Rising memory component costs are pressuring smartphone manufacturers globally, leading to higher handset prices and weakened demand in key markets including the United States and China. Research from Counterpoint indicates that while industry leaders such as Apple Inc. (NASDAQ: AAPL) and Samsung Electronics Co. Ltd. (OTC: SSNLF) are leveraging scale to absorb these shocks, smaller competitors are facing significant headwinds.

US Market Contraction

US smartphone sales declined 5% year over year in the second quarter of 2026, driven by elevated memory prices and broader macroeconomic pressures. The contraction was uneven across the market. Sales from the four largest manufacturers — Apple, Samsung, Motorola, and Alphabet Inc.'s (NASDAQ: GOOGL) Google — fell by just 4%. In contrast, the rest of the market plunged 45% as smaller manufacturers struggled to justify higher component costs.

The pressure was most acute at the entry level. Sales of smartphones priced below $100 tumbled 64%, as manufacturers either halted shipments of certain devices or raised prices to offset memory inflation. Prepaid smartphone sales also dropped 11%, although Samsung and Motorola gained market share as weaker competitors pulled back. Motorola raised prices on several Moto G models during the quarter, while Samsung increased the price of the Galaxy A17 by $50 in July.

Counterpoint expects average selling prices to rise again in the third quarter. Apple is anticipated to increase prices for its iPhone 18 lineup, while Google will launch its Pixel 11 devices at higher prices than the Pixel 10 series. Despite this, Apple is expected to benefit from a strong upgrade cycle as users transition from the iPhone 15 series, with carrier subsidies playing a critical role in demand retention.

China Market Slump

The challenge is equally pronounced in China, where smartphone sales fell 8.6% year over year during the first 30 weeks of 2026. The decline accelerated into double digits following the 618 shopping festival, as seasonal weakness combined with persistent memory-cost inflation.

Huawei remained the market leader, maintaining a weekly sales share above 20% since the second quarter, supported by demand for the Enjoy 90 Pro Max and stable pricing. However, Counterpoint expects Huawei to raise prices in the second half to offset higher costs. Apple's demand weakened significantly after the 618 festival, with its weekly sales ranking dropping to fifth place during its typical pre-launch seasonal slowdown. Some demand had also been pulled forward by the shopping event.

Xiaomi Corp. (OTC: XIACY) climbed to second place in week 30 following the launch of the REDMI Note 17 series. Nevertheless, higher pricing and specification cuts hurt sales compared to the previous generation. Xiaomi subsequently introduced another round of price increases ranging from 300 Chinese yuan to 500 Chinese yuan across several product lines.

What the Numbers Show

The divergence between the top four manufacturers (-4%) and the rest of the market (-45%) in the US highlights a widening gap in cost absorption capabilities. While large players use scale to secure components at lower prices, smaller rivals are forced to pass costs directly to consumers or exit segments entirely, particularly in the sub-$100 tier where volume collapsed by nearly two-thirds. This suggests that market consolidation may accelerate as memory inflation persists.

Outlook: AI and Cost Pressures

Conditions are expected to remain tough in the second half as rising memory and system-on-chip costs drive further price increases. Simultaneously, spending on agentic artificial intelligence is becoming a competitive necessity rather than a differentiator. Counterpoint warned that companies unable to keep pace with both hardware cost inflation and AI integration risks falling further behind.

Apple shares were up 0.31% at $303.25 during premarket trading on Thursday.

Apple Inc (NASDAQ: AAPL) shares fell 2.24% to $306.30 on Monday after Jefferies downgraded the stock to Underperform from Hold and slashed its price target to $263.66 from $285.56. The downgrade, led by analyst Edison Lee, cites significant supply chain headwinds, specifically the cancellation of an all-glass iPhone model scheduled for release on Sept. 27 due to low manufacturing yields. This development complicates Apple’s strategy to drive higher average selling prices amid surging industry-wide memory costs.

Lee’s revised financial model reflects these operational setbacks, trimming earnings per share projections for fiscal 2028 and fiscal 2029 by 2.1% and 3.4%, respectively. Applying an 8% reduction to his discounted cash flow valuation, Jefferies now sees approximately 16% downside potential from current levels. The cancellation of the premium all-glass device represents a major setback for Apple’s push toward higher-priced iPhone models, undermining near-term margin expansion efforts.

Supply Chain and Product Cycle Risks

The core of Jefferies’ bearish thesis rests on the disruption to Apple’s product roadmap. The all-glass iPhone was intended to be a key driver of upgrade cycles and pricing power. Its cancellation, attributed to low manufacturing yields, removes a critical high-margin SKU from the upcoming lineup. Lee warned that this loss coincides with rising memory component costs, squeezing potential profitability in the short term.

Trade-In Dynamics and Demand Pull-Forward

Compounding the product cycle concerns is Apple’s recent decision to increase iPhone trade-in values by roughly 5% in the United States and around 2% across European markets. While this move may stimulate immediate sales of the current iPhone 17 lineup, Lee argues it risks accelerating demand too early. By pulling consumers forward into buying decisions sooner, Apple may thin out the available buyer pool when the next-generation iPhone 18 arrives, adding pressure to a cycle already weakened by the cancelled model.

Conflicting Analyst Views

Despite Jefferies’ caution, other market participants remain bullish. Deepwater Asset Management Managing Partner Gene Munster defended Apple’s valuation, arguing that investors are overlooking key growth drivers such as artificial intelligence and impending price increases. Munster previously predicted Apple would be the best-performing Magnificent Seven stock in the first half of 2026, noting that shares remain undervalued ahead of a massive hardware upgrade cycle expected to begin in 2027. He dismissed supply chain concerns as secondary to Apple’s pricing power, suggesting iPhone prices could rise by approximately 15%, lifting average selling prices from $850 to $975.

What the Numbers Show

The divergence between Jefferies’ near-term caution and Munster’s long-term optimism highlights a critical tension in Apple’s investment thesis. While Q3 revenue grew 16% year-over-year, marking the company’s strongest June quarter ever, the structural integrity of the upcoming product cycle is now in question. The cancellation of the all-glass iPhone directly impacts the high-margin segment that analysts like Munster rely on for future ASP growth. If the trade-in incentives successfully pull demand forward, the subsequent quarters may see weaker upgrade rates, challenging the narrative of a seamless transition to AI-driven hardware cycles in 2027.