Xiaomi's Struggling Transition: Can It Navigate Smartphone Margin Pressures and EV Challenges?

In the rapidly evolving tech and automotive landscapes, Xiaomi's dual-track strategy-balancing smartphone margin erosion with electric vehicle (EV) ambitions-has become a focal point for investors. As the company navigates a high-uncertainty environment, its ability to mitigate strategic risks while capitalizing on valuation asymmetries will determine its long-term viability.

Smartphone Margins Under Pressure: A Looming Threat

Xiaomi's smartphone business, once a cornerstone of its profitability, is grappling with margin compression in Q3 2025. According to data, rising storage chip prices and a decline in average selling prices (ASPs) have driven the segment's gross margin down to 11.5%, a 0.6% drop year-on-year. Despite a modest increase in global shipments to 42.4 million units, revenue fell by 2.1% to RMB 45.5 billion. This trend is exacerbated by the underperformance of low-end models, which now account for a disproportionate share of sales.

However, the high-end Xiaomi 17 series offers a glimmer of hope. Sales of this flagship model surged 30% year-on-year, with the Pro variant capturing over 80% of the segment's revenue. This shift toward premiumization could partially offset margin pressures in the short term. Yet, analysts at Huatai Securities caution that broader market saturation and aggressive competition from Samsung and Apple may limit long-term upside.

EV Ambitions: A High-Stakes Gamble

Xiaomi's EV division, launched in 2021, is now a critical growth lever. By Q3 2025, the unit is projected to deliver 109,000 vehicles, generating RMB 28.6 billion in revenue with a gross margin exceeding 26%. This marks a pivotal milestone, as the segment transitions from capital-intensive development to profitability. The SU7 model, in particular, has gained traction among tech-savvy consumers, leveraging Xiaomi's ecosystem of 500 million MIUI users.

Yet, the path to dominance is fraught with risks. A fire incident in April 2025 involving the SU7 raised safety concerns, while the company's autonomous driving system remains untested in real-world conditions. Additionally, high European tariffs-ranging from 10% to 48% threaten to erode margins in key markets. Competitors like Tesla and BYD, who collectively hold 35% of the global EV market, are also accelerating their innovation cycles.

Valuation Metrics: A Tale of Two Sectors

Xiaomi's valuation appears mixed when benchmarked against peers. As of August 2025, its price-to-earnings (P/E) ratio stands at 40.83–52.31, significantly lower than Tesla's 278.86 but higher than Samsung's 19.7. The company's price-to-book (P/B) ratio of 4.43 further suggests a premium to its tangible assets, reflecting investor optimism about its EV potential.

BYD, a direct EV competitor, offers a compelling comparison. Its P/E ratio of 21.9x and P/B of 3.37–4.20 indicate a more conservative valuation, aligning with its sector average. This discrepancy highlights Xiaomi's premium pricing for growth, which may or may not be justified depending on its ability to scale production and address quality concerns.

Strategic Risks in a High-Uncertainty Environment

Xiaomi's transition hinges on mitigating three key risks:
1. Production Bottlenecks: Current capacity constraints could delay scaling, particularly as demand for the SU7 outpaces supply.
2. Regulatory Hurdles: Tariff barriers in Europe and potential safety investigations in China may disrupt international expansion.
3. Ecosystem Integration: The success of Xiaomi's EVs depends on seamless integration with its smartphone and IoT platforms-a complex technical and operational challenge.

Conclusion: A Calculated Bet for the Future

Xiaomi's dual-track strategy is a high-stakes gamble. While smartphone margins remain under pressure, the EV division's profitability and ecosystem-driven differentiation offer a compelling long-term narrative. However, investors must weigh the company's valuation premium against its strategic risks. In a market where uncertainty is the norm, Xiaomi's ability to execute its premiumization and EV scaling plans will define its next chapter.