Samsung has come up with something that Tim Cook, head of his rival Apple, has suggested would be almost impossible: he shifted smartphone production from China.
Late last month, the South Korean electronics group silently closed its last remaining Chinese smartphone plant in Huizhou, Guangdong, distributing gifts to its flagship Galaxy S10 and Note 10 phones, along with some cash bonuses, to long-term employees.
The departure of the world’s largest smartphone maker was the last blow to China’s long dominance in high-end production, with rising wages and the threat of US tariffs weighing on other companies, like Apple.
Recently, two years ago, according to analysts, the 6,000 workers at the Huizhou plant still produced 63 million phones or 17% of Samsung’s global production.
But its closure, alongside the plants in Tianjin and Shenzhen, is the culmination of a ten-year strategy by Samsung to “diversify the risks of its production bases”, according to a South Korean company manager.
Attracted by cheaper labor costs and huge tax breaks, Samsung built its first smartphone plant in the Bac Ninh province of Vietnam in 2008 for $ 2.5 billion and another in the Thai province of Nguyen in 2013 for $ 5 billion. These two plants have a combined annual capacity of 150 million units and produce about 60% of Samsung phones. Last July, Samsung announced that it would create the largest mobile phone factory in the world in Noida, India.
While shifting capacity elsewhere, Samsung maintained its Chinese production to serve the Chinese market. But it has seen its share evaporate at 1.1% in the first quarter from around 20% in 2013, according to Strategy Analytics, eliminating the last obstacle to the closure of its factories there.
“Samsung has not paid enough attention to the particularities of the Chinese market,” said Yanhui Wang, general secretary of Mobile China Alliance.
“Our market share in China has fallen so much. . . In the past we have also used Chinese production for overseas sales, but its competitiveness as a global production base has diminished, “said the Samsung executive.
Samsung has struggled to balance its global smartphone market dominance with local customizations that appeal to Chinese consumers. Although Samsung and its Chinese competitors all use Google’s Android operating system, home phone manufacturers like Huawei and Xiaomi have been more adept at developing their alternatives to the Google Play Store and other services blocked in China.
“The reason why Samsung entered China was its huge market and economic cost, but the two factors are gone,” said CW Chung, head of research at Nomura in Seoul.
Samsung is still investing heavily in its memory chip manufacturing plant in Xian, to which Chinese Premier Li Keqiang made a surprise visit this week, saying he “welcomes the increase in investment in China by of Samsung and other high-tech global companies “.
While Samsung will continue to produce some low-end smartphones in China through contract manufacturing, high-end devices like the S10 will now be made in Vietnam.
Most of the value that Chinese telephone factories add is the unskilled manual assembly, which means that rising labor costs have eroded China’s competitive advantage, said Huang Weiping, professor of economics at Renmin University in Beijing.
“The problem with smartphone manufacturing in China is that there are few components that China can provide and those are cheap. As far as assembly work is concerned, China no longer has the advantage in terms of costs, “Huang said. Analysts say that wages in China are twice as high as in Vietnam and more than those of similar workers in India.
But supply chain experts have claimed that other smartphone makers, unlike the vertically integrated Samsung that owns components and assembles them internally, are unlikely to be able to move away from China, even when wages rise.
Companies like Apple, who rely on contract manufacturing rather than managing their own factories, have spent decades investing to educate their suppliers’ workforce in China, says Paul Stepanek, president of Complete Manufacturing and Distribution, who advises the Asia supply companies.
“The number one reason we like to be in China is people. China has extraordinary capabilities, “said Cook at a conference in Guangzhou at the end of 2017.
Thursday 10 October 2019
This makes it more difficult for most companies that outsource their production to respond to the short-term pressures of the US-China trade war. “It is not realistic … suddenly, somewhere like Indonesia will be able to accomplish all the things that go into the products of the world,” said Stepanek.
However, Samsung is not the only one looking beyond China. Manufacturers of American gadgets including Google, Fitbit, GoPro and iRobot have moved to diversify their production beyond China in the last year. LG Electronics is increasing its smartphone production in Vietnam rather than China, while Sony said in March that it was closing its Beijing smartphone factory in favor of facilities in Thailand.
Not all electronics companies that have diversified outside of China have found a smooth process. GoPro was one of the first American device manufacturers to take the turn, announcing last December that it would move the production of US action cams from China to Mexico by the second half of 2019. But at the beginning of this month, the Silicon Valley-based company was forced to cut its sales and profit forecasts for its new Hero8 cameras, citing production delays.
Such examples make Donald Trump’s goal of convincing large electronics groups to bring production back to the United States even more unlikely.
As Mr Cook stated in 2017: “In the United States, you could have a meeting of tool engineers and I’m not sure we could fill the room. In China, you could fill more soccer fields.”
Source: Archy Netys