Gasgoo Munich- Xiaomi Corp. (1810.HK) unveiled its second-quarter earnings for 2026 on August 18. Under pressure from rising memory component costs, the smartphone business is struggling to grow. In contrast, the smart EV and AI innovation division emerged as a rare bright spot, generating 24.9 billion yuan in quarterly revenue and lifting its contribution to group income to 23%.Even as the business scales up, Xiaomi's EV arm remains in a capital-intensive phase. The unit must shoulder costs for vehicle manufacturing, intelligent features, and AI-related R&D. While profitability remains elusive, there are signs that losses are narrowing quarter-over-quarter.Several brokerage reports have highlighted the competitive edge created by Xiaomi's "Human x Car x Home" ecosystem. Yet looking ahead to the second half, the domestic vehicle market outlook is far from rosy, leading analysts to adopt a cautious stance on whether Xiaomi will meet its annual delivery targets.Behind 100,000 Deliveries: Rising Scale, a Long Road to ProfitFinancial data reveals Xiaomi's smart EV business generated 23.9 billion yuan in revenue in the second quarter of 2026 — a 15.9% year-on-year increase. Deliveries climbed 28.2% to 104,200 units. However, as volume expanded, revenue per vehicle slipped to 229,000 yuan, a 9.6% decline from the previous year.Xiaomi attributed the decline in gross margins to several factors: a lower mix of the high-end SU7 Ultra model in deliveries, persistently rising prices for core industry components, and increased investment in underlying AI technology, which drove up overall operating costs.Image Source: Xiaomi Corp.On a segment reporting basis, the innovation division — which includes automotive and AI operations — posted a gross margin of 19.2%, retreating from last year. The division recorded an operating loss of 2.6 billion yuan. While that marks a 500 million yuan improvement from the first quarter, it is more than eight times the loss from the same period last year. A distinction is necessary here: this segment consolidates vehicle sales, automotive R&D, and investment in the MiMo large model, meaning this loss figure cannot be directly equated with the loss from the automotive hardware business alone.Guosen Securities predicts that as the product mix improves, the EV division's gross margin should gradually approach its full-year target of 20%, while maintaining its delivery goal of 500,000 units for the year. However, the firm notes that given external constraints and weak sentiment in the domestic auto industry, whether Xiaomi hits those sales targets will depend largely on the incremental contribution from upcoming new models.Ecosystem is Xiaomi's trump card. Unlike traditional automakers, Xiaomi's competitiveness extends beyond the vehicle itself to the "Human x Car x Home" ecosystem the group has cultivated over time.By the end of the second quarter, Xiaomi's AIoT platform had connected 1.16 billion devices, with the Mi Home app boasting 124 million monthly active users. By integrating HyperOS with the MiMo large model, the company has enabled cross-terminal synergy between phones, smart home devices, and cars — positioning the vehicle as a critical node in the mobile intelligent terminal network.Xiaomi invested 9.2 billion yuan in R&D during the second quarter, an 18.9% year-on-year increase, funneling resources simultaneously into smartphones, AI models, humanoid robots, and automotive operations.Sinolink Securities notes that a massive user base, global distribution channels, and a proprietary AI foundation form a unique competitive moat for Xiaomi's EV business. However, the ecosystem advantage primarily enhances user experience and conversion. Since related R&D costs are booked under the innovation division, they will weigh on profitability in the short term, and the commercial realization of this ecosystem will require prolonged market validation.Zooming out to the group's overall performance, the smartphone business is holding its ground through a push into premium segments, while IoT operations are showing resilience thanks to overseas expansion. Internet services, meanwhile, continue to serve as the group's profit anchor due to high margins.SkyNomad Series Arrives: From a Single Hit to a Multi-Model MatrixXiaomi currently sells two models: the SU7 pure electric sedan and the YU7 coupe SUV. The SU7 series has already achieved a breakthrough in market penetration, leading the segment for sedans priced above 200,000 yuan for several consecutive months.Xiaomi plans to launch the SkyNomad extended-range SUV (N70/N90 Max) in September, targeting the family market, followed by another new model in the fourth quarter. With the arrival of SkyNomad, Xiaomi will finally plug the gap in its extended-range powertrain offerings, completing the initial construction of a multi-powertrain product matrix.The SkyNomad series targets a distinctly different demographic than the SU7 and YU7, theoretically unlocking a new incremental market. However, the domestic extended-range sector has become a red ocean, with competitors like Li Auto and AITO having already established a firm foothold in consumer perception.During the earnings call, Xiaomi Partner and Group President Lu Weibing noted that pre-launch orders for the SkyNomad have exceeded internal expectations, adding that the display models have drawn significant foot traffic since arriving in stores.Image Source: Xiaomi SkyNomadThe Challenge Ahead: Balancing Scale, Profit, and the Product MatrixCrossing the 100,000-delivery threshold in a single quarter signals that Xiaomi has secured its place in the mainstream new energy vehicle market, but the operational challenges lying ahead have only just begun.First, how to balance scale expansion with margin recovery. As the industry price war drags on and component prices fluctuate, Xiaomi must juggle boosting delivery volumes with optimizing its product mix to avoid relying on low-margin, high-volume sales. While analysts are optimistic about margin recovery, hitting the 20% target will depend on the mix of high-spec models and the realization of economies of scale.Second, whether SkyNomad can replicate the market success of the SU7 and YU7. The ability to transfer Xiaomi's proven playbook in the pure electric market to the fiercely competitive extended-range family SUV sector is the most critical variable for the next stage of its EV business.Third, monetizing the "Human x Car x Home" ecosystem. While cross-device AI experiences and a massive user base are already in place, converting that experiential advantage into product premiums and tangible operational profits remains to be seen.As a bellwether for consumer electronics giants crossing into auto manufacturing, Xiaomi's EV business has cleared the survival hurdle. The key market focus going forward will be whether the company can drive simultaneous improvements in scale and profitability as it ramps up multiple products. Gasgoo will continue to track orders and deliveries following the SkyNomad launch to monitor Xiaomi's next phase of growth.
