Xiaomi (XIACY) is accelerating its push to control more of the technology inside its devices, unveiling its new Xring O3 smartphone processor and tapping Taiwan Semiconductor Manufacturing to produce it on an advanced 3-nanometer process. The move pushes Xiaomi closer to the vertically integrated model used by Apple , while handing TSMC another customer for one of its most valuable manufacturing nodes.

Xiaomi is one of the world's largest smartphone makers, but its business now stretches across connected consumer electronics, internet-of-things products and electric vehicles. Smartphones remain a major revenue source, while EVs, AI and other new businesses are becoming increasingly important.

The Xring O3 has entered mass production and is expected to power an upcoming Xiaomi flagship foldable phone, with shipments targeted at roughly 200,000 to 300,000 units, according to Reuters. Xiaomi has invested more than RMB20 billion, or roughly $3 billion, in chip development and built a semiconductor team exceeding 3,000 employees.

The strategy extends well beyond phones. TSMC will also manufacture Xiaomi's Xring O100, a 6nm neural-processing chip designed to run the company's MiMo large-language model on devices, and the 3nm D100 processor intended for autonomous driving. Both are scheduled for deployment next year.

That makes Xiaomi increasingly important to TSMC across smartphones, edge AI and automobiles.

For TSMC, the deal reinforces demand for advanced nodes already running at high utilization. Three-nanometer products represented 30% of TSMC's wafer revenue in the second quarter, when revenue jumped 36% and net income surged 77%.

Investors Takeaway

For Xiaomi, the critical question is whether proprietary silicon can improve product differentiation and margins rather than simply add development costs. Second-quarter adjusted profit fell 42.6% as expensive memory and components pressured the smartphone business, making cost control particularly important.

Investors should watch Xring O3 shipment volumes, adoption of the O100 and D100 next year, and whether Xiaomi can meaningfully reduce dependence on outside chip designers.

For TSMC shareholders, Xiaomi is another sign that advanced-node demand is broadening beyond traditional customers. August sales, due September 10, will provide the next read on whether that momentum remains intact.