Samsung will reportedly outsource nearly a fifth of its smartphone production, coming to around 60 million units, to Chinese ODMs like Wingtech in 2020. This move comes at a time when Samsung is changing its low-end smartphone strategy to compete with existing segment leaders like Xiaomi and Huawei (Honor).
Samsung has traditionally designed and manufactured most of its smartphones in huge factories based in Vietnam. In fact, the company closed its last factory in China this October, giving lucrative severance packages to its employees which included Galaxy S10+ and other models as gifts.
Only around 8% of the total smartphone production was outsourced to ODM companies like Wingtech in 2019. But according to the new Reuters report, this figure is all set to jump to 20% or around 60 million units in 2020. The company has been in talks with ODM makers like Wingtech since last year to shift some of its production to their factories. And it looks like we could see a majority of Samsung’s low-end and mid-range models coming from these ODM makers in the coming months.
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Why are Smartphone makers outsourcing their production to ODMs?
ODMs or Original Design Manufacturer designs and makes smartphones (usually budget and mid-range ones) that are then rebranded and sold by other smartphone companies. Samsung’s new production strategy to outsource some of the budget manufacturing to ODMs make sense because of the savings in the cost of production.
Since ODMs are involved in manufacturing smartphones for a lot of brands, they have huge economies of scale advantage. They are able to procure components nearly 10% to 15% cheaper than traditional means, translating into a lower production cost per unit. It should come as no surprise that companies like Huawei, OPPO, and Xiaomi rely on ODMs for their smartphone production.
Is there a Potential downside?
While ODMs provide tremendous cost advantage, there have been questions about quality. Samsung’s low-end and mid-range smartphones, manufactured by these ODMs, wouldn’t directly be controlled for quality by Samsung, unlike in its own factories in Vietnam.
The Reuters report adds that Samsung’s increased orders could give these ODM makers additional experience and knowledge to further improve their competitiveness in the market and lower costs for its other clients like Huawei and Xiaomi.
Nevertheless, shifting some of the low-end model production to ODMs seems like a necessary move. Even LG is moving its low-end and mid-range smartphone production to ODMs to improve its pricing strategy.
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(Source)
