Budget Smartphones Become Less Attractive in the Era of Artificial Intelligence

NextFin News -- The artificial intelligence world is highly divided. On one side, SK hynix and Micron Technology have seen their market caps break the US$1 trillion mark; on the other, a host of handset makers are facing squeezed sales and profits, forcing them to raise prices and cut some entry-level product lines just to stay alive first. Amid the upheaval, emerging markets led by the Middle East have bid farewell to their “golden age,” turning from boom to bust. Even in the relatively affluent Gulf markets, they can’t “take” the pressure from rising prices anymore.

“Business has been incredibly tough this year. The war has already dampened people’s willingness to spend, and once phone prices go up, it gets even harder,” said Liu Shuai (a pseudonym), who runs a phone shop in Dubai’s old city. He has been in the business for six years, and this year has been the hardest. “I mainly sell our domestic Chinese brands. Now that we’re not doing new entry-level models, we’ve switched to used phones. I’m basically selling mid-to-high-end models where there’s still some margin.”

The downturn in the Middle East handset market is only a microcosm of shifts across emerging markets worldwide. The newly released first-quarter data across regions show that emerging markets—once the engine of global growth—have clearly lost momentum and are now seeing steep declines. Some markets still posted growth in Q1, but full-year forecasts still point to an unavoidable recession. By contrast, markets like Europe, which skew toward mid-to-high-end phones, at least won’t be struggling quite as much.

“You can tell from the rankings that Transsion and Xiaomi fell the most. Their approaches are pretty similar, and they also have to answer for profits. Cheap entry-level phones aren’t moving, and that won’t change the bigger picture. They can only adjust themselves. Their push into the high end over the past couple of years didn’t really improve things either, so they can only try changing products and channels to see if it helps,” said a distributor close to Transsion.

Middle Eastern Big Spenders Can’t “Take It”

In Deira, Dubai’s old city, electronics and mobile phones are clustered together. Unlike the glitz of the CBD, it feels a bit like Huaqiangbei from years ago. Users can find almost any phone brand here—especially Chinese brands, which local consumers favor for their strong value for money.

Liu Shuai noted that in earlier years, pretty much everyone made money. Back then, all kinds of gray-market imports and refurbished phones were everywhere—it was essentially Huaqiangbei’s Middle East branch. The same went for countries like Kenya in Africa: opportunities were endless. If you were willing to work hard and endure the loneliness, you could find your own gold mine.

In recent years, emerging markets—led by the Middle East—have become the next target for smartphone makers seeking incremental growth in a stagnant environment. As can be seen, whether it’s Samsung and Apple or Chinese brands such as Xiaomi, HONOR, and OPPO/Vivo, all have stepped up investment in the region and achieved solid growth. However, unlike mature markets in Europe and the US, emerging markets generally have weaker “risk resistance.” Most users here are more price-sensitive; once prices rise, demand is immediately dampened.

Omdia’s latest research data showed that in Q1 2026, the Middle East smartphone market (excluding Türkiye) fell 6% year on year to 11 million units. Although channels significantly brought inventory forward ahead of Ramadan and new-product launch cycles, weak sell-through at retail and persistent consumer caution continued to suppress upgrade demand. Meanwhile, ongoing global inflation in memory costs pushed smartphone prices up across both new and existing product lines, noticeably squeezing room for promotions.Among them, Saudi Arabia—the region’s largest smartphone market—declined 3% year on year in Q1 2026. Liu Shuai said bluntly, “A friend of mine who runs a shop in Saudi said business was down by about 10% this year. It’s really tough. Entry-level models have had price increases of around 20% just to protect margins, and they’re hard to move. High-end models are less affected, but even those ‘rich guys’ aren’t placing orders as readily as before.”

Notably, under sustained and increasingly volatile pressure, the Middle East—long the core growth engine among emerging markets—saw its Q1 drop as only the beginning. Omdia analysts expected that in the second half of 2026, vendors would face a significantly more challenging operating environment, and that the Middle East smartphone market would fall 22% for the full year. Even in the relatively affluent Gulf markets, shipments were also expected to decline.

Other Emerging Markets Also Face Sales Decline

The downturn in the Middle East smartphone market is not an isolated case; it is simply a microcosm of emerging markets turning downward—taking a temporary leave from the high-growth “golden era.”

Among them, Southeast Asia—where Chinese brands have been cultivating the market for quite some time—also suffered an overall 9% decline in the first quarter of this year, with shipments totaling just 21.6 million units. Aside from Samsung and Apple, Xiaomi, Transsion, OPPO, and vivo all posted declines to varying degrees. Indonesia, the largest market in Southeast Asia with shipments of 7.2 million units, saw the sharpest drop in absolute terms, down 17% year on year.

Africa, while still showing growth for now, is expected to shrink by 28% for the year as a whole. Omdia analysts noted that in 2026, Africa’s ultra-low-priced smartphone market is entering a structurally more challenging phase: margin compression is pushing the business model for entry-level devices to a tipping point, putting pressure on the core sub-$200 segment in Africa, with the US$80–150 price band being hit the hardest. At the same time, the downturn in the smartphone market has also slowed the pace of digital adoption in Africa, pushing it back beyond the previously expected 2026–2027 window.

