Samsung’s plan to outsource a fifth of its smartphone production to China next year may help it compete with low-cost rivals such as Huawei and Xiaomi but it’s a strategy fraught with risks, people with familiar with the move said.
Samsung Electronics, which shut its last in-house Chinese smartphone factory in October, is quietly moving production of some Galaxy A models to contractors such as Wingtech, which are little known outside China.
Samsung has been coy about the volumes involved but sources said the South Korean tech giant plans to ship some 60 million phones made in China by so-called original design manufacturers (ODMs) next year out of a total of about 300 million devices.
Wingtech and other ODMs make phones for multiple brands - including Huawei, Xiaomi and Oppo - giving them the economies of scale to keep costs down, and the nimble contractors can develop and produce new budget phones quickly.
Critics of Samsung’s strategy say it risks losing control of quality and undermining its manufacturing expertise by outsourcing, and may even help rivals by giving contractors the extra volume they need to lowers costs further for all.
Samsung can ill afford another quality crisis. It scrapped its flagship Galaxy Note 7 in 2016 after reports the expensive phones were catching fire and delayed the launch of its folding phone this year after screen defects were identified.
But with margins razor thin for budget smartphones, people familiar with Samsung’s strategy say it has little choice but to follow rivals and use Chinese ODMs to shave costs.
“This is an inevitable strategy rather than a good strategy,” a source with knowledge of Samsung’s Chinese operations said.
Samsung said in a statement to Reuters that it has been making limited lines of smartphones outside its own plants to broaden its existing portfolio and “ensure efficient management in the market”. It declined to say how many Samsung phones are made by ODMs and said future volumes had yet to be determined.
Wingtech did not respond to a request for comment.
Research firm Counterpoint says ODMs can procure all the components needed for $100-$250 smartphones for 10 percent to 15 percent less than major brands with their own factories in China.
One supply chain source said Wingtech can get some parts for up to 30 percent less than Samsung Electronics pays in Vietnam, where it has three factories churning out smartphones, TVs and home appliances.
Wingtech started making tablets and phones for Samsung in 2017, accounting for 3 percent of its smartphones. That’s expected to hit 8 percent, or 24 million units, this year, according to IHS Markit.
Samsung’s outsourcing plans involve its lower and mid-range Galaxy A series, with Wingtech having a hand in both design and production, sources said. The A6S, one of the models to be outsourced, costs from 1,299 yuan ($185) in China.
The Wingtech phones will mainly go to Southeast Asia and South America, one source said. Samsung is gaining share in both at the expense of Huawei, which is suffering from U.S. sanctions that bar it from putting all Google’s services on new phones.