To The Moon

TMTPOST -- In 2024, artificial intelligence (AI) has become the latest buzzword in nearly every industry, driving innovation and fueling sales. The smartphone sector, which experienced a trough in the previous year, is now bouncing back, thanks in part to AI’s integration into phones and a release of pent-up demand from consumers who had postponed upgrading their devices during the pandemic.

Despite some skepticism about the sustainability of this growth, many experts believe that the smartphone market’s revival is real. Some argue that the resurgence is based on the low comparison base of 2023 rather than any substantial demand. However, whether it's driven by a new cycle of device replacements, government policies, or increased brand marketing efforts, the industry is undeniably experiencing a phase of positive recovery and growth.

Over the past year, several factors have emerged as key drivers of change: AI, price hikes, the global expansion of Chinese brands, and the surprising fall of Apple from its once-dominant pedestal in the Chinese market.

However, while the overall smartphone market remains somewhat uninspiring, certain innovations, such as Huawei's folding phone, have sparked considerable discussion about the future of smartphone form. Yet, due to the technical challenges and high costs involved, such products remain distant from mainstream adoption.

As one of the most essential gadgets in today’s digital ecosystem, smartphones continue to hold their ground, even with emerging challengers like AR glasses. Given the rapid technological advancements over the past few years, the smartphone's dominant position in consumer goods remains secure—especially now that AI is deeply integrated into the devices. It is foreseeable that AI-powered smartphones will drive market growth next year, with AI agents becoming the strongest competitive moat for brands to retain their user bases.

AI will gradually become a main consideration for users to upgrade their devices, said Guo Tianxiang, Research Manager at IDC China. And the most significant impact will be initially felt in the mid-to-high-end market segments, he added.

Since the fourth quarter of 2023, the Chinese smartphone market has steadily recovered. The backlog of upgrade demand, combined with the release of new AI-driven features, has given a boost to consumer confidence, despite macroeconomic challenges like weak demand and rising costs. The crucial factor here is that many consumers are now at a point where upgrading is no longer an option but a must. With about half of China’s 500 million smartphone users in the mid-range price bracket, companies like OnePlus, Realme, iQOO, and Honor are fiercely competing in this segment, offering high-performance devices at attractive prices.

Apple’s Fall and the Growing Dominance of Chinese Brands

Apple’s dominance in China has begun to wane in 2024, largely due to the resurgence of Huawei, which has successfully clawed its way back to the top of the Chinese market. While Apple continues to lead globally, its performance in China has been lackluster, with its sales slipping out of the top five in the second quarter of this year. Huawei, on the other hand, has regained its position as the second-largest brand in China, trailing only behind Vivo. Xiaomi, OPPO, and Honor have also made significant strides in high-end markets, particularly in the foldable phone segment.

Foldable smartphones, once seen as a niche market, are becoming more mainstream as technology improves. In the near future, these devices will see continued growth as they become more affordable and consumer-friendly. IDC expects that the Chinese foldable smartphone market will see an 8.3% year-on-year growth rate in 2025, with shipments surpassing 10 million units.

Apple has attempted to counter this trend by slashing prices and launching a series of promotional campaigns. These moves helped Apple regain some traction, especially during key shopping events like the Double 11 sales. According to What’s Worth Buying, Apple’s price reductions during these sales events helped the iPhone 16 Pro series become the best-selling phone in the "trade-in" category. Despite this, the wider trend is clear: Chinese brands are increasingly challenging Apple in both mid-range and high-end markets.

New Markets, New Growth: The Global Smartphone Push 

While China's smartphone market remains saturated, opportunities for growth still exist in emerging markets. Brands like Xiaomi, Honor, and OPPO are increasing their presence a in regions such as Latin America, Southeast Asia, and Africa during their international expansion. These regions, which continue to experience strong demand for affordable smartphones, are seen as critical battlegrounds for Chinese manufacturers. 

OPPO, for example, has experienced strong growth in India and Latin America, where it secured a 9% market share in the third quarter of 2024, making a return to the fourth position globally. According to IDC’s Guo Tianxiang, the smartphone industry is still in an "incremental" phase in many developing countries, where demand for lower-cost, value-for-money products remains high.

At the same time, Apple is also ramping up its efforts in these markets, although it’s  facing significant hurdles. The company has had to make concessions, such as local manufacturing partnerships, to meet regulatory requirements in countries like India. However, even with these adjustments, the challenges of competing in developing markets are becoming increasingly apparent, and Apple is not immune to the risks involved. 

The AI Phone Revolution: From 1.0 to 2.0

One of the most anticipated developments in the smartphone industry is the advent of the AI-powered phone. Although AI applications in smartphones have been around for some time, 2024 marks a significant leap forward with the launch of AI 2.0 smartphones, which promise deeper integration of AI capabilities. The powerful processors like the Snapdragon 8 Gen 2 and MediaTek Dimensity 9400 has enabled more sophisticated AI functions, moving beyond basic features like image recognition and into areas like intelligent assistance, predictive analysis, and task automation.

IDC forecasts that global shipments of the next-generation AI phones will reach 170 million units in 2024, accounting for about 15% of all smartphone shipments. By 2027, the market share of AI phones will exceed 50%, with shipments expected to reach 150 million units.

Chinese brands are leading the charge in this AI transformation. Meizu, for instance, has  embraced AI, shifting its focus from traditional smartphones to AI-centric platforms. The company’s Flyme AIOS system is seen as a crucial differentiator, offering a more personalized user experience through its deep integration with the hardware.

OPPO has similarly integrated AI at the system level, allowing for a more intuitive, personalized user experience. The company’s AIOS includes multi-modal features such as "one-touch screen," which combines voice, vision, and touch to enable seamless interactions with the device.

The Future of AI in Smartphones

The evolution of AI in smartphones will continue to be driven by the development of more powerful and efficient chips, as well as the need for greater battery efficiency. The trend toward "lightweight" AI models is also gaining momentum, with 3B parameter models becoming the new standard. These models are more energy-efficient, enabling more advanced AI functionalities without overtaxing the device’s hardware.

Ultimately, the integration of AI into smartphones promises to transform the user experience, making devices smarter, more intuitive, and capable of handling complex tasks autonomously. The "AI Agent" — a smart assistant capable of learning user preferences and managing tasks — is expected to be a key component of this transformation.

The future of AI phones looks bright, with expectations of widespread adoption across various price segments. By 2025, IDC predicts that shipments of AI smartphones in China will reach 118 million units, capturing 40.7% of the market.