Summary in Plain Language
Xiaomi has relied on its cost-effective business model—selling products at lower prices than its competitors—for 15 years. By reducing costs, it has gained a large market share and then using that scale to further lower costs, creating a virtuous cycle that has led to substantial profits. However, the external environment has changed dramatically in 2026: the cost of essential components for smartphones has quadrupled, subsidies for purchasing new energy vehicles have been cut in half, and the policy benefits for smart home devices have also diminished. These three main businesses have all faced challenges, resulting in a more than 40% decline in profits in the first half of the year. Lei Jun’s autumn press conference was quite contradictory: on one hand, Xiaomi introduced the most expensive folding smartphone to date, aiming to shed its cost-effective image and regain control over pricing; on the other hand, it launched a new electric SUV with a price cut of 20,000 to 30,000 yuan to compete in the market. Essentially, the old strategies that worked in the past are no longer effective, and Xiaomi is now trying to find new ways to survive.
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Detailed Analysis
1. Why Did Xiaomi’s Cost-Effective Model Stop Working in 2026?
Xiaomi’s success was based on a large volume of purchases, which allowed it to negotiate lower prices from suppliers, making its products more affordable and attracting more customers. This cycle sustained its profits. But in 2026, this model collapsed:
The cost of key smartphone components quadrupled, with storage accounting for 30% of the total cost, up from 10% before. It’s like running a milk tea business where the cost of milk and tea leaves suddenly doubled, forcing you to either raise prices and drive away existing customers or sell at a loss. Xiaomi’s main customer base is sensitive to prices; raising prices would lose customers, while not raising prices would result in losses. Additionally, the reduction in new energy vehicle taxes and the end of subsidies for trading in old appliances have eliminated the growth driven by policies. Now, only companies with strong brand value, like Huawei and Apple, can pass on increased costs to consumers without losing market share. Xiaomi, without pricing power, has dropped from the top five in the domestic smartphone market. Its cost-effective strategy has become ineffective.
2. Why Is Xiaomi Investing Billions in Self-Developed Chips?
Lei Jun’s emphasis on self-developed chips is not just for show; it’s a last-ditch effort to stay competitive. Previously, Xiaomi relied on third-party components, leaving it at the mercy of suppliers’ price increases. By producing its own chips, systems, and AI models, Xiaomi can control the largest part of its costs and set its own prices. This gives it the confidence to charge higher prices. Previously, Xiaomi’s phones were seen as cost-effective, but now it must rely on its own technology to justify higher prices. Without self-developed components, it would struggle to compete.
3. Why Are Xiaomi’s Prices for High-End Phones and SUVs So Different?
The conference’s contradiction lies in the fact that the phone was priced at a record high of 10,999 yuan, while the SUV was discounted by 20,000 to 30,000 yuan. This reflects the different situations of the two businesses:
- Smartphones have no room for further price cuts; selling them at lower prices would only lead to losses. Xiaomi must target the high-end market, even if consumers are initially skeptical. The electric SUV market is shrinking, and Xiaomi needs to use price cuts to maintain its market share. The company’s focus on cost-effective products in the past no longer applies, and it must rely on its own technology to differentiate its products.
4. Is Xiaomi Really in Danger?
Many think Xiaomi is in trouble due to declining profits and sales, but it’s actually in a strong position. It has 219.3 billion yuan in cash, an internet advertising business with an 80% margin, and 767 million monthly active users worldwide. The real challenge is changing consumers’ perception of its brand. For 15 years, Xiaomi was associated with affordability, but now it needs to convince them that its high-end products are worth the price. If the high-end folding phone succeeds, it can move towards higher profits. Otherwise, it will continue to struggle in the competitive mid-to-low-end market. The press conference is just the first step; the real test will come in fourth-quarter sales.