Surging demand for AI hardware is driving up the cost of key technology components, in particular, memory chips, which could spell the end of budget-priced smartphones. 

As AI increasingly demands memory chips, driving up prices, the cost of making cheap smartphones is likely to no longer makes sense, as outlined in a new report from research firm Omdia. 

According to the research, the biggest impact is expected to be on entry-level Android phones, traditionally priced below US$100 (around A$150), which have been popular with children, seniors and first-time smartphone buyers.The memory costs for this category of smartphones are expected to surge 400% in Q3 2026. 

As outlined by Omdia, AI servers and AI-enabled devices are consuming huge volumes of DRAM and NAND flash memory, reducing supply for low-cost smartphones and pushing component prices higher.

The report projects overall smartphone shipments to decline by 12%, with entry-level phones to be hit the hardest with devices priced under $400 expected to contract by 22%.

Manufacturers are increasingly prioritising higher-margin AI smartphones, making it less attractive to produce budget handsets with slim profit margins.

This could mean that entry-level devices will either increase in price or become less capable, with brands potentially forced to cut specifications such as RAM, storage or camera quality to maintain low retail pricing.

For Australian retailers, the shift could reshape the budget smartphone category, with entry-level buyers potentially keeping devices longer or moving to refurbished phones as new models become more expensive.

Budget brands that mainly compete on price could come under the most pressure, while manufacturers like Apple and Samsung are in a better position to absorb the higher component costs.

The report reveals the effects of AI as the technology is no longer just changing smartphone features but is reshaping the entire supply chain. Pricing is affected across the industry, not only on those products with AI features.