A 57% Profit Slump Shows the Cost of Holding the Line
Xiaomi’s latest quarterly results reveal how fragile smartphone profitability has become as component inflation meets cooling demand. Net income plunged 57% year-on-year to 4.72 billion yuan in the first quarter, while revenue fell 11% to 99.14 billion yuan. The core smartphone business was hit hardest: revenue slipped 12.5% to 44.3 billion yuan and shipments dropped 19% to 33.8 million units, the steepest decline among the top five global brands. Even though the company managed to nudge up average selling prices, its smartphone gross margin slid from 12.4% to 10.1%. That combination of Xiaomi profit decline and margin compression underlines the central dilemma: memory chip costs are surging, but consumer appetite for frequent upgrades is weakening. For Xiaomi and its peers, the old model of competing largely on aggressive pricing is colliding head-on with a structurally more expensive supply chain.
Memory Chip Costs Turn Into a Structural Threat
Behind the disappointing earnings sits a powerful driver: rising memory chip costs tied to booming demand for AI infrastructure. Xiaomi’s management has been unusually vocal about this trend. CEO Lei Jun reminded audiences that the company was among the first to warn publicly about memory price increases last year. He now expects memory chip costs to keep climbing for at least the next two years, while president Lu Weibing believes the current cycle could last until the end of 2027 and possibly into 2028. These aren’t short-term fluctuations but a multi‑year squeeze on smartphone makers’ bill of materials. Storage and memory are now materially inflating production costs for smartphones and other devices. As smartphone prices rising gradually becomes the norm, manufacturers must decide whether to absorb more of these expenses or risk testing consumers’ willingness to pay for new models.
When Average Selling Prices Rise Into Weak Demand
The tension in Xiaomi’s business model is visible in its pricing data. Despite weaker smartphone demand and falling shipments, the company’s global smartphone average selling price increased by 8.2% year-on-year to a record level in the first quarter. Premium devices played a growing role: phones priced at Rs 42,240 or more accounted for 23.5% of Xiaomi’s total smartphone units sold in its home market. That shift upmarket supports revenue, but it also amplifies the perception that smartphone prices rising is making upgrades less accessible for mainstream buyers. Xiaomi is caught between protecting margins and preserving smartphone affordability as component costs climb. Higher ASPs help cushion profit pressure from memory chip costs, yet they risk sidelining price‑sensitive customers who previously flocked to Xiaomi for value‑driven devices.
Absorb the Pain or Pass It On? The Industry’s Choice
Lei Jun says Xiaomi is working to absorb part of the additional memory and storage costs by improving supply chain efficiency and implementing internal technological optimisations instead of immediately passing everything to buyers. But he has also warned that if memory costs keep rising at the current pace, holding prices steady will become increasingly difficult. Lu Weibing has gone further, predicting that several premium flagships from Chinese brands could cross the 10,000 yuan (around USD 1,470; approx. RM6,800) threshold by year‑end. This is the pricing crossroads facing the entire industry: either compress margins further, which threatens long‑term R&D and innovation, or let smartphone prices rising become explicit and risk slowing upgrade cycles. For consumers, the era of ever‑more‑capable phones at flat or lower prices may be drawing to a close.
What Xiaomi’s Warning Means for Future Affordability
Lei Jun’s advice at the Xiaomi 17 Max launch—urging frequent upgraders not to delay purchases—was more than a marketing line. It was a signal that smartphone affordability, as users have known it, is under pressure. Xiaomi’s wider portfolio, from AIoT devices to electric vehicles, shows it is betting on diversification rather than relying solely on phones to drive growth. Yet the smartphone remains the anchor of its ecosystem, and the Xiaomi profit decline illustrates how vulnerable that anchor is to swings in memory chip costs and demand. If component inflation persists while competition stays intense, more brands may follow Xiaomi in nudging prices upward, especially at the premium end. Consumers will face a tougher calculus: hold onto devices longer, trade down to cheaper tiers, or accept that cutting‑edge performance now comes with a structurally higher price tag.