Xiaomi Pays 3 Billion Yuan in "Memory Tax"

"Will things be very difficult today?"

A user asked this question in a third-party Xiaomi investor community, with others raising doubts about whether the coming year would be better. It is fair to say that investors' faces were filled with pessimism about Xiaomi.

On August 18, Xiaomi released its second-quarter financial report. Core indicators such as revenue and profit declined year-on-year. Single-quarter revenue amounted to RMB 108.92 billion, down 6.1% year-on-year, while adjusted net profit was RMB 6.2 billion, a 42.6% year-on-year drop.

Looking purely at year-on-year figures, the results indeed appear lackluster. However, on a quarter-on-quarter basis, Q2 revenue actually grew by 9.9% compared to Q1. Adjusted net profit also saw a slight increase of 2.4%. Signs of "recovery" are evident in both revenue and product structure.

"After adjustments, the result we delivered in Q2 shows that although shipments declined year-on-year, we remain ranked third globally." Lu Weibing responded to questions regarding the dynamic balance of "price, shipment volume, and gross margin" during the earnings call, stating, "Our ASP (Average Selling Price) also increased by nearly RMB 300."

This quarter, smartphone business revenue was RMB 42.1 billion, a 7.5% year-on-year decline; shipments totaled 31.2 million units, a 26.5% year-on-year decrease; but the ASP surged to RMB 1,351, up 25.9% year-on-year, setting a new historical record.

With shipments down by a quarter, revenue only fell by 7.5%, thanks to the ASP boost driven by adjustments in product structure and price hikes—on one hand, entry-level products were reduced, and on the other, product prices were raised.

"I think the impact is greatest on low-end and entry-level phones. For versions with an 8+128GB storage combination, the retail price exceeds RMB 1,500," said Lu Weibing.

In other words, when memory costs account for part of the RMB 1,500 retail price, the total retail price could potentially break through RMB 2,000 or even higher. This is why we emphasized in previous articles that "soaring memory costs have forced the death of budget phones."

According to financial report data, the gross margin for Xiaomi's smartphone business in Q2 was 8.5%, compared to 11.5% in the same period last year. However, in Lu Weibing's view, the Q2 gross margin of 8.5% was a figure that exceeded expectations.

"Last quarter, everyone was very worried that our gross margin might not hold above 8%, or even slide towards 7%. In fact, we still held at 8.5%, which should exceed everyone's expectations."

The stabilization of gross margin is a key signal of "recovery," but the rapid rise in storage costs has eaten away the premium gained from moving upmarket.

Lu Weibing stated that Xiaomi had predicted last year that memory prices would enter a long-term upward cycle, but the sharp increases in Q4 last year, and especially in Q1 this year, still exceeded expectations, describing the rise as "very exaggerated."

How significant is the impact of rising memory prices on Xiaomi's gross profit?

Based on the 11.5% gross margin in the same period of 2025, Q2 smartphone revenue of RMB 42.1 billion should have contributed approximately RMB 4.84 billion in gross profit. The actual gross profit was about RMB 3.58 billion, meaning roughly RMB 1.26 billion in gross profit was consumed by storage and other costs in Q2 alone. Cumulatively for the first half of the year, the loss falls between RMB 2.3 billion and RMB 2.7 billion.

In other words, in the first half of 2026, Xiaomi's smartphone business effectively paid RMB 3 billion in "memory tax."

With gross margins stabilizing, Lu Weibing believes the smartphone business has entered a "visible and controllable" state. Regarding storage price hikes, Lu Weibing considers this a dynamic process. He indicated that it is unlikely for storage prices to maintain the current high level, which is about five times that of Q2 last year, for a long time, but they will not return to the previous lows either, forming a new equilibrium somewhere in between. Specifically, the rate of price increases will slow down in Q3, with gradual rises in Q4.

"It is difficult for everyone to make a very precise estimate in the short term, as this involves complex multi-party gaming. Apple initially adopted a no-price-hike strategy, but recently stated it would implement a significant price increase for its new flagship phones. Some other manufacturers also initially said they would lower prices, but recently announced substantial price hikes."

