The All Things Digital blog recently featured a summary of a teardown analysis of Samsung’s newest S4 Galaxy smartphone. This teardown analysis was performed by research firm IHS which pegged the total material cost of the U.S, version at slightly above $237 contrasted to a market entry price of $639 without carrier subsidies.

IHS and All Things Digital again confirm what we at Supply Chain Matters have observed for some time, the advantages that Samsung gains from sourcing many of its key Galaxy S4 components from Samsung’s internal component businesses to include the LCD display touch screen components, camera and wireless broadband chips.

The latest teardown also uncovered that Samsung is producing four different phone variants to support worldwide consumer fulfillment. The IHS teardown noted specific sourcing difference among both the Korea and U.S. model variations.  The U.S. version sourced the main applications processor chip with Qualcomm while the Korea and other geographic versions contain Samsung’s processor chip. In the graphics imaging processing chip, the U.S. version features a Fujitsu chip, while the Korea model relies on functions embedded in the Samsung sourced applications processor.  Supply Chain Matters believes that both of these are examples of risk aware sourcing strategy, insuring that there is more than one strategic supplier for important key components.

Samsung’s recent report of quarterly earnings indicates that over 70 percent of current operating profits stem from its mobile business, which includes smartphones, electronic tablets as well as conventional mobile phones.  Its component businesses such as semiconductor chips, LCD displays and components contributed the remaining profit.  Equity analysts are astute to note that three years ago, the contributions were reversed.  With product margins steadily decreasing in the lower tiers of consumer electronics value-chains, the supply chain vertical integration strategy undertaken by Samsung has paid a handsome return to date while providing the cash to fund more innovation in components.

The Wall Street Journal recently pointed out that while other companies cut-back on production related capital expenditures during the past market turndown, Samsung boldly continued investing in product, value-chain and factory innovation. That strategy has allowed Samsung to now become a peer level competitor to Apple, and in some cases, lead in overall global volume output.

Supply chain vertical integration may or may not apply to various industry or company strategic plans.  But, where it is being applied in Korea based firms such as Samsung, General Electic and Hyundai, it is contributing to positive business outcomes.

Bob Ferrari