Rising Component Costs Hit Xiaomi: Q2 Profit Falls 42%

A pile of supplier invoices piled higher than usual, and the numbers on Xiaomi’s ledger tell the story: higher parts bills have eaten into profits, and fast. The company reported a sharp decline in net income for April through June as memory prices and other hardware costs squeezed margins across its core businesses.

Xiaomi’s net profit for the quarter came in at about €846 million, down 42.6 percent from a year earlier and short of the roughly €900 million analysts had expected, according to LSEG data. Revenue reached around €14.9 billion, also below the consensus forecast of approximately €16.0 billion.

Why did results slip so quickly? A mix of rising component costs and intensifying competition. The smartphone division, the company’s historical cash engine, saw revenue fall 7.5 percent year on year to about €5.74 billion. Gross margin in the mobile business contracted from 11.5 percent to 8.5 percent as parts inflation bit into every handset Xiaomi sold.

Shipments tell the same tale. Omdia’s figures show Xiaomi shipped 31.2 million smartphones in the quarter, a 26 percent drop from last year and the second consecutive quarter of declining volumes. The company’s exposure to lower-priced segments amplifies the pain: more than half of Xiaomi’s shipments are priced under €184, leaving it unusually sensitive to rising memory costs compared with other top vendors.

From phones to cars: a costly pivot

At the same time, Xiaomi is doubling down on new revenue streams. The company has poured capital into electric vehicles and artificial intelligence initiatives as growth in the domestic smartphone market loses steam. Those investments are starting to show top-line promise but remain loss-making in the near term.

EV revenue rose 15.9 percent year on year to roughly €3.26 billion in the quarter. Deliveries climbed too, with Xiaomi handing over more than 104,000 vehicles to customers, up 28.2 percent from a year earlier. Still, the company booked combined losses tied to EV projects, AI work and other new initiatives of about €355 million for the period.

There is a strategy behind the pain. Xiaomi plans to enter European EV markets by 2027 and has broadened its lineup beyond sedans and crossovers with the new SkyNomad series launched in July. But entering a crowded global auto market requires capital and time, and the near-term impact is lower profitability.

So where does Xiaomi go from here? Cost control will be critical. If memory and component prices ease, margins could recover, but that’s a market variable the company cannot fully control. At the same time, scaling EV operations and monetizing AI efforts are long-run bets that could diversify revenue away from smartphones—if Xiaomi can weather the next few quarters.