BUSINESS

Samsung, LG ramp up outsourcing of smartphone models

Expansion of third-party phone production viewed as part of Samsung’s biz restructuring in China

  • Published : Nov 19, 2019 - 17:27
  • Updated : Nov 19, 2019 - 20:00
With the smartphone market mirroring the PC industry, South Korean tech firms Samsung Electronics and LG Electronics are banking on outsourcing production to other global manufacturers to boost their sales overseas, according to industry sources Tuesday.

The country’s two biggest phone makers are seeking to increase production by third-party original development manufacturers in countries like India and China. It may be bad news for contractors here, but may be appreciated by overseas vendors and authorities, industry analysts told The Korea Herald.

“As long as Samsung maintains strict quality control, safety and privacy, it will be fine to outsource more smartphones or feature phones to low-cost ODMs in Asia,” said Neil Mawston, executive director at Strategic Analytics based in London in an email. “For example, Apple’s iPhones are largely built by ODMs in China today, and they performs well.”

Just like the PC industry where most computers are made by ODMs in lower-cost countries like China, more global smartphone production are likely to be relocated to emerging countries and regions like Latin America, India and China, the analyst mentioned.

“We expect Samsung to outsource more of the bottom half of its smartphone portfolio in the 2020s, to reduce costs,” Mawston said. “The cheaper models have the lowest profit margins.”

Both Samsung and LG have increased ODM volumes for midrange and low-end mass market models in China, India and Vietnam, in order to save costs and seek quicker launch cycles, according to industry sources. 

Chilean consumers try out a Samsung Galaxy Note 10 phone at a launching event in Santiago, Chile, in August. (Samsung Electronics)

As per news reports, Samsung is likely to churn out around 60 million units of mass-market models with Chinese and Indian ODM firms for next year. Some rumors say that Samsung aims to increase the proportion of third-party phone production to 20 percent of its total annual output.

Samsung, however, declined to confirm the figure, while promising to minimize the impact on Korean contractors, during a conference call with investors after announcing its third-quarter earnings results.

LG has been depending on outsourcing since last year as the company shifted 30 percent of its production to ODMs in order to shave off costs for its money-losing phone business. Market analysts forecast that the company has already increased the ODM proportion to 50 percent this year and plans to raise it next year.

“For consumers, I doubt many of them would know or are interested in knowing where and who manufactured the phone, as long as the quality and after-sales service is fine,” said Linda Sui, director at Strategic Analytics based in Boston. “Hence I don’t think this is a major concern or issue.”

In terms of control of cost, quality and delivery, the outsourcing strategy will help Samsung and LG retain their product competitiveness and market leadership in countries where they are struggling against rising rivals like Xiaomi, the researchers said.

The LG Q60, LG K50 and LG K40 phones (LG Electronics)

For Samsung, the recent ODM contracts with Chinese companies like Wingtec and Huaqin are viewed as its last resort to restore its market share in China as well, in which the world’s biggest phone provider has just around 1 percent market share. 

Meanwhile, the Korean phone maker shut down its own manufacturing facilities in Tianjin last year and Huizhou in September. It is also planning to reduce the number of local offices for the mobile business in China from 11 to five as part of its restructuring plans.

“If Samsung is creating more jobs with Chinese or Indian ODMs, this will please consumers and authorities in the countries, and will help its push in the world’s two biggest electronics markets in the future,” Mawston said.

By Song Su-hyun (song@heraldcorp.com)