It takes a huge investment to be able to manufacture computer chips like these. Annabelle Chih/Getty ImagesThe boom in data center construction is taking up much of the supply of high-tech components, especially processor and memory chips. This demand is squeezing consumer device makers, which are having trouble acquiring enough chips.This is happening even though data center servers and smartphones use different types of chips. The key distinction between consumer electronics and data centers is what they need chips to be optimized for. Smartphones and PCs require low power use, thermal efficiency and tight integration. Data centers that run AI systems such as large language models, or LLMs, require maximum compute power, memory bandwidth and storage throughput. To meet these needs, consumer devices tend to rely on systems-on-a-chip – chips that combine processing and storage – with dynamic random access memory, or DRAM, and NAND, a type of nonvolatile memory. In contrast, AI servers rely on graphics processing units, or GPUs, or other accelerator processors combined with high-bandwidth memory chips.I study global supply chains and how businesses respond to market constraints within these supply chains. The reason for the consumer electronics supply crunch has to do with the nature of the chip market: its concentration and high costs and how it responds to boom-and-bust cycles.AI is not replacing consumer electronics; it is reorganizing the chip market around new priorities for specific chip characteristics. Data centers are pulling capital and scarce memory capacity toward the production of accelerator processors and high-bandwidth memory and the data handling and electronics equipment that surround them. Chipmaking explained. A winner-takes-most industryChip manufacturing behaves less like a competitive commodity market and more like a layered oligopoly. Scale matters because the leading firms can reinvest in research, improve yields, secure equipment and deepen customer relationships. In the case of graphics processor chips, designers such as NVIDIA, which has 85% market share, depend on advanced semiconductor foundries such as TSMC, which has more than 70% market share, to manufacture chips using extreme ultraviolet lithography machines from ASML, a monopoly.A small number of producers both design and manufacture memory chips. Currently, three companies – Samsung, Micron and SK Hynix – hold a majority market share in the memory chips market. Long development cycles, extremely high fixed costs and the need for technological leadership reinforce concentration over time. Consumer electronics firms such as Apple, along with other technology firms such as Amazon, Google, Microsoft and Xiaomi, increasingly design their own processor chips, because these chips shape the user experience, AI performance, power efficiency and system-level differentiation. Manufacturing memory chips, by contrast, is extraordinarily capital-intensive; requires high precision, efficiency and production line utilization; and is dominated by a few incumbent suppliers. Since 2000, the memory chip industry has moved through repeated cycles of overcapacity and undersupply: the post-dot-com collapse, the 2007-09 glut, the tighter 2010s after consolidation, the severe 2022-23 downturn, and the AI-driven tightness of 2024-25. This has led to high levels of concentration in the industry and chipmakers that are hesitant to add capacity. Producers often operate chip fabrication plants, or fabs, at or near capacity due to high fixed costs. The risk of having expensive facilities go underused keeps chipmakers from bringing new fabs online in lockstep with demand increases. Consolidation has reduced the number of major suppliers, who now increasingly direct investment toward higher-margin products rather than broadly adding capacity. That shift is important for understanding why AI demand is tightening chip supplies even as demand for consumer electronics continues to grow. The most advanced computer chips are made with a machine manufactured by one Dutch company. How the AI data center boom redirects capacityThe AI boom has changed memory demand from a broad consumer cycle into a more segmented market centered on high-bandwidth memory chips. In 2023, Micron cut capital spending and the company’s fabs operated below levels needed to justify their cost. By 2026, however, Micron was reporting strong AI demand, record data center DRAM revenue and rapidly rising high-bandwidth memory sales. This shift matters because the market for supplying memory cannot respond quickly. Opening new fabs requires years of planning, large capital commitments and investments in advanced process equipment and skills. Memory chip manufacturers are likely to remain cautious about expanding capacity even as their profitability improves, with 2026 spending focused more on technology upgrades and high-value products than on large increases in chip supply. In practical terms, AI is not simply lifting all memory demand equally; it is redirecting scarce capacity toward massive, or hyperscale, data centers and server markets first.Can consumer electronics catch up?Consumer electronics can catch up, assuming the manufacturers can weather the cost increases from tariffs and geopolitical pressures. One way they could is by making investments to enable small AI language models to run on consumer devices, a move analysts expect the companies to attempt. Apple shifted a growing share of U.S.-bound iPhone production out of China to India and moved much of its iPad, Mac, Apple Watch and AirPods assembly for the U.S. market to Vietnam to lower the company’s tariff burden. Yet relocation does not eliminate cost pressure. Manufacturing iPhones in India still costs roughly 5% to 8% more than in China, and in some cases closer to 10%, because supplier ecosystems, logistics and production efficiency remain stronger in China. Rising geopolitical tensions between the United States and China led to supply constraints and export controls on critical minerals and chip components, raising input costs for consumer electronics manufacturers. This led to higher total import costs and reduced margins for firms unable to pass costs fully to consumers, leading to further consolidation in supply.Consumer devices do not need to replicate data center infrastructure to offer AI on their products. Their opportunity lies in running small language models on-device for summarization, rewriting, search, assistance and lightweight reasoning. Doing so, however, creates a distinct hardware requirement. Phones and laptops need to incorporate multiple functions on the same chip, combining processing capability with fast local memory and enough storage to keep on-device AI responsive. Apple’s current device requirements for the company’s AI, Apple Intelligence, also show that older phones often lack the compute power and memory needed for useful on-device AI. To adopt AI, device makers need to redesign their products with higher-end chips – both processors and memory – that can piggyback on the AI model-oriented growth in the chips market driven by the data center boom. Such a shift by the device makers could also provide a useful backstop for the memory chipmakers in case the projected AI and data center growth does not materialize in the medium to long term, a boom-and-bust cycle that memory chipmakers have had to endure many times in the past. Chipmakers have been devoting much of their precious manufacturing capacity to lucrative AI chips that are filling new data centers, like this Meta facility in Stanton Springs, Ga. AP Photo/Mike Stewart What this means for the wider economyThe AI and data center boom is redistributing capital, supplier attention and pricing power across the broader economy. Sectors with limited purchasing leverage are especially vulnerable when chip supplies tighten. For example, medical technology accounts for less than 1% of the overall chip market, leaving essential equipment manufacturers exposed during shortages. In contrast, sectors linked to power delivery and digital infrastructure may benefit from the boom because they try to keep up with demand for cloud services and electrification. The International Energy Agency estimates that data centers consumed about 415 TWh of electricity in 2024 and notes that AI is accelerating the deployment of high-performance servers, which implies stronger demand for the grid, storage, cooling and networking equipment around them. For the consumer electronics industry, the strategic task is not to try to match the AI data centers chip for chip but to build differentiated, energy-efficient, on-device AI services while managing higher supply chain and tariff risks.And for consumers looking to buy phones, games and laptops, because of high demand from data centers, the next few years are likely to bring higher prices, shortages and delayed product releases.Vidya Mani has received funding from LMI. I am a Senior Research Fellow at the Inter-American Dialogue and a member of GRI