The global memory chip prices have experienced a sharp surge, which could potentially put a squeeze on the profit margins of smartphone manufacturers. However, Morgan Stanley's most recent report provides strong backing for Xiaomi. It posits that the rising costs may, in fact, lead to an improvement in Xiaomi's profit margins.

The report highlights that historical data reveals a positive trend. During the three price hike cycles spanning from 2016 - 2017, 2019 - 2021, and 2022 - 2023, Xiaomi's gross profit margins on smartphones witnessed an increase. Morgan Stanley is of the opinion that Xiaomi has the ability to transfer the rising costs to the end - consumer prices by employing cost - pass - through mechanisms. Moreover, there exists a so - called 'time lag dividend.' This means that after cost inflation drives up the prices, if the inflation trend reverses, manufacturers will find themselves in a situation where they have 'high selling prices and low costs.' Such a scenario would then trigger a rebound in gross profit margins.

Furthermore, Xiaomi's continuous premiumization strategy has played a crucial role. By enhancing its product mix, this strategy has bolstered Xiaomi's defensive capabilities during periods of cost fluctuations.