Consumers pick up phones at a Samsung booth in a shopping mall. Photo: IC

Samsung's plan to outsource a fifth of its smartphone production to China next year may help it compete with rivals such as Huawei and Xiaomi.

Samsung Electronics, which shut its last in-house Chinese smartphone factory in October, is quietly moving production of some Galaxy A models to contractors such as Wingtech which are little-known outside China.

Samsung has been coy about the volumes involved but sources said the South Korean tech giant plans to ship some 60 million phones, which are made in China by original design manufacturers (ODMs), next year out of a total of about 300 million devices.

Wingtech and other ODMs make phones for multiple brands including Huawei, Xiaomi and Oppo, giving them the economies of scale to keep costs down, and the nimble contractors can develop and produce new, budget phones quickly.

People familiar with Samsung's strategy say it has little choice but to follow rivals and use Chinese ODMs to shave costs.

"This is an inevitable strategy rather than a good strategy," a source with knowledge of Samsung's Chinese operations said.

Samsung said in a statement to Reuters that it has been making limited lines of smartphones outside its own plants to broaden its existing portfolio and "ensure efficient management in the market." It declined to say how many Samsung phones are made by ODMs and said future volumes had yet to be determined.

Wingtech did not respond to a request for comment.

Cheaper components

Research firm Counterpoint says ODMs can procure all the components needed for $100 to $250 smartphones for 10 to 15 percent less than major brands with their own factories in China.

One supply chain source said Wingtech can get some parts for up to 30 percent less than Samsung Electronics pays in Vietnam, where it has three factories churning out smartphones, TVs and home appliances.

Wingtech began making tablets and phones for Samsung in 2017, accounting for 3 percent of its smartphones. That's expected to hit 8 percent, or 24 million units, this year, according to IHS Markit.

Samsung's outsourcing plans involve its lower and mid-range Galaxy A series, with Wingtech having a hand in both design and production, sources said. The A6S, one of the models to be outsourced, has costs starting from 1,299 yuan ($185) in China.

The Wingtech phones will mainly go to Southeast Asia and South America, one source said. Samsung is gaining market share in both at the expense of Huawei, which is suffering from US government's?blacklisting.

'Game of survival'

Analysts said Samsung's strategic shift signaled the declining manufacturing prowess of the company, once a low-cost Asian manufacturer and now the world's top producer of high-end electrical consumer goods.

US rival Apple outsources production to Foxconn Technology, but still designs its phones in California.

Samsung said in an emailed response to Reuters that it will be involved in the oversight of the design and development of smartphones produced by ODMs.

Samsung has been pairing South Korean component suppliers with Chinese contractors to keep closer tabs on quality control, according to an individual familiar with Samsung and Chinese ODMs.

"We understand that the logic of increasing production volume with Chinese contractors is a strategic business decision, but that doesn't mean all of us are happy about it," an executive at a Korean component supplier said.

Samsung told Reuters it has applied the same quality checks and standards as it does for all of its devices, adding that it was committed to delivering high-quality products.

Historically, Samsung has designed and produced almost all its phones in-house in vast factories in Vietnam and, more recently, India while winding down production in South Korea and China where labor costs more.

But Roh Tae-moon, the youngest executive to become a president at Samsung Electronics, is championing the new ODM strategy in his role as number two at the mobile division, people familiar with the matter said.

"It is crucial to cut costs to maintain competitiveness with Huawei and other Chinese handset makers," said a Samsung insider who declined to be named.

Other Korean firms have also embraced outsourcing. LG Electronics, whose smartphones have been losing money for several years, has said it plans to expand its ODM output from budget models to mid-priced phones.

"Smartphones have come down to a battle over costs. It's a game of survival now," said Kim Yong-serk, a former Samsung mobile executive who is a professor at South Korea's Sungkyunkwan University.