Samsung plans to contract out the manufacturing of about 20% of its smartphone production to Chinese original design manufacturers (ODMs) such as Wingtech, sources familiar with the matter told Reuters. Samsung is reportedly targeting ODMs to help design and produce models within the low- to mid-tier Galaxy A series.
The smartphones would mostly be shipped to Southeast Asia and South America, according to one Reuters source. This would represent a departure from the status quo for Samsung in two significant ways: Samsung has historically manufactured and designed the bulk of its phones in-house, and it recently shifted its own production away from China and South Korea and toward Vietnam and India.
Though the move appears to be an aberration for Samsung, it will help drive value to its growing smartphone segment, the low- to midtier Galaxy A series. This smartphone lineup accounted for 56% of Samsung’s smartphone sales in Q2 2019, helping the company buck six consecutive quarters of declines.
However, margins for midtier phones tend to be slim, according to Reuters, potentially exacerbated by competition from feature-packed midtier phones across the industry, including from the likes of Huawei and Xiaomi, both of which outsource to Wingtech.
Should Samsung shift production to ODMs, it could match its competitors’ cost advantages: For instance, ODMs can bulk order components and negotiate better prices from suppliers — this leads to an estimated 10% to 15% cost savings compared with in-house manufacturing for $100-$250 smartphones, according to Counterpoint research cited by Reuters. ODMs can also distribute fixed costs associated with adding new product features, which is partially why many premium smartphone features have launched simultaneously within the midrange.
Smartphone-makers could continue to consolidate low- to midtier device manufacturing around ODMs, but the strategy may not catch on within the flagship segment. Much of the cost savings for ODMs come from leveraging economies of scale across manufacturers.
If Samsung were to choose Wingtech as its supplier, for instance, the China-based ODM would be able to bargain for components on behalf of three of the top four smartphone-makers by global shipments. With flagship phones, however, smartphone-makers may want to retain greater control over the manufacturing process to create product differentiation.
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