Samsung farms out more phones to fend off rivals

Samsung's plan to outsource a fifth of its smartphone production to China next year can help it compete with low-cost rivals such as Huawei and Xiaomi, but it is a risk-laden strategy, people familiar with the measure said.

 Samsung Electronics, which closed its last Chinese smartphone factory in October, is quietly moving the production of some Galaxy A models to contractors such as Wingtech, which are little known outside of China.

 Samsung has been shy about the volumes involved, but sources said the South Korean tech giant plans to send some 60 million phones made in China by so-called original design manufacturers (ODM) next year for a total of approximately 300 million devices .

 Wingtech and other ODM manufacture phones for multiple brands, including Huawei, Xiaomi and Oppo, giving them economies of scale to keep costs down, and agile contractors can develop and produce new low-budget phones quickly.

Critics of Samsung's strategy say it runs the risk of losing quality control and undermining its manufacturing experience by outsourcing, and can even help its rivals by providing contractors with the additional volume they need to further reduce The costs for all.

Samsung cannot afford another quality crisis. He undid his flagship Galaxy Note 7 in 2016 after reports that expensive phones were catching fire and delayed the launch of his folding phone this year after screen defects were identified.

But with very thin margins for low-budget smartphones, people familiar with Samsung's strategy say they have no choice but to follow their rivals and use Chinese ODM to reduce costs.

"This is an inevitable strategy rather than a good strategy," said a source with knowledge of Samsung's Chinese operations.

Samsung said in a statement to Reuters that it has been making limited lines of smartphones outside its own plants to expand its existing portfolio and "ensure efficient management in the market." He declined to say how many Samsung phones are manufactured by ODM and said that future volumes have not yet been determined.Wingtech did not respond to a request for comment.

While Samsung is eager to remain the world leader in the smartphone market, some analysts fear that it is not worth the risk since profits in the budget phone business are scarce for everyone. (REUTERS)

CHEAPER COMPONENTS

The research firm Counterpoint says that the MDGs can acquire all the necessary components for smartphones for $ 100- $ 250 for 10% to 15% less than the leading brands with their own factories in China.

A supply chain source said Wingtech can get some parts for up to 30% less than Samsung Electronics pays in Vietnam, where it has three factories that produce smartphones, televisions and appliances.

Wingtech began manufacturing tablets and phones for Samsung in 2017, representing 3% of its smartphones. It is expected to reach 8%, or 24 million units, this year, according to IHS Markit.

Samsung's outsourcing plans include its mid-range and low-end Galaxy A series, with Wingtech participating in both design and production, sources said. The A6S, one of the models to be outsourced, costs from 1,299 yuan ($ 185) in China.

Wingtech phones will mainly go to Southeast Asia and South America, a source said. Samsung is gaining participation in both at the expense of Huawei, which suffers the US sanctions that prevent it from putting all Google services on new phones.

While Samsung is eager to remain the world leader in the smartphone market, some analysts fear that it is not worth the risk since profits in the budget phone business are scarce for everyone.

"Low-end phones are a headache for Samsung," said CW Chung, head of research at Nomura in Korea.

Chung said they were now commodities and that it was "silly" to make them at home. But he and other experts said that if Samsung gave the MDGs more volume, that could further reduce contractor costs and increase their experience and knowledge.

"If ODM companies become more competitive, rivals will be more competitive," said Tom Kang, an analyst at Counterpoint, adding that once a company loses its experience in manufacturing low-end phones through outsourcing, it is difficult recover knowledge .

Historically, Samsung has designed and produced almost to two their phones internally in large factories in Vietnam and, more recently, in India, while production ends in South Korea and China, where labor costs more. (REUTERS)

"SURVIVAL GAME"

Chung said Samsung's strategic change signaled the company's manufacturing skill decline, which was once a low-cost Asian manufacturer and now the world's leading producer of high-end electric consumer goods.

US rival Apple outsources production to Taiwan's Foxconn technology, which has factories in China, but Apple still designs its phones in California.

Samsung said in a response emailed to Reuters that it will participate in the supervision of the design and development of smartphones produced by ODM.

A person familiar with the MDGs of Samsung and China said contractors save money by cutting some steps of the manufacturing process, potentially allied by posing quality problems. He refused to go into details.

With that in mind, Samsung has been pairing South Korean component suppliers with Chinese contractors to monitor quality control more closely, the person said.

"We understand that the logic of increasing production volume with Chinese contractors is a strategic business decision, but that does not mean that we are all happy with that," said an executive of a Korean component supplier.

Samsung told Reuters it has applied the same quality controls and standards it does with all its devices, adding that it has pledged to deliver high quality products.

Historically, Samsung has designed and produced almost all of its phones internally in large factories in Vietnam and, more recently, in India, while production ends in South Korea and China, where labor costs more.

But Roh Tae-moon, the youngest executive to become president of Samsung Electronics, is defending the new ODM strategy in his number two role in the mobile division, two people familiar with the matter said.

"It is crucial to reduce costs to stay competitive with Huawei and other Chinese phone manufacturers," said a Samsung expert who declined to be identified.

Other Korean companies have also adopted outsourcing. LG Electronics, whose smartphones have been losing money for several years, has said it plans to expand its ODM production from economical models to mid-priced phones.

“Smartphones have been reduced to a battle for costs. Now it's a survival game, "said Kim Yong-serk, a former Samsung mobile executive who is a professor at Sungkyunkwan University in South Korea.