Artificial intelligence hardware demand has caused memory component prices to triple, severely impacting production costs for entry-level smartphones. Manufacturers of budget devices now face tight profit margins, with potential price hikes likely to shift consumer preference toward the secondary market.
The rapid expansion of artificial intelligence infrastructure is creating an unexpected supply squeeze for the smartphone industry. As chipmakers prioritize high-value memory components for AI data centers, the supply available for consumer electronics has tightened significantly. Data indicates that the cost of memory per unit for smartphone manufacturers has tripled since 2025, rising from approximately $20 to over $60 today.
This spike in component costs creates a specific financial challenge for the budget smartphone segment. In premium devices, memory costs represent a smaller portion of the total build expense. However, for entry-level smartphones priced under $200, memory components account for nearly 60% of the total bill of materials. Manufacturers in this segment operate on thin margins, leaving them with little room to absorb such a sharp rise in costs without impacting profitability.
To manage this pressure, original equipment manufacturers are shifting their operational strategies. Many are reducing the number of budget models they sell to streamline supply chains and are increasingly opting for older, cheaper semiconductor chips to keep device prices stable. While these moves help manage costs, they also risk lowering the competitive appeal of these handsets. If companies choose to pass these increased costs to customers through higher retail prices, analysts expect a decline in shipment volumes, as budget-conscious buyers may opt to keep their current phones longer or move to the pre-owned device market.
The strategic shift is most impactful for companies with a high concentration of sales in the mass-market and entry-level segments, such as Xiaomi, OPPO, vivo, and Transsion. Unlike premium-focused brands like Apple or Samsung, which have more flexibility to maintain margins through higher-value products, mass-market players are more exposed to fluctuations in component pricing.
Looking ahead, the primary concern for investors will be whether these companies can maintain their profit margins without sacrificing market share. Market analysts are watching to see if the combination of higher prices and limited device upgrades will lead to a contraction in global shipment volumes throughout 2026 and 2027.