Apart from smartphones, AI large model-related businesses are merged into the RMB 1 billion revenue of "Automotive, AI, and Other Innovation Businesses," making it impossible to split out the statistics. However, it is confirmed that this business is currently not profitable.

Xiaomi CFO Lin Shiwei also stated that since the "revenue is small and just starting," there are no plans to disclose it separately in the short term.

According to financial report data, AI-related investments accounted for nearly 30% of R&D expenses in the first half of the year. R&D expenses this quarter were RMB 9.2 billion, an 18.9% year-on-year increase, indicating continued large-scale cash burning.

When answering investor questions, Lu Weibing focused Xiaomi's AI layout on the "Human x Car x Home" ecosystem, which distinguishes Xiaomi from other large model companies.

The Xiaomi MiMo foundational large model, led by Luo Fuli, currently has a team of over 100 people. Its core goal is not to rely solely on the model itself for commercialization via API and Token Plans, but ultimately to integrate into the "Human x Car x Home" ecosystem, pushing models into vehicles. At a small communication session, Luo Fuli also stated that the future envisioned by the MiMo team is moving from language to the physical world, and within Xiaomi's ecosystem, this physical world refers to the automotive business.

Data shows that Xiaomi MiMo V2.5 topped the global weekly call volume on the OpenRouter platform, growing from 1.5 trillion tokens to 10.5 trillion tokens within two months. Lin Shiwei defined this as "a real vote by global developers on the model," noting that API calls and Token Plans have begun to contribute revenue.

However, management remains restrained regarding monetization. Lin Shiwei said that AI is still in a period of large-scale investment, and there is no rush to pursue monetization; API revenue is "just beginning, with monetization not being the primary objective." Lu Weibing also stated that R&D expenses "have not been adjusted due to storage pressure, and the overall approach remains quite aggressive."

According to data mentioned by Lei Jun in a previous public speech, Xiaomi will invest RMB 60 billion over the next three years. Meanwhile, Xiaomi previously stated that by 2026, cumulative investment in AI + Embodied Intelligence businesses will reach RMB 16 billion.

Notably, as the longest-term business line in Xiaomi's AI layout, it has recently begun frequently releasing updates externally, including news on models and organizational structure.

During this year's WAIC, Xiaomi achieved a "triple launch," including promoting robots entering factories for "internships," launching the first unified generative model in the embodied intelligence field, Xiaomi-Robotics-U0, and the embodied foundational model, Xiaomi-Robotics-1.

However, compared to AI, which has already seen slight revenue realization, the commercialization path for embodied intelligence business is longer.

"Humanoid robots are still quite far from final large-scale commercialization and maturity, making it difficult to set targets," said Lu Weibing. He emphasized the logic behind Xiaomi's bet on this field: first, optimism about the direction of general embodied intelligence; second, the deep integration with Xiaomi's existing businesses—large models, chips, and systems can all synergize with robots, and once robots succeed, they will feed back into these capabilities.

In other words, the first step for Xiaomi's embodied intelligence business is to gradually emerge within its own smart factories and home scenarios, rather than rushing to sell products externally. This is why Xiaomi has been emphasizing the concept of robots entering factories for "internships" this year.

Therefore, returning to the financial report itself, looking at Xiaomi's performance for the entire second quarter, the year-on-year decline was indeed significant. However, viewed quarter-on-quarter, signs of "recovery" are slowly appearing, including a quarter-on-quarter rebound in revenue, ASP hitting a historical high, and cash reserves on hand amounting to RMB 219.3 billion.

Answering the initial question from investors from this perspective, the answer is "Difficult, but there are also good omens."

So where does the uncertainty lie?

Excluding businesses like AI and embodied intelligence that will take longer to see commercial returns, the current focus is on the gross margin of 8.5%, which is at a historical low. Improving this figure tests not only the wisdom of Xiaomi's management in product mix but also how much flexibility Xiaomi can gain in its supply chain, with the spearhead being storage prices.

Due to rising storage prices, Xiaomi paid RMB 3 billion in "memory tax" over the past six months. However, storage is a typical cyclical industry; cycles always pass, and ultimately, it depends on when storage prices turn around.

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