Xiaomi's High-Stakes Pivot: Auto and AI Gains Battle Smartphone Squeeze

Xiaomi's smartphone profits plunge 63% due to soaring memory costs, while its EV and AI divisions now generate 35% of gross profit. The new SU7 EV sees strong demand as the company bets big on transformation.

Xiaomi's stock is caught in a tug-of-war between its ambitious future and a costly present. Trading just 0.22 percent above its 52-week low at €3.42, the shares have shed roughly 23 percent year-to-date, reflecting deep investor unease. The pressure stems from a severe profit squeeze in its core smartphone business, even as its electric vehicle and artificial intelligence divisions show remarkable momentum.

The root of the problem lies in soaring component costs. Between September and December 2025, prices for essential 16Gb DDR5 memory modules skyrocketed by nearly 300 percent. This has devastated smartphone profitability: the segment's contribution to the company's total gross profit has collapsed from nearly 41 percent to just 15.1 percent over two years. Management warns this cost pressure, driven by supply shortages, will persist through the first half of 2026.

In response, Xiaomi is accelerating its expensive transformation. The company is now channeling over 40 billion RMB in planned R&D expenditures for the year, with 16 billion RMB earmarked directly for AI and new initiatives. This aggressive investment is beginning to show results in non-core areas. The EV, AI, and new initiatives segment now contributes close to 35 percent of total gross profit.

The automaking arm is a focal point. The refreshed SU7 model, unveiled on March 19, 2026, secured 15,000 orders within 34 minutes and has since amassed over 40,000 firm reservations. It features series-standard upgrades including an 800-volt high-voltage architecture, LiDAR, 4D millimeter-wave radar, and Nvidia's Thor-U computing platform, with the Pro variant claiming a CLTC-rated range of 902 kilometers. To sustain growth, Xiaomi plans to launch four to six new vehicles in 2026, spanning sedans and SUVs priced between 200,000 and 550,000 yuan, while maintaining an annual delivery target of 550,000 units.

However, this expansion comes as the previous flagship model, the YU7, loses steam. Delivery wait times have plummeted from an initial 33-56 weeks to just 7-14 weeks, signaling a shrinking order backlog. Compensating for this slowdown is critical.

Simultaneously, Xiaomi's AI model, MiMo-V2-Pro, is making waves. Usage data from OpenRouter shows it is the world's most utilized AI assistant, processing 4.79 trillion tokens weekly—triple the volume of the second-place model and representing 46 percent week-over-week growth. It ranks eighth globally on the Artificial Analysis Intelligence Index and undercuts Western rivals on price at one dollar per million input tokens.

To bolster its European automotive push, Xiaomi has recruited Dieter Lorenz, a former Tesla manager with six years of experience building logistics networks in Central Europe, to oversee operational infrastructure for the region.

All eyes are now on the upcoming first-quarter 2026 results, due at the end of May. Investors will scrutinize whether the EV division has maintained the profitability achieved in 2025, if the SU7's momentum offsets the YU7's decline, and if planned price adjustments for new smartphone models like the Redmi Note 17 series can mitigate the crushing memory costs. The report will reveal if the company's costly bet on cars and AI can truly offset the erosion of its foundational business.