Latin America is similar. Although in the first quarter of 2026, rising RAM and storage costs had not yet been clearly reflected in average selling prices (ASP), the pricing pressure is already very real and will become more evident in the second half of the year. Analysts said that as retail prices begin to gradually reflect higher memory costs from late in the second quarter onward, demand may weaken—especially in the entry-level and low-end segments, which account for about 70% of the overall Latin American market. If this is compounded by further increases in component costs, as well as the inflationary effects that macroeconomic uncertainty and global developments could bring in the fourth quarter, demand may slow further, extending the downcycle into the first half of 2027.

Compared with this year’s bleak picture, emerging markets in previous years weren’t exactly a place where you could sit back and count money—but as long as you had channels and supply, it was far easier to make money than at home. That gap was precisely what many companies targeted: besides early movers like OV and Transsion, Xiaomi and Honor also stepped up investment, and their growth was clear.

A former Xiaomi employee who had been seconded to the Middle East market told the author, “It’s much easier to build a market here than in China, and it’s not nearly as cutthroat. Sometimes we even saw doubled growth—there was no worry about selling at all. It quickly became the second overseas market, after Europe, to break 20% market share.”

But all of that changed completely this year. The growth is gone and the pressure is here; without high-end users to prop things up, some places are even tougher than China. A channel partner of OPPO in Indonesia told the author that this year’s decline is already an irreversible trend and will continue for quite a long time; the industry stopped expecting growth long ago. Now, compared with protecting shipment volume, protecting profit margins matters more.

Shifts in the market are bearing this out. In the first quarter, the average selling price (ASP) of smartphones in Southeast Asia reached $349—an all-time high—up 19% year over year. From the perspective of brands, they have now accepted the reality of declining volumes and know they can’t change it. All they can do is raise per-unit profitability to preserve cash flow. The awkward part is that more than 60% of smartphones in Southeast Asia currently sell for under $200. How to control the size of any price hike is far more vexing than simply selling the product.

Budget phones: AI’s Biggest “Victim”

The traditional growth playbook in emerging markets is losing effectiveness. The “low margin, high shipment” model is a thing of the past—and the root cause of all this is AI.

AI’s rapid progress is forcing many industries to be rebuilt from the ground up, and smartphones are no exception. Yet before AI delivers truly disruptive user-experience breakthroughs, the fire it has stoked in the memory market has made smartphones the biggest casualty. As costs keep climbing, many brands have already cut the number of new models, and some have even paused R&D on new products.

Data show that memory accounts for nearly 15% of a smartphone’s BOM (bill of materials). According to Counterpoint, surging memory prices are reshaping the smartphone BOM structure: for low-end phones with wholesale prices below $200, total BOM cost in Q1 2026 rose 25% quarter over quarter, with memory costs set to make up as much as 43% of the total BOM. For budget models, the old price advantage is becoming increasingly hard to sustain. The only option is to raise prices to avoid selling at a loss—but consumers aren’t buying it.

The hotter AI gets, the more expensive memory becomes; the more expensive memory becomes, the harder it is to sell budget phones—seemingly a deadlock. On one side, SK hynix and Micron are raking it in; on the other, a host of phone makers are “crying out in pain” in emerging markets. But there are exceptions. While most manufacturers are pulling back, some brands used this moment to step up investment in channels and, in doing so, delivered strong growth. Among them, HONOR posted robust growth in the Middle East, Africa, and Latin America in the first quarter, with some regions seeing increases of more than 100%. Analysts said that, much like Samsung, HONOR took advantage of this phase to keep ramping up investment in brand building and channel expansion.

At the same time, a Mexican retailer told the author that HONOR’s aggressive push has largely benefited from the groundwork Huawei laid earlier. “With Huawei’s help, HONOR didn’t have to relearn its commercial structure, dealer resources, or go-to-market playbook through trial and error—let alone start from scratch—so naturally it has been able to scale very quickly.”

However, this is only one quarter of data. With memory and storage prices rising, it remains unclear how long such a strategy can be sustained, and there are still far too many variables ahead. On an earnings call, Xiaomi Group President Lu Weibing revealed that this current round of memory price increases has been lasting for quite some time, with the jump especially pronounced from last year’s fourth quarter through this year’s first and second quarters. Prices for the same memory configurations have surged to nearly four times year-on-year, and this rapid upswing in storage costs is likely to continue into 2027, and possibly even 2028.

According to the latest financial report, in the first quarter Xiaomi’s smartphone business generated RMB 44.3 billion in revenue, down 12.5% year-on-year, while gross margin fell to 10.1%, a decrease of 2.3 percentage points from the same period last year. The former Xiaomi employee mentioned above told the author that, beyond price hikes, Xiaomi had already adjusted its product mix—for example, discontinuing low-priced 4G variants and also eliminating low-memory entry configurations—shifting the overall lineup further upmarket.

“Put simply, it’s a ‘forced’ specs upgrade: cut the cheap, low-spec models outright and use higher-memory configurations to offset the impact of rising storage prices. OPPO and vivo are basically doing the same. Everyone has reached a tacit consensus—it’s still better than losing money on every unit sold.”

As the passive growth tailwind in emerging markets fades and the old order is disrupted, the rules of survival in the smartphone industry have been completely rewritten. Budget phones “don’t need” AI, yet they have become the biggest “victims.”