[ANALYSIS] Heavy cost-cutting to hurt Samsung's competitiveness

Consumers take a look Samsung Electronics' foldable phones at a Samsung store in Singapore, Aug. 27. Courtesy of Samsung Electronics

By Baek Byung-yeul

Samsung Electronics has been trying to cut smartphone production costs in order to boost output volume and stay ahead of its rivals.

The Korean electronics giant has been able to retain its No. 1 status in terms of global smartphone sales by stepping up production outsourcing and reducing the manufacturing costs of various components.

However, such radical cost reduction efforts could have a negative impact on Samsung's competitiveness, an industry source said Thursday.

"In order for Samsung to maintain its competitiveness in the smartphone business, the company's phone-related industrial ecosystem needs to run smoothly," a high-ranking source in the smartphone industry said.

The official added that increasing partnerships with ODM companies could erode Samsung's competitiveness.

ODM refers to original development manufacturers that design, manufacture and supply products. Samsung has been expanding ODM outsourcing as price competition intensifies in the global smartphone industry.

Market tracker Counterpoint Research recently reported that smartphone shipments from ODM and independent design house (IDM) companies grew 7.2 percent year-on-year in the first half of 2021 as the global smartphone market rebounded 19 percent during the same period. The growth of the ODM market was driven by increasing orders from key clients, such as Samsung and Chinese makers including Xiaomi.

Samsung's active use of ODM companies is part of the "en vogue" manufacturing trend in terms of cost reduction. But there are also concerns that selling low-priced products can undermine brand image. Unlike how Apple has developed its own products and outsourced manufacturing of its smartphones, reliance on ODM companies can lead to quality problems, because Samsung's involvement in the product development process decreases.

"Samsung's excessive cost reduction and indiscriminate expansion of ODM are negative factors in maintaining the firm's smartphone ecosystem," the industry source added.

To distinguish itself from Apple's iPhone series in premium smartphone segments, Samsung is trying to increase the presence of foldable smartphones. The Korean company has succeeded in gaining the attention of consumers with its newly launched foldable phones ― the Galaxy Z Fold3 and the Galaxy Z Flip3.

Among the foldable phones, the Z Flip3 is particularly attracting young consumers with its sleek exterior design and convenient folding feature. Industry sources say the foldable phones are expected to reach the 1-million milestone in sales before Apple's new iPhone hits stores here next month.

However, market watchers point out that Samsung needs to solve a supply shortage issue of the foldable phones in order to ensure their success around the world.

"Samsung seems to have succeeded in attracting young customers with its foldable phones. But the company is facing tight supplies as the supply chain of the related parts is not smooth," the official said.

U.S. mobile carrier T-Mobile's Chief Financial Officer Peter Osvaldik also reportedly pointed out Samsung's smartphone supply chain issue.

"Samsung has really fallen behind the eight ball relative to other OEMs on the global supply chain issue," the top executive said during a BofA Securities investor event Sept. 14, according to a report by Fierce Wireless. Although his remarks were made referring to Samsung's Galaxy S and A series, there is the possibility that such criticism may emerge over supply shortages of foldable phones in the future.

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