Xiaomi's Silicon Bet Arrives With Its Margin Squeeze in Full View

Xiaomi's in-house 3nm chip targets margin erosion from memory costs, while EV sales grow and buybacks signal confidence.

The timing of Xiaomi's chip reveal was no accident — and the market knows it. On Monday, the Chinese electronics giant unveiled the Xring O3, its first in-house 3-nanometer AI processor, manufactured by Taiwan's TSMC. Two people familiar with the matter told Reuters that TSMC has also been contracted to produce two additional Xring chips. The announcement landed just days after quarterly results laid bare the very problem this silicon strategy is meant to solve.

That problem is margin erosion. Adjusted net income tumbled 42.6% year-on-year to 6.2 billion yuan in the second quarter, while revenue slipped 6.1% to 108.9 billion yuan. The culprit: historically high memory and component costs that have squeezed the smartphone business. By designing its own processors, Xiaomi is attempting to loosen the pricing grip that Qualcomm and MediaTek have long held over its most important product line.

A Two-Pronged Product Offensive Takes Shape

The chip unveiling came alongside a second reveal: the "AI Cube," a mini-PC prototype that pairs the Xring O3 with the O100 and D100 chipsets and is designed to run AI models with up to 200 billion parameters locally. The message is clear — Xiaomi no longer wants to be just a phone maker, but a company with its own silicon foundation spanning handsets, PCs, and eventually vehicles.

That ambition was already telegraphed. On August 19, company president Lu Weibing announced the launch of the "Pengcheng" electric vehicle series and new flagship smartphones for the second half of the year. The chip presentation fits neatly into that pre-announced product push rather than arriving as a surprise. The first device to feature the Xring O3, the "Xiaomi 18 Fold," is expected in September — a date that will serve as the real test of whether the chip's performance claims hold up in a shipping product.

The Numbers Tell a Story of Two Businesses

Beneath the headline profit drop, the core business shows signs of life. According to a Seeking Alpha analysis from August 20, average selling prices in the smartphone segment rose 26% year-over-year — evidence that Xiaomi's push upmarket is gaining traction. The EV division, meanwhile, narrowed its losses even as memory costs weighed on results. The "Smart EV, AI and New Initiatives" segment generated 24.9 billion yuan in revenue on 104,199 vehicle deliveries, with an operating loss of 2.6 billion yuan.

The SU7 sedan crossed a notable threshold on August 17, with cumulative deliveries surpassing 500,000 units. That milestone underscores that the EV business is building real scale despite its losses. The picture that emerges is one of mutual reinforcement: the smartphone operation funds the margin-thin EV division, while the chip strategy aims to make both less vulnerable to external cost pressures over the long run.

Buybacks and a Stock Still Below Its Averages

Alongside the chip news, a Hong Kong exchange filing showed Xiaomi repurchased 1.8 million Class-B shares on Monday — a signal management typically uses to express confidence in the company's valuation. The buyback came as the stock gave back 3.3% to 3.06 euros on the day, following a 9.6% run-up over the prior week.

The recent bounce has been meaningful: the shares have recovered 9.2% over the past seven trading sessions and now sit at 3.05 euros, comfortably above the 50-day moving average of 2.90 euros. But the longer-term picture remains sobering. The stock is still 15% below its 200-day average of 3.58 euros, down 5.6% on the month, and 29% off since the start of the year. The distance from the 52-week high of 6.54 euros, set in September 2025, underscores that the recent optimism has yet to break the prevailing downtrend.

The volatility — 61% on a 30-day basis — suggests the market is far from settled on how to price Xiaomi's silicon gamble. Whether the September launch of the Xiaomi 18 Fold validates the chip's promise will likely determine if this is the start of a structural shift or just another product cycle.