Xiaomi’s profit just took a memory-fueled hit

Every price you pay is the end of an argument you were never invited to join. Somewhere upstream, two buyers wanted the same thing, one of them paid more, and the receipt eventually lands in your hands.

For most of the past decade, that argument went the consumer’s way in electronics. Memory got cheaper. Screens got cheaper.

Phones got better while the sticker barely moved, which is why a $150 handset in Jakarta or Lagos could do most of what a $900 flagship could do.

Then artificial intelligence (AI) showed up with a bigger wallet. Data-center operators started buying the advanced memory that trains and serves large models, and the companies that make it pointed their fabs at whoever paid the most.

Conventional DRAM and NAND flash, the ordinary chips inside your phone, got scarce and expensive.

That stays an abstract supply chain story until somebody puts a hard number on it. Somebody just did.

Xiaomi (XIACY) reported second-quarter results on Aug. 18, and the numbers show what happens when a company built on volume gets priced out of its own product.

Why AI data centers now set your phone price

Memory is one of the largest line items in a smartphone’s bill of materials, and it is the one component a manufacturer cannot substitute away from. A phone needs DRAM to run and NAND to store. There is no cheaper version of “enough.”

For years, that was fine, because memory was a commodity in permanent oversupply. AI ended that. Suppliers, including Samsung and SK Hynix, shifted capacity toward the advanced chips that go into data centers running AI workloads, which cut availability of conventional memory and pushed prices up, Bloomberg reported.

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The squeeze does not hit every phone maker equally. Apple (AAPL) sells at price points with enough gross margin to absorb a component shock without blinking. A company whose volume sits at the bottom of the market has no such cushion.

Xiaomi is that company. More than half its shipments are priced below $200, which made it the most exposed of the top five smartphone vendors to memory-cost inflation, according to Omdia data reported by Mobile World Live.

That is the setup. Here is what it cost.

What the memory squeeze did to Xiaomi’s margins

Adjusted net profit fell 42.6% year over year to 6.2 billion yuan, roughly $919 million, against an average analyst estimate of 6.6 billion yuan, according to Reuters. Revenue slipped 6.1% to 108.9 billion yuan, also short of the 112.2 billion yuan consensus. It was the third consecutive quarterly profit decline.

The smartphone division is where the damage is concentrated. Handset revenue fell 7.5% to 42.1 billion yuan, and smartphone gross margin compressed to 8.5% from 11.5% a year earlier.

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Read that margin figure twice. A business selling 31.2 million phones in three months is keeping about eight and a half cents of every dollar before it pays a single salary, rents a single building, or spends anything on research.

“Significant increases in key component costs, including memory,” along with tougher competition, created headwinds for the business, Xiaomi said in its earnings statement.

Here is the part I find most revealing. Xiaomi did not simply lose sales. It walked away from them on purpose.

• Shipments came in at 31.2 million units, down about 26% year over year, Omdia data reported by Reuters indicated.
• Xiaomi shipped 42.4 million phones in the same quarter of 2025, according to the company’s Q2 2025 results, meaning that roughly 11 million units disappeared from the run rate.
• Average selling price hit a record 1,351 yuan as the company optimized its product mix and raised pricing, according to the earnings call.
• Premium devices priced above 3,000 yuan reached 32.1% of mainland China sales, based on the company’s second-quarter presentation.

When I lined those four data points up against each other, the strategy became obvious. Xiaomi deliberately cut loose the cheap end of its lineup, the exact tier where a memory price spike turns a thin margin negative, and traded volume for price.

It raised the average selling price to a record level, and the smartphone gross margin still fell three percentage points.

That is the uncomfortable part. The mitigation worked and the margin dropped anyway.

Why the EV business cannot cover the smartphone gap

Xiaomi’s answer to a maturing phone market has been electric vehicles, and on delivery volume, the pivot is working. Second-quarter deliveries reached 104,199 units, up 28.2%, with EV revenue rising 15.9% to 23.9 billion yuan.

Profit is a different conversation. The smart EV, AI, and other new initiatives segment posted an operating loss of 2.6 billion yuan for the quarter. Research and development spending rose 18.9% to 9.2 billion yuan.

My analysis of the segment math says the pivot is roughly two years from carrying the company. An operating loss of 2.6 billion yuan against group adjusted profit of 6.2 billion yuan means the growth business is currently consuming about 40% of what the mature business earns.

That is a defensible trade if memory costs normalize on schedule. It is a serious problem if they do not.

The balance sheet buys time. Xiaomi held 219.3 billion yuan in total cash resources against 39.3 billion yuan in borrowings at quarter end, the interim report revealed. No interim dividend was declared.

What Xiaomi’s next two quarters hinge on

Management says the worst has passed. President Lu Weibing said on the earnings call that the pace of memory price increases had begun to slow and should keep slowing in the second half, and that the hardest stretch for the phone business was behind it.

He was careful about what that means. Lu said he expects memory prices to keep climbing in the second half, “though in a less severe way,” according to Electronics Weekly. Decelerating is not falling.

The pass-through has already reached buyers. Handset prices rose in the United States this summer on the same shortage, and retailers have been raising prices across categories for separate reasons. Two cost shocks are arriving at the same checkout counter.

For investors, the test is narrow and dated. Third-quarter results will show whether smartphone gross margin stabilizes near 8.5% or breaks lower, and whether the SkyNomad SUV series launched in September ships at a price that improves the EV mix rather than diluting it.

Analyst price targets across the hardware chain will move on the same question.

For everyone else, the takeaway travels further than one Chinese conglomerate. The AI buildout is no longer a story confined to the companies selling AI. It has become a cost input for firms that never touched a model, and those firms are passing it forward.

Xiaomi raised phone prices three times this year to cover it. Your next handset is part of that receipt.

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