Sam­sung ’s out­sourc­ing wor­ries sup­pli­ers

The Korea Times - - BUSINESS - By Nam Hyun-woo [email protected]­re­atimes.co.kr

Small- and medium-sized en­ter­prises sup­ply­ing smart­phone parts to Sam­sung Elec­tron­ics are in­creas­ingly con­cerned about the firm’s ac­cel­er­at­ing moves to hire Chi­nese man­u­fac­tur­ers to pro­duce its phones, ac­cord­ing to in­dus­try of­fi­cials Mon­day.

Out­sourc­ing the pro­duc­tion of 60 mil­lion phones to Chi­nese mak­ers is seen as a move to lower pro­duc­tion costs and more ef­fec­tively com­pete with Chi­nese smart­phone mak­ers in emerg­ing mar­kets, they said.

Ac­cord­ing to in­dus­try sources, Sam­sung Elec­tron­ics will out­source the man­u­fac­tur­ing of more than 60 mil­lion Galaxy M and Galaxy A se­ries smart­phones to Chi­nese orig­i­nal de­sign man­u­fac­tur­ers (ODMs) next year. This will ac­count for 20 per­cent of the com­pany’s an­nual smart­phone de­liv­ery of 300 mil­lion.

ODM refers to a com­pany that de­signs and man­u­fac­tures a prod­uct, to be re­branded and sold by an­other com­pany. Un­like orig­i­nal equip­ment man­u­fac­tur­ers, which man­u­fac­ture prod­ucts based on the or­der­ing firm’s de­sign and spec­i­fi­ca­tions, ODMs de­sign the prod­ucts to be man­u­fac­tured.

Sam­sung Elec­tron­ics has been ex­pand­ing its ODM smart­phone busi­ness in re­cent years. Last year, the com­pany out­sourced 3 mil­lion smart­phones in­clud­ing the Galaxy A6s to Chi­nese ODMs and is ex­pand­ing the vol­ume to any­where be­tween 30 mil­lion and 40 mil­lion this year, the sources said.

Sam­sung Elec­tron­ics re­fused to con­firm the num­bers, but said it is true that the com­pany is at­tempt­ing to ex­pand ODM con­tracts due to in­creas­ing com­pe­ti­tion among down-mar­ket mod­els.

“For ef­fi­cient use of our re­sources and lineup, the com­pany is us­ing ODM in a limited num­ber of mod­els,” the com­pany said.

Koh Dong-jin, head of Sam­sung Elec­tron­ics’ IT & Mo­bile Com­mu­ni­ca­tions divi­sion, has al­ready dropped hints at the com­pany’s bid to ex­pand ODM smart­phones.

“The mar­ket for smart­phones with price tags un­der $150 is heav­ily con­tested, and it is dif­fi­cult for Sam­sung Elec­tron­ics to man­u­fac­ture them on its own,” Koh said in a press con­fer­ence in Au­gust. “If the com­pet­i­tive­ness of prod­ucts is not com­pro­mised, I be­lieve a limited level of ODM out­sourc­ing is the right way.”

Sam­sung Elec­tron­ics has al­ready signed ODM con­tracts with China’s Wingtech in Septem­ber last year and Huaqin in July. Wingtech and Huaqin are the top Chi­nese ODM phone mak­ers. Wingtech has clients in­clud­ing Huawei, Xiaomi and Len­ovo.

Do­mes­tic parts sup­pli­ers are cast­ing wor­ries over Sam­sung Elec­tron­ics’ move. An as­so­ci­a­tion of Sam­sung Elec­tron­ics part­ner firms formed a task­force re­cently to ad­dress Sam­sung’s pro­jected ODM ex­pan­sion and re­port­edly con­tact­ing Chi­nese ODM firms to con­tinue their sup­ply.

An­a­lysts also ex­pect Sam­sung’s move to­ward ODMs will pose a se­ri­ous threat to do­mes­tic part­ner firms.

Han­wha In­vest­ment & Se­cu­ri­ties an­a­lyst Kim Joon-hwan said do­mes­tic smart­phone parts sup­pli­ers are likely to lose 3.4 tril­lion won ($2.9 bil­lion), when Sam­sung out­sources 70 mil­lion smart­phones to ODMs.

“The do­mes­tic smart­phone parts in­dus­try will again face un­cer­tain­ties,” Kim said. “Espe­cially, Sam­sung’s ex­pan­sion of ODM smart­phones will throw se­ri­ous dif­fi­cul­ties to part­ner com­pa­nies which are highly re­liant on mid- or low-price smart­phones.”

Dur­ing a job fair of Sam­sung Elec­tron­ics part­ner com­pa­nies on Oct. 15, Sam­sung Elec­tron­ics Co-Vice Chair­man Yoon Bookeun said he ex­pects ODMs will not re­sult in huge losses, but parts sup­pli­ers are con­cern about fu­ture un­cer­tain­ties.

“The ex­pan­sion of ODM smart­phones seems to be ir­re­sistible,” an in­dus­try of­fi­cial said. “ODM out­sourc­ing is cur­rently limited to some low-price mod­els, but there is no guar­an­tee that Sam­sung will not ex­pand ODM con­tracts to high-end or flag­ship prod­ucts.”

Korea Times file

Seen above are Sam­sung Elec­tron­ics’ Galaxy A6s smart­phones, which are the first Sam­sung smart­phones pro­duced by an orig­i­nal de­sign man­u­fac­turer.

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