Challenge Mode was barely even more of a challenge. It was at the start of the game, but once your Pokémon adapted, it was the same walk in the park as before.
It doesn't matter how good or difficult the AI is if you're going to steamroll them anyway due to being slightly overlevelled. The only way to get round it is to physically cap your Pokémon so they can't go above say Level 20 before Gym 1, but people would complain even more at that.
People with teams of 5-6 would not be overleveled if universal EXP share was able to be turned off. You could even scale the levels of gym leaders. Considering that, better trainer AI with more, stronger Pokemon would absolutely matter quite a bit. As it stands, the AI is so bad that basic utility moves are completely unnecessary—let alone strategy or team synergy.
It really wouldn't be half as difficult to design a proper hard mode as you let on. Countless other RPGs do it just fine.