required to scale that fast, combined with a shift toward in-house components, explains why the company is burning through resources.

Earlier this week, Xiaomi reinforced its message with a share buyback. On May 21, it repurchased 3.3752 million Class B shares for approximately 99.9998 million HKD — a symbolic show of confidence as the stock trades just above its 52-week low. The buyback did little to alter the market’s mood; the shares dipped on Friday to €3.30. Over the past twelve months, the loss has deepened to nearly 46%.

The more consequential signal, however, is Xiaomi’s long-term spending plan. In its new planning period, the group intends to invest at least 200 billion yuan (about €25.5 billion) in research and development covering chips, the HyperOS software platform, and artificial intelligence. That is almost double the previous phase’s 105.5 billion yuan. The goal is vertical integration: reducing reliance on external suppliers for critical components and strengthening the ecosystem that links smartphones, smart-home devices, and cars.

Price competition, a premium pivot, and a massive R&D push — Xiaomi is running three expensive strategies in parallel. Tuesday’s unaudited results will show whether the smartphone margin squeeze is as severe as feared and, crucially, how much the EV segment is losing on each vehicle. The buyback buys time, but the YU7 must now prove it can generate orders at its lower price point without destroying unit economics.