The global smartphone market recorded its steepest drop on record last year, with shipments down 14% from the previous year. The decline, driven by a persistent chip shortage, marks the worst performance in the industry’s history. Behind that shortage is a broader shift in the semiconductor world: soaring demand for artificial intelligence is reordering how chip makers allocate production and set prices.
Why chips are scarce
The chip shortage isn’t just about capacity — it’s about where that capacity goes. Semiconductor factories, already running at tight margins, are increasingly prioritizing orders from AI-focused firms over traditional smartphone makers. AI chips require specialized manufacturing processes and command higher prices, making them more attractive to foundries. That leaves less room for the kinds of chips that power phones: application processors, modem chips, and power management components.
This reallocation has driven up prices for the remaining smartphone-grade chips. Some suppliers have hiked contract prices by as much as 20%, according to industry reports. Phone makers have passed some of those costs to consumers, but with demand already softening, they’ve absorbed a chunk themselves. The result is thinner margins and delayed product launches.
What the decline means for phone makers
Manufacturers are struggling to secure enough components to meet even reduced demand. Several companies have had to cut production targets for mid-range and budget models — segments that rely on chips in shortest supply. That’s a problem because those models account for the bulk of global shipments.
High-end devices, which often use premium chips from a handful of suppliers, have fared slightly better. But even there, shortages of supporting chips like capacitors and display drivers have caused bottlenecks. The industry is now looking at longer lead times for chip orders, with some deliveries stretching beyond six months.
Consumers, meanwhile, are holding onto their phones longer. Replacement cycles in major markets have stretched past three years, a trend that predates the shortage but has accelerated during it. Fewer new models, higher prices, and limited stock have made people think twice before upgrading.
The AI factor and where it leads
The chip shortage isn’t a temporary blip — it’s structural. AI demand is not cyclical; it’s growing. Companies building data centers for training large language models and running inference are locking in long-term supply agreements with foundries, effectively reserving capacity for years.
That means smartphone makers will have to compete not just with each other but with the entire AI ecosystem for every wafer. Some analysts expect the shortage to ease by mid-2026, but only if new fabrication plants come online without delays. Others warn that demand for AI chips could absorb most new capacity before it even reaches the market.
For now, the smartphone industry is left waiting. A few manufacturers have begun designing their own chips in hopes of better controlling supply, but that takes years and billions of dollars. Until then, the 14% drop may not be the last record the market sets.
The next test will come when quarterly shipment data for early 2025 is released in April. If the shortage hasn’t eased, another double-digit decline is possible.
