Samsung will reportedly use Chinese ODM to design,produce 60 million phones next year

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Looking to lower the manufacturing costs of some of its handsets, Reuters reports that Samsung plans on outsourcing the production of some Galaxy A handsets to a Chinese original design manufacturer (ODM) named Wingtech. Samsung closed its production facilities in China last month and by relying on Wingtech to assemble these phones, the company hopes to reduce the cost to manufacture low-end handsets; this will allow it to cut retail prices in certain regions including India, the second-largest smartphone market in the world. But since it is a developing country, consumers are very mindful of a handset's price which is why value for money manufacturers like Xiaomi are doing well in that country.

20% of Samsung's 2020 phone production could come from Wingtech

Phones produced by Wingtech will reportedly be shipped to Southeast Asia and South America. Besides Xiaomi, Samsung is expected to take business away from Huawei. Due to its U.S. supply chain ban, the latter cannot ship new phones using the Google Play services version of Android. Huawei's phones in the aforementioned markets will be powered by an open-source version of Android and won't be able to use Google's core Android apps like the Play Store, Search, YouTube, Gmail, Maps and others. This might not matter inside China, but outside of the country it is a big deal. A Samsung insider who wished to remain anonymous says, "It is crucial to cut costs to maintain competitiveness with Huawei and other Chinese handset makers."

Sources cited by Reuters say that Samsung plans on shipping 60 million handsets out of China, about one-fifth of the 300 million units it expects to roll off of the assembly line in 2020. But the report also mentions some of the risks that Samsung faces by using an ODM. Perhaps the biggest gamble is that Samsung will lose control over the quality of the phones being manufactured. And the strategy could backfire because Wingtech also produces handsets for Xiaomi; any economies of scale that Wingtech realizes from taking Samsung on as a customer could result in lower pricing for Xiaomi phones as well. Samsung says that it will apply the same quality testing and standards to the models made in China. The company says that it is committed to making high-quality units in the country.

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The Samsung Galaxy A6s is one of the phones that will be produced by Wingtech next year

The models being farmed out to Wingtech include lower and mid-range Galaxy A models. While Samsung will have oversight over their design, the ODM will also have some say in the design of the phones. One model that will be produced by Wingtech is the Galaxy A6s which retails for the equivalent of $185 in China. As you might expect, Korean suppliers are not thrilled with this move. An executive at a Korean component supplier ruefully noted, "We understand the logic of increasing the production volume with Chinese contractors is a strategic business decision but that doesn’t mean all of us are happy about it."

Research firm Counterpoint says that an ODM can obtain all the parts needed to build a $150-$250 smartphone for less than what it would cost Samsung to obtain these parts in China. Counterpoint says that Samsung would pay 10% to 15% more for these components if it decided to build these devices itself in China. A source who works in the supply chain said that Wingtech can get some parts for 30% less than what Samsung pays for them in Vietnam where it currently makes some models.

Since 2017, Wingtech started manufacturing phones and tablets for Samsung. That year, the company was responsible for 3% of Samsung's handsets and that percentage is expected to rise to 8% this year, or 24 million units. CW Chung, head of research at Japanese securities house Nomura says that "Low-end phones are (a) headache for Samsung," pointing out that they are should be considered a commodity product. But the analyst also said that this news is a sign that Samsung's manufacturing abilities are declining.