Samsung Electronics, which recently closed its last Chinese smartphone factory, will continue producing smartphones in China, outsourcing the work to an original design manufacturer (ODM).

Samsung will continue selling made in China phones in the Chinese market through ODM production. ODM differs from an original equipment manufacturer (OEM), which consigns smartphones designed and developed by a contractor. An ODM maker is in charge of all processes from design and development to final production.

Samsung confirmed that its factory in Huizhou, Guangdong province, stopped operating on September 30, following the shutdown of another factory in Tianjin in December 2018. Samsung’s decision to close down its Chinese phone factories was made as its market share in China fell below 1%, and labor costs soared.

Samsung’s Chinese market share was 20% in 2013, but it rapidly declined, facing challenges from Chinese phone makers such as Huawei, Xaomi and Oppo.

Industry sources said that it would reallocate the production capacity of the Chinese factory to other global manufacturing sites. Most of the production facilities of the closed Chinese factory are expected to move to factories in India and Vietnam. The Huizhou factory, established in 1992, could produce more than 60 million phones a year as of 2017, according to local media reports.

An industry source told Asia Times on Monday: “Samsung will produce lower-end smartphones in China through ODM as it ceased operation of its Chinese plant.

“ODM production won’t be enough to cover the Chinese market. Phones, including high-end ones, will be imported to the Chinese market from Vietnam or India.”

Samsung launched its first ODM phone, the Galaxy A6s, in the Chinese market last November. It expanded ODM products this year, launching the A10 in India and Vietnam and the A60 in China this year, according to industry experts.

Samsung to expand ODM

Industry experts expect Samsung to expand its ODM smartphone production.

Kim Joon-hwan, an industry analyst at Hanwha Investment & Securities, said in a recent report: “Medium- and low-priced smartphones have become usable and functions of phones that people usually use have become similar, making it hard to appreciate the difference between [high-end and low-end] smartphones. South Korean smartphone manufacturers, including Samsung, thus will introduce ODM production in earnest to survive.”

He added, “Samsung Electronics’ ODM production, which stood at only 3% as of 2018, is expected to increase in the future.”

Samsung’s smartphone portfolio also increases the need for ODM production.

“Samsung’s mid- to low-priced smartphones, which cost less than $300, accounted for 75% of its total smartphone sales as of 2019. In particular, smartphones that cost less than $200 targeted for ODM accounts for around 50-60%, similar to Chinese rivals,” Kim said.

“The number of Galaxy models has increased from less than 10 in 2011 to 20-30 in 2018, making it difficult to maintain production of the models with internal resources. Besides, Samsung has difficulties with competing with Xiaomi and Oppo of China, which are expanding their market share with the cost-to-benefit ratio.”

According to industry insiders, IHS Markit forecast that Samsung will expand ODM smartphone production to 20% of its total smartphone production next year, from 3% in 2018. Samsung declined to comment on its plan for ODM production.