How AI Chip Demand Sparked a Smartphone Shock
The current smartphone downturn is a supply-driven crisis in which artificial intelligence systems absorb scarce memory chips, forcing phone makers to cut shipments and raise prices. Instead of a normal demand slowdown, AI chip demand for data-center and server hardware is drawing wafer capacity away from DRAM and NAND used in handsets, creating a severe memory chip shortage. According to IDC’s latest forecast, global smartphone shipments are expected to fall 12.9%, described by its analysts as the biggest annual drop ever recorded and a “tsunami-like shock originating in the memory supply chain.” With limited cleanroom capacity, memory manufacturers are prioritizing higher-margin AI infrastructure for companies such as Google, Meta, Microsoft, and Amazon. Each AI server rack can consume memory equivalent to hundreds of phones, so the economics make low-margin smartphone contracts less attractive and leave device brands scrambling for components.
Smartphone Prices Rising to a USD 523 Average
As memory grows scarce and expensive, smartphone prices are rising quickly while shoppers hold off on upgrades. IDC forecasts that the average selling price of a smartphone will hit USD 523 (approx. RM2,410), a record level that reflects how crucial memory has become in device costs. In many mid-range models, memory already accounts for 15–20% of manufacturing costs, so any spike in DRAM and NAND prices immediately hits the bill of materials. Higher component costs arrive on top of delayed launches and weaker demand, which are already pressuring brands. Analysts tracking major device makers report shipment declines and compressed sales windows, especially when flagship launches slip by several weeks. With less room to absorb memory inflation, manufacturers are quietly trimming promotions and shifting production toward higher-priced models, making smartphone prices rising feel less like a temporary blip and more like a lasting reset.
Budget Phone Extinction and the Vanishing Sub-USD 200 Segment
The memory chip shortage is having its harshest impact at the low end, driving what many analysts describe as budget phone extinction. IDC warns that the sub-USD 100 (approx. RM460) smartphone category, estimated at around 171 million devices a year, faces extinction even after memory prices stabilize. As suppliers abandon these uneconomical models, phones under USD 200 (approx. RM920) are also becoming scarce because there is little profit left once memory and other components are paid for. Low-end Android brands that once relied on volume sales are being squeezed out, while bigger names such as Apple and Samsung are better positioned to secure supply and pass along higher costs. In many emerging markets, IDC expects retail prices to climb by 40–50%, pushing buyers toward refurbished phones and much longer replacement cycles as new entry-level devices become harder to find.
Polarized Market: Premium Survivors and Entry-Level Gaps
The memory crisis is widening the gap between premium devices and the remaining entry-level models, while the middle of the market erodes. Recent shipment data shows the sub-USD 300 (approx. RM1,380) segment growing 8%, helped by aggressive carrier promotions and brands that still maintain scaled production. At the same time, the mid-range USD 300–599 (approx. RM1,380–RM2,760) and USD 600–700 (approx. RM2,760–RM3,220) tiers are shrinking, with declines of 19% and 6%, respectively. Premium USD 800+ (approx. RM3,680+) phones have fallen only 1%, as loyal users and installment plans soften the blow of higher prices. This polarization means consumers may soon see shelves stocked with costly flagships and a handful of subsidized low-end models, but very few solid mid-range options. For shoppers who once aimed for a balanced price-performance handset, realistic choices are narrowing fast.
Geopolitics, Tariffs, and the Long Road to Recovery
Memory shortages are not the only pressure point. Geopolitical tensions and tariffs have led some manufacturers to build inventory early, only to face weaker demand later. In one major market, smartphone shipments fell 3% year-over-year to 33.4 million units after brands accelerated stockpiling ahead of new import tariffs. Launch delays for key flagships further compressed sales into shorter windows and shifted buyers between brands. Analysts now describe the situation as a “structural reset of the entire market,” with recovery not expected until late 2027 and only modest improvement after that. Entry-level buyers face the worst of it: limited options at familiar price points, steeper upfront costs, and growing pressure to keep older devices for an extra generation or turn to refurbished models. Unless memory capacity expands significantly, the perfect storm of AI chip demand, trade friction, and rising costs is likely to linger.