Samsung may outsource production to Xiaomi’s manufacturer in China

It was rumored a couple of months back that Samsung will introduce a new low-end series called the Galaxy P. It was said to be Samsung’s first (original design manufacturer) smartphone. What that means is that the company won’t produce the device at its own factories. The production would be outsourced to one of the many ODM firms in the country.

We then heard in August that Samsung might shut down a smartphone factory in China. It has two plants in the country and may shut one down owing to increasing labor costs and sluggish sales. It’s expected to suspend operations at the Tianjin Samsung Telecommunication (TSTC) factory in Tianjin by next year.

Samsung looking to cut manufacturing costs

A new report from South Korea claims that Samsung may outsource the production of its mid-range and low-end Galaxy smartphones in China to Wintech. That’s the company that makes smartphones for Xiaomi, one of Samsung’s core competitors in this key market.

Samsung hasn’t confirmed anything as yet so the shut down of the Tianjin plant is far from a done deal. However, executives from its mobile business led by Executive Vice President Roh Tae-moon are said to have visited Wintech for talks on manufacturing Samsung phones.

Samsung’s public relations officials have not confirmed the report as they couldn’t check the executive’s schedule. However, they did concede that “The company has been considering introducing the ODM system not only in China but also in other countries when needed.”

If a deal is reached between Samsung and Wintech, the company will then release smartphones in China that bear the Samsung logo but are not produced at its factory. The shift to an ODM system will help Samsung cut manufacturing costs as it restructures the smartphone business in China.

The company’s market share in China is below 1 percent and the mobile division’s boss has even apologized for Samsung’s poor performance. DJ Koh has vowed to do more in order to regain Samsung’s lost market share.

A Samsung official cited in the report mentions that there were casual internal discussions among senior officials of the China business a few years back about outsourcing production. It seemed to them that the Apple-Foxconn partnership was working well as far as the cost-to-quality ratio is concerned.

Merely shifting to ODM may not be enough for Samsung to regain footing in China now. Its challenges in this key market are bigger than manufacturing costs, such as the distribution network problem. What might happen is that Samsung may make a few ODM models but is likely going to keep its manufacturing-driven position in the market.

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