Outsourcing by Samsung to China Feared by Phone Parts Suppliers

Samsung outsourced last year to China ODMs 3 million units of smartphones including the Galaxy A6 series.

Increased concern present from small and medium-sized companies supplying smartphone parts to Samsung Electronics about the firm’s move to hire Chinese counterparts to manufacture its phones, according to industry officials, Monday.

The smartphone maker’s move to outsource production of 60 million phones to Chinese manufacturers is seen to lower production costs and more effectively compete with cheaper Chinese smartphones emerging in markets.

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

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

In recent years Samsung Electronics has been expanding its ODM smartphone business to cheaper manufacturers. Last year alone, the company outsourced to Chinese ODMs 3 million units of smartphones including the Galaxy A6s, and is planning on increasing the volume to anywhere between 30 million and 40 million this year.

Samsung Electronics declined to confirm the numbers, although it said that it is true that the company is trying to expand its ODM contracts owing to increased 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.

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

Koh said during a press conference last August, “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.” He added, “If the competitiveness of products is not compromised, I believe a limited level of ODM outsourcing is the right way.”

Samsung Electronics signed ODM contracts with two of the top Chinese ODM phone makers, Wingtech, in September last year, and Huaqin in July. Wingtech’s clients include Xiaomi, Lenovo, and Huwaei.

Domestic parts suppliers are expressing their worries over Samsung Electronics’ plan. An association of the company’s partner firms recently formed a task force to address Samsung’s predicted ODM expansion. It also reportedly contacted Chinese ODM companies to continue their supply.

Samsung’s move toward ODMs, according to analysts, will pose a grave threat to local partner firms.

Kim Joon-hwan, an analyst from Hanwha Investment & Securities, reported that local smartphone parts suppliers are likely to suffer a loss of 3.4 trillion won ($2.9 billion) after Samsung outsources 70 million smartphone units 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.”

Samsung Electronics Co-Vice Chairman Yoon Boo-keun said during a job fair of Samsung Electronics partner companies on Oct. 15 that he expects ODMs will not result in huge losses. Still, parts suppliers are concerned about future dilemmas.

“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.”

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