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Analysis: 'Chipflation’ Reshaping the Smartphone Market

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By Eason Chen/Scott Huang/Shir Bashi

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Rising costs for memory and components are reshaping the global smartphone market, a trend known as “chipflation.” Counterpoint Research co-founder Neil Shah says smartphone shipments could fall 14% this year, followed by another 3% to 4% decline next year. He expects potential sales of 100 million to 150 million phones to be “wiped out” over the next three years as lower-end devices become too costly for some consumers. Shah says Taiwanese foundries such as TSMC could benefit as consumers move toward more expensive phones, while display, battery and other component makers face pressure. Consumers may end up shelling out for higher-end devices rather than pay higher costs for more basic phone models.

NEIL SHAH, CO-FOUNDER COUNTERPOINT RESEARCH:
“Yeah. So, uh, because of the rising memory prices, we are seeing the overall cost of the devices going up, especially what is happening in the lower end of the devices where they are getting so costly that you cannot launch new devices. And that is resulting in almost 14% drop this year. And next year it will be 3 to 4% drop. And which means we'll see over the next three years almost 100 million or 100 to 150 million phones wiped out of this because most of the consumers in low end won't be having a phone to buy. So they'll have to either buy an expensive phone or a second hand phone.”

NEIL SHAH, CO-FOUNDER COUNTERPOINT RESEARCH:
“Yeah. So if you look at most of the low end phones have been dominated by Chinese brands, and most of the Chinese brands depend on supply chain in China, but also a little bit on Taiwan, some foundries, TSMC and even long tail components like UMC and others. But what is happening is that will get wiped off, or there will be some supply chain issues with respect to that segment. But the people are also buying expensive phones. They are forced to buy expensive phones. So many of the foundries like TSMC will benefit actually, because of people buying more expensive phones, more expensive iPhones and Android phones.”

NEIL SHAH, CO-FOUNDER COUNTERPOINT RESEARCH:
“Yeah. So the bigger hit would be taken by all the other component vendors, which are squeezed because OEMs want to keep a bill of materials constant, the cost of the device. So if the memory and chip prices, the stock prices are increasing, then the pressure goes on the display manufacturers, the component manufacturers, the battery manufacturers. So those are actually squeezed more. And they have to they can't grow their ASP. And as a result, you will see most of those supply chain will be affected because of this deflation.”

NEIL SHAH, CO-FOUNDER COUNTERPOINT RESEARCH:
“So, uh, the phone which you used to buy two years ago. The same phone, which used to cost US$150, is now costing US$300. So buying the same spec phone for $300 doesn't make sense. So you will spend a little bit more extra and buy a $500 phone because anyways, you are using your phone so much. It's the highest return on investment you would get for any electronic device. So people would end up buying a better phone with a more advanced spec, more advanced camera, better RAM, and better processor.”