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