The global smartphone industry is heading toward its sharpest annual contraction on record, as a severe shortage of memory chips, intensified by the ongoing U.S.-Iran conflict and the AI infrastructure race, disrupts production and threatens the economics of low-cost mobile devices.

According to Counterpoint Research, global smartphone shipments are now expected to fall 13.9% in 2026 to approximately 1.08 billion units, a steeper decline than the 12.4% contraction the firm projected earlier this year. If realized, the drop would mark one of the most significant setbacks for the industry since smartphones became a mainstream consumer technology.

The downturn highlights a growing consequence of the artificial intelligence boom. As semiconductor manufacturers redirect capacity toward higher-margin AI processors, memory chips, and other components essential for smartphones have become increasingly scarce. The imbalance is creating winners and losers across the technology sector, with AI infrastructure suppliers benefiting while consumer electronics makers face mounting pressure.

At the heart of the problem is a global memory chip shortage that industry analysts describe as the most severe supply-side disruption the smartphone market has encountered in years. Major cloud computing companies and AI developers are spending hundreds of billions of dollars on data centers, servers, and advanced AI systems, creating unprecedented demand for semiconductors.

That demand has encouraged chipmakers to prioritize AI-related products, which command significantly higher margins than components used in budget smartphones.

Counterpoint analyst Wang Yang said the impact is being felt most heavily in the low- and mid-tier segments of the market.

“Smartphone makers in the low and mid-tier are caught between cost increases they cannot absorb and consumers with limited spending power,” Wang said.

“The question is no longer how to grow shipments or market share, but whether to remain in the market at all.”

The pressure is already becoming visible in pricing. Global smartphone wholesale prices rose 14% during the first quarter, even as shipments fell 3.1% year-on-year. Analysts expect prices to continue climbing as manufacturers exhaust inventories accumulated before the latest supply crunch.

Some entry-level smartphones priced below $150 could disappear altogether, as rising component costs make such devices increasingly uneconomical to manufacture.

The development carries significant implications for emerging markets across Africa, Asia, and Latin America, where low-cost smartphones remain the primary gateway to digital services, mobile banking, e-commerce, and internet access. A sustained reduction in the availability of affordable devices could slow smartphone adoption rates in several high-growth regions.

The crisis also exposes a broader transformation occurring within the semiconductor industry. For decades, smartphones were among the most important drivers of chip demand. Today, AI servers and data centers are increasingly dictating investment decisions across the semiconductor supply chain.

Industry executives from companies including Nvidia, AMD, Intel, and Foxconn have repeatedly highlighted surging AI-related demand this year. Global cloud providers are projected to spend more than $700 billion on AI infrastructure in 2026, with some forecasts suggesting annual capital expenditure could approach $1 trillion in the coming years.

As a result, smartphone manufacturers are finding themselves in direct competition with some of the world’s largest technology companies for access to critical components.

While the broader market struggles, premium smartphone makers are proving more resilient.

Apple continues to benefit from strong demand among higher-income consumers willing to pay for flagship devices. The company reported record revenue during the first quarter, driven in part by upgrades to its iPhone 17 lineup.

Counterpoint expects Apple’s smartphone shipments to remain largely unchanged this year before returning to growth in 2027. Strong profit margins and relatively stable access to components place the company in a stronger position than many competitors.

Apple could also emerge from the downturn with increased market share as smaller rivals struggle to secure supply.

Samsung Electronics appears similarly well-positioned. Counterpoint forecasts only a 4% decline in Samsung shipments this year, significantly outperforming the broader market. The South Korean giant benefits from its extensive semiconductor operations, diversified supply chain, and strong presence across both premium and mid-range segments. Stable component availability has allowed Samsung to maintain production volumes even as competitors face mounting disruptions.

The outlook is far more challenging for brands focused on lower-priced devices.

Transsion Holdings, whose brands dominate several African markets and are heavily concentrated in smartphones priced below $150, is projected to experience a 32% decline in shipments this year.

Counterpoint also forecasts steep declines for Xiaomi and Honor, with shipments expected to fall 28% and 20%, respectively.

The diverging fortunes illustrate how the smartphone industry is increasingly splitting into two distinct markets. Premium brands with stronger pricing power, established ecosystems, and greater supply-chain influence are weathering the storm. Budget-focused manufacturers, meanwhile, face shrinking margins, rising costs, and growing uncertainty about future production capacity.

Beyond 2026, the industry’s trajectory may depend largely on whether memory chip supply improves and geopolitical tensions ease. If AI-related demand continues accelerating while semiconductor capacity remains constrained, the smartphone market could face a prolonged period of slower growth, higher prices, and deeper consolidation.