Rising Chip Costs Eliminate Cheap Smartphone Options

Finding a new smartphone for under $100 has become increasingly difficult for global consumers. According to data from IDC cited by GN technics/mobile (en-US), worldwide shipments of these low-cost devices have dropped by nearly 60% in the second quarter of 2026 compared to the same period last year. This sharp decline marks a significant shift in the mobile market, where bargain-basement handsets are rapidly disappearing from retail shelves and online stores.

The reduction is not limited to the very lowest price brackets. Manufacturers are retrenching across the lower end of the spectrum, with major players like Xiaomi reducing their output of models priced below $200. This trend indicates that the economic viability of producing basic smartphones is collapsing, forcing brands to abandon segments that no longer generate sufficient profit margins.

AI demand drives up component costs

The primary driver behind this price squeeze is the surge in demand for artificial intelligence infrastructure. Chipmakers are prioritizing the production of high-value memory components for data centers and AI systems, which has limited the supply available for consumer electronics. As a result, the cost of memory has skyrocketed relative to the total value of a budget phone.

For devices priced under $200, memory now accounts for nearly 60% of the total manufacturing bill of materials. Industry analysts note that this cost structure makes low-end phones uneconomic to manufacture. When the core components cost too much relative to the final selling price, companies can no longer sustain the production of these basic models without suffering significant losses.

Brands shift focus to premium models

To protect their profit margins, smartphone manufacturers are climbing the price ladder. Chinese brands, in particular, are pruning their ultra-cheap model lines and focusing on higher-end devices. Counterpoint Research estimates that Xiaomi’s average selling price has climbed by approximately 30% since 2023, reaching around $197, while competitors like Oppo have seen similar increases.

This strategic pivot was highlighted recently when Xiaomi introduced its 18 Fold model, a premium folding device with a starting price of $1,640. By targeting the high-end segment, companies can offset the rising hardware costs with higher sales volumes of profitable devices. However, this move leaves consumers in the budget segment with fewer options and higher prices for the remaining basic models.

Price reversal appears unlikely

Experts suggest that the era of ultra-cheap phones is over. Memory producers have little motivation to expand capacity for low-end components, as their resources are fully committed to the more lucrative AI sector. Even if supply pressures eventually ease, analysts argue that this would only moderate further price increases rather than reverse them.

While some manufacturers can offset hardware costs with revenue from internet services and apps, the fundamental economics of the hardware have changed. Consumers should expect the baseline price for new smartphones to remain elevated, with the gap between budget and mid-range devices narrowing significantly.