Xiaomi Faces Growth Test as Subsidies Fade and EV Backlog Thins

Xiaomi faces a critical test of its growth trajectory as the dual tailwinds of government subsidies and initial electric vehicle (EV) demand begin to wane, despite posting its first profitable quarter in the automotive segment. The Beijing-based technology giant reported third-quarter 2025 revenue of RMB 113.1 billion (US$15.7 billion), a 22.3% increase year-on-year, yet this headline growth masks a sharp stagnation in its traditional electronics business.

While the automotive division successfully turned a core operating profit of approximately RMB 680 million (US$94.4 million) for the first time, the company’s legacy smartphone and AIoT (Artificial Intelligence of Things) operations showed visible strain. Revenue from these traditional sectors grew by a mere 1.6%, significantly weighing down momentum. The tightening of China’s national trade-in subsidies has severely impacted demand for home appliances, causing growth in the IoT segment to decelerate precipitously from over 40% in previous quarters to single digits.

Investors have reacted with caution, driving Xiaomi’s share price down from recent highs of over HK50 to near HK40, reflecting skepticism about the sustainability of the company's expansion. Market concerns are now focused on a potential reversal in supply-and-demand dynamics for Xiaomi’s EVs by mid-2026. Although deliveries reached 109,000 units in the third quarter, new order intake has slowed to approximately 20,000 units per month, signaling that the company is depleting its order backlog faster than it is replenishing it.

The convergence of rising component costs, specifically memory chips, and intensifiying domestic competition places additional pressure on margins. With the "vacuum period" before new vehicle models launch and the fading efficacy of consumption stimulus, Xiaomi must demonstrate how it will sustain valuation levels as it transitions from a supply-constrained to a demand-constrained environment.

Legacy Business Stalls as Subsidies Wane

The most immediate drag on Xiaomi’s performance stems from its traditional hardware sectors, which are heavily exposed to shifts in government policy. The IoT division, previously a high-growth engine, generated revenue of RMB 27.6 billion (US$3.8 billion), representing a modest 5.6% year-on-year increase. This marks a stark contrast to the 40%-plus growth rates seen in the preceding three quarters.

The slowdown is directly attributed to the tightening of national subsidies (“Guobu”). Unlike previous direct discount models, recent policy adjustments in various regions—shifting to lottery or limited-quota systems—have effectively curbed consumer enthusiasm. Large home appliances, which rely on these subsidies to reduce end-user prices by RMB 1,000 to 2,000 (US138–138–277), saw double-digit revenue declines. Without the 15-20% discount incentives, consumers are increasingly delaying purchases, raising fears that the segment could face negative growth in 2026 against a high comparative base.

Smartphone Struggle and Margin Compression

The core smartphone business also contracted, with revenue falling 3.1% to RMB 46 billion (US$6.4 billion), alignment with market expectations but signaling structural challenges. While overseas shipments grew 2.7%, domestic shipments fell 1.8%, resulting in a further loss of market share in China to 14.6%.

More concerning for investors is the erosion of profitability. The gross margin for smartphones slid to 11.1% in the third quarter. This compression is driven by a mix of aggressive pricing competition and rising component costs, particularly memory storage. The company’s latest flagship launch, the Xiaomi 17 series, faced a lukewarm reception compared to the iPhone 17, which offered storage upgrades without price hikes. With memory prices expected to continue rising, Xiaomi faces a difficult choice in 2026: absorb the costs and sacrifice margins, or raise prices and risk further dampening demand.

EV Profitability vs. Looming Demand Gap

The automotive division provided the quarter’s highlight, generating RMB 29 billion (US$4 billion) in revenue. The average selling price (ASP) per vehicle rose to RMB 260,000(US$ 36,100), supported by a favorable mix of the new YU7 model. The gross margin for the EV business reached 25.5%, surpassing the legacy business and enabling the division to achieve its first core operating profit.

However, forward-looking indicators suggest a looming challenge. While deliveries have ramped up to nearly 50,000 units in October due to factory expansion, weekly new orders have slipped to between 4,000 and 5,000 units. This run rate implies the company is burning through its substantial backlog—estimated at nearly 400,000 units—at a accelerated pace.

Calculations suggest that if the current order rate persists, Xiaomi will exhaust its "hoarded" orders by mid-2026. At that point, the narrative will shift from a production bottleneck to a demand shortfall. With a lack of major new vehicle launches in the immediate term, the company faces a potential gap in growth drivers just as its production capacity fully comes online.

Financial Outlook

Despite the headline revenue growth, the diverging trajectories of Xiaomi's business units have created a complex valuation picture. The company reported an adjusted net profit of RMB 11.3 billion (US$ 1.57 billion), though analysts emphasize that core operating profit—excluding investment gains an done−offs—stood at RMB 6.7 billion (US$ 930 million).

The market is now pricing in a "pessimistic scenario" where traditional businesses achieve only single-digit growth in 2026 and the EV segment ends its supply-constrained phase. Unless Xiaomi can revitalize smartphone demand or stabilize EV order inflows through new product releases, the "profitability honeymoon" of the third quarter may give way to a period of stagnant growth.