---
title: "Xiaomi adjusts business strategy: AI phones show aggressiveness"
description: "In our previous series of tracking studies, we have reached the following conclusions about Xiaomi's smartphone business: 1) The business is greatly affected by the macro environment and competitive l"
type: "topic"
locale: "en"
url: "https://longbridge.com/en/topics/24195081.md"
published_at: "2024-09-30T15:17:50.000Z"
author: "[仝志斌](https://longbridge.com/en/profiles/10247393)"
---

# Xiaomi adjusts business strategy: AI phones show aggressiveness

![image](https://pub.pbkrs.com/uploads/2024/9b3d0bc2ebd14c63236af5911156db31?x-oss-process=style/lg)

In our previous series of tracking studies, we reached the following conclusions about Xiaomi's smartphone business:

1) The business is heavily influenced by the macro environment and competitive landscape. To some extent, the industry's high growth previously supported its premiumization strategy. However, in recent years, Xiaomi has adopted a relatively conservative approach to prioritize profit protection. For a long time, Xiaomi's inventory management has been very prudent.

2) Currently, the smartphone business remains Xiaomi's primary source of profit and cash flow (even though the car business has more "star potential"). The long-term stable development of this business is crucial for the group's sustainable operations.

Recently, new developments have emerged in the industry. For example, according to Canalys' report, global smartphone sales in Q2 2024 grew 6% YoY, the highest growth rate since Q2 2021. At the same time, competition in the industry has intensified (including but not limited to the high-profile launch of Huawei's Mate XT). Since smartphones are Xiaomi's core business, the fluctuations in its performance directly impact the stability of the group's operations.

What development path should Xiaomi's smartphone business follow in the new era? The key points of this article are:

First, Xiaomi is shifting its operational strategy from conservative to aggressive—the former prioritizes profit, while the latter focuses on market share.

Second, smartphone pricing remains relatively restrained, with limited short-term upside for ASP (average selling price).

Third, AI smartphones present both opportunities and challenges, as the short-term surge in raw material costs will affect gross margins.

Fourth, market share should be the primary metric for evaluating Xiaomi's smartphone business.

**Xiaomi's Smartphones Turn Aggressive**

ASP and gross margin are key indicators for assessing the business's performance. Let’s analyze them in detail.

![image](https://pub.pbkrs.com/uploads/2024/eb49f17df2f3f2263b1012c99a0e5914?x-oss-process=style/lg)

Broadly speaking, ASP and Xiaomi's smartphone gross margin are positively correlated: higher selling prices indicate stronger product premiumization capabilities, leading to higher gross margins. This is why market analysts pay close attention to ASP.

After 2021, the industry's growth momentum reversed sharply, compounded by soaring raw material costs due to global supply chain disruptions. Xiaomi responded by lowering ASP to accelerate inventory clearance and preserve cash flow. As shown in the chart above, both lines declined during this period, reflecting the immense pressure on the company.

After 2023, ASP stabilized, but gross margins saw a qualitative improvement (rebounding more sharply). Casual observers might interpret this as "Xiaomi has emerged from the downturn." However, considering historical and industry context, the real reason becomes clear:

The rapid decline in upstream raw material costs (industry PPI bottomed in Q4 2023) passively boosted Xiaomi's gross margins. For example, in Q3 2023, ASP hit a multi-year low, but gross margins reached a new high due to falling core component prices and reduced inventory impairment provisions.

The market in 2024 is entirely different. While ASP remains stable (with a slight sequential decline in Q2 2024, still within a controllable range), **gross margins have shown a more pronounced decline.**

The reason is simple: raw material costs have surged. Lei Jun has stated that "memory prices have risen over 85% this year."

This has led to two contrasting perspectives:

Optimists:

Although gross margin declines are again driven by rising raw material costs, this time is fundamentally different. In 2022-2023, Xiaomi adopted a contraction strategy, even sacrificing short-term market share to minimize impact and protect profit margins.

