Supply Chain Matters highlights an announcement from Samsung of the closure of a smartphone manufacturing facility in China. While related to declining sales in that country, the move has parallels to the shifting of supply network strategy.

This blog serves as a side-panel reinforcement of our just published highlights of our third 2019 prediction which declared unprecedented levels of global supply network challenges in the coming year, and that structural supply network strategy changes are already underway.

A reinforcement of such trends come from reports this week published by Reuters, The Wall Street Journal and other business publications.

Reuters reported this week that global high-tech electronics manufacturer Samsung will cease manufacturing operations in of its two existing smartphone manufacturing facilities within China. A corporate statement indicated:

As part of ongoing efforts to enhance efficiency in our production facilities, Samsung Electronics has arrived at the difficult decision to cease operations of Tianjin Samsung Electronics Telecommunication.

Samsung further reiterated to business media that China remains an important consumer market and pledged to continue to invest in its existing remaining Chinese factories, including supply network facilities producing batteries, memory chips and other electronic components.

The facility located in the northern city of Tianjin is one of two smartphone manufacturing facilities within the country. The closing was first rumored in reports published in August. The facility reportedly employs upwards of 2600 people and is scheduled to cease operations by the end of this month. Samsung indicated that it would offer compensation packages to affected employees and further provide opportunities to transfer to other Samsung production facilities.

The other Samsung smartphone manufacturing facility is located in Huizhou, in the southern province of Guangdong. According to the Reuters report, the Huizhou facility provides existing production output of 72 million smartphones annually while the Tianjin facility produced 36 million units. Samsung declined to disclose to Reuters capacity levels for each factory,

The closing decision was prompted by declining smartphone sales volumes in China. According to sales data from Counterpoint Research, Samsung’s smartphone market share within China has fallen to one percent. Samsung indicated that sales within one of the largest smartphone markets by unit volume have been steadily declining due to rising competition from lower-cost, domestic smartphone manufacturers. This has been a similar trend for Apple, a smartphone manufacturing that is also facing increased scrutiny and supplier impacts as a result of forecasted lower unit sales volumes in China and other global regions including the United States.

In its reporting, The Wall Street Journal indicated (Paid subscription required) that Samsung’s smartphone manufacturing would eventually be shifted to India, as China sales continue to flounder. In the summer, Samsung announced plans to invest $700 million to construct what was termed as the world’s largest smartphone production facility in India. The WSJ report cites Bank of America analyst data indicating that between 50 and 60 percent of Samsung’s current annual smartphone production are assembled from Vietnam, while 20 to 30 percent are shipped from China and 10 percent from India.

From our Supply Chain Matters lens, it would appear that Samsung has indeed initiated the delicate task of the shifting of sourcing and end production strategies that will occur over the coming months and years. While the motivations appear to be specific smartphone market related, and not directly related to current tariff developments, the parallels to longer-term adjustments to supply management strategy consideration are apparent. India could well become the next significant smartphone growth market and eventually with the bulk of Samsung’s smartphone production being produced in India and Vietnam, global-wide distribution takes on a different perspective for lower-cost sourcing.

Other Evidence

Within today’s WSJ’s Heard on the Street editorial column reflecting on the topic of trade feud winners, columnist Aaron Blake opines that before the current trade hostilities between the U.S. and China, there was already signs of an exodus of capital out of China, destined to lower-labor cost countries. The notion is that the trade war has accelerated the trend towards destinations such as Vietnam, Indonesia and the Philippines.  The reality being that companies are not eager to make such moves visible to countries with existing huge business or supply network presence.

To reinforce that strategy shifts are occurring, the WSJ column cited top executives from Bank of America and Citigroup indicating that clients are actively moving supply chains.

Obviously, bankers should be in the know.

 

Bob Ferrari

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