Baek Byung-yeul is a journalist at The Korea Times focused on cultural content, including films and cultural events in South Korea. You can contact him at baekby@koreatimes.co.kr to share your insights.
ANALYSIS Rising labor cost forcing Samsung to rethink mobile strategy
A customer at a smartphone shop in Seoul tries out Samsung Electronics' Galaxy Z Fold 3 smartphone, Aug. 23. Yonhap
By Baek Byung-yeul
By Baek Byung-yeul
Samsung Electronics is reportedly planning to diversify its smartphone production base, which is currently concentrated in Vietnam, to other countries such as India and Indonesia, in an effort to minimize risks on concentrating production in one place, as well as rising labor costs.
According to a report from local tech news site TheElec, Samsung is set to reorganize its global smartphone production system. “The main goal is to redistribute production concentrated in Vietnam, Samsung's largest overseas smartphone production base, to other regions,” the news outlet said.
To achieve this, production capacity for 19 million smartphones will be transferred gradually from Vietnam to India and Indonesia next year, TheElec said. For the plan, production lines in India and Indonesia will also be expanded. Samsung has an annual mobile phone production capacity of 182 million in Vietnam.
Rising wages are one of the reasons why Samsung is trying to diversify its production base. According to data from the Korea Trade-Investment Promotion Agency (KOTRA), a Vietnamese high school graduate with a manufacturing job makes an average $370 monthly salary in their first year as of 2021, while in India the figure is $300 and Indonesia, $290.50.
Vietnam has been highlighted as an attractive place that can replace China with its young labor force and relatively lower wages, but manufacturing companies are nowadays required to be cautious with their investments, as wages there continue to increase.
According to the agency's report elaborating strategies for companies seeking to enter Vietnam, the minimum wage showed a double-digit increase rate until 2016, but since 2017, it has been increasing in single digits. The agency pointed out that continuous wage increases are a risk because they are a cost increase factor for manufacturing companies.
Another reason for restructuring its smartphone business strategy is to disperse its concentration from Vietnam. Due to the increasing number of confirmed COVID-19 patients in Vietnam this year, Samsung had to shut down its production facilities there.
“In Vietnam, there were production disruptions in certain places due to lockdowns that affected our operation," Kim Sung-koo, vice president at Samsung's mobile communications business, said during the company's conference call for second-quarter results in July.
Samsung is operating two Vietnamese production sites in Bac Ninh and Thai Nguyen, which produced 182 million smartphones in 2020, accounting for around 60 percent of Samsung's total mobile phone production.
Samsung plans to invest $90 million and $50 million in expanding production lines in India and Indonesia, respectively. Under this reorganizing plan, its Vietnam base will be responsible for 50 percent of the total smartphone production next year, while India will account for 29 percent and Indonesia will account for 6 percent, TheElec reported.
Samsung Electronics' smartphone factory in India / Courtesy of Samsung Electronics
Predicting next year's smartphone market, industry tracker TrendForce said Samsung is forecast to produce 276 million smartphones in 2022, up 1.1 percent from 2021.
The analyst firm said smartphone production in 2022 is expected to return to pre-pandemic levels with a total of 1.39 billion phones, but it will be difficult for Samsung to dramatically improve its shares due to increasing competition with Chinese makers and Apple.
“Samsung will have increasing difficulty in growing its market share as most of its products do not target the demand for entry-level phones. This also means that retaining market share will become more challenging for the brand,” the company said in its recent report.
A Samsung Electronics' representative was unavailable for comment at the time of this article's publication.