After 2024, Xiaomi's global smartphone market share hit a multi-year high (14.6% in Q2 2024, per Canalys). Its pricing strategy has turned aggressive: **particularly in overseas markets, where low prices have "rolled out" higher market share—a clear offensive strategy.**

Pessimists:

Strong brands typically have pricing power to pass rising costs to consumers. For example, Apple's gross margins remain stable regardless of industry fluctuations.

Despite its scale, Xiaomi's profitability remains volatile due to upstream cost fluctuations, lacking cost-transfer capability. It is still stuck in price wars.

Both views have merit and supporters. How should we interpret them?

![image](https://pub.pbkrs.com/uploads/2024/ec5984af7d5e1d0eb42fa531d618033c?x-oss-process=style/lg)

Inventory changes are a key window into corporate confidence: companies increase inventory when optimistic and reduce it to mitigate risks when pessimistic (Xiaomi entered a prolonged inventory clearance cycle after 2021).

After Q3 2023, Xiaomi's inventory surged. While this is partly due to its car business, combined with its strategy of controlling ASP to gain global market share, **it’s clear that Xiaomi's internal outlook has shifted, returning to a market-share-first approach, even at the expense of some profitability.**

The industry's "involution" remains severe. Not only has Xiaomi failed to fully achieve brand premiumization, but most major players are also cutting prices to compete for share. The logic is:

Gross profit = sales volume × gross margin = market share × total market size × gross margin.

In a highly homogenized market where competition relies on price wars, sacrificing some gross margin for higher market share can ultimately yield greater profits.

Given Xiaomi's situation, its strategy is understandable:

1) The company is generally optimistic and adopting an offensive stance.

2) Price wars are necessary to gain market share, especially overseas, where ASP follows this principle.

**AI Smartphones Spark an "Arms Race": Soaring Raw Material Costs**

After the above analysis, many may still focus on Xiaomi's smartphone gross margins, especially as AI smartphones gain traction in China, with Xiaomi keen to showcase its mid-to-high-end models.

Recent positive industry sentiment stems not only from recovering demand but also:

1) A major replacement cycle is approaching—2016 was the peak for global smartphone shipments, implying a replacement wave is imminent.

2) AI smartphone innovations are stimulating demand.

These factors could create a powerful synergy. However, **the new cycle will also drag manufacturers into a fresh "arms race,"** with users demanding higher performance.

In AI smartphone tech, considering cost, latency, and other factors, **most manufacturers are adopting edge AI as the primary path.**

Edge AI processes data closer to users (at the network edge) rather than in centralized cloud facilities, offering cost efficiency (avoiding cloud computing costs) and low latency. This, however, raises hardware requirements.

For example, smartphone SoC architectures now include NPUs (neural processing units) alongside CPUs and GPUs, forming a triple-computing setup for diverse AI scenarios.

Additionally, as offline AI models require large datasets and smooth performance, AI smartphones will drive upgrades in DRAM and NAND capacity. Yole predicts average DRAM capacity in premium smartphones will rise from 9GB in 2023 to nearly 10GB in 2024, with 16GB models (sufficient for 7B-parameter LLMs) growing from 8% to 11% (Ping An Securities).

![image](https://pub.pbkrs.com/uploads/2024/44a72aafb63184820beb257bda19ecf2?x-oss-process=style/lg)

This creates a cycle: **"AI smartphones boost computing demand → drive SoC and memory upgrades → surge in chip/memory demand and prices → smartphone makers face profit pressure."**

For Xiaomi, AI smartphones are a critical opportunity to boost shipments, improve finances, and achieve brand premiumization. **However, short-term cost pressures from raw materials cannot be fully passed to consumers amid market share battles, forcing Xiaomi to absorb some costs.**

Given the early stage of AI smartphones and fierce competition, we conclude:

1) Xiaomi's smartphone gross margins may face further downward pressure (especially over the next 1-2 quarters).

2) Short-term focus should be on market share, not profitability. Scale, not per-unit margins, will determine success.

Xiaomi rose to prominence with smartphones and has since diversified, especially after the SU7's strong debut. Yet, smartphones remain its cornerstone, and their performance—especially in the AI replacement cycle—could impact its valuation as much as cars.

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> **Disclaimer**: This article is for reference only and does not constitute any investment advice.