Samsung Electronics Co. (005930) built the world’s largest smartphone business by tapping China’s cheap and abundant workforce. Not for much longer: it’s shifting output to Vietnam to secure even lower wages and defend profit margins as growth in sales of high-end handsets slows.
By the time a new $2 billion plant reaches full production in 2015, China’s communist neighbor will be making more than 40 percent of the phones that generate the majority of Samsung’s operating profit. The Suwon, South Korea-based company’s second handset factory in Vietnam is due to begin operations in February, according to a Nov. 22 statement on the local government’s website.
Samsung surged past Apple Inc. to the top of the mobile-phone industry by offering cutting-edge devices for more than $900 to basic models costing less than $150. With demand sagging in the most-profitable top end and Chinese rivals driving prices lower, Samsung is joining technology companies such as Nokia Oyj (NOK1V) and Intel Corp. (INTC) to be drawn to Vietnamese wages that are about a third those in China.
“The trend of companies shifting to Vietnam from China will likely accelerate for at least two to three years, largely because of China’s higher labor costs,” said Lee Jung Soon, who leads a business-incubation team of the Korea Trade-Investment Promotion Agency in Ho Chi Minh City. “Vietnam is really aggressive in fostering industries now.”
It seems to be working.
The government has approved $13.8 billion of new foreign projects this year through Nov. 20, a 73 percent increase on a year earlier, according to the General Statistics Office in Hanoi. South Korea led with $3.66 billion.
China’s $8.4 trillion economy, 59 times the size of Vietnam’s, received $97 billion of foreign direct investment -- although this was actually utilized -- in the first 10 months, 6 percent up on a year earlier.
Intel, the world’s largest chipmaker, opened a $1 billion assembly and testing plant in Ho Chi Minh City in 2010. Nokia said its facility near Hanoi producing Asha smartphones and feature handsets became fully operational in the third quarter. LG Electronics Inc. (066570), Samsung’s smaller South Korean rival, is building a new 400,000 square meter complex to make TVs and appliances as part of a $1.5 billion investment plan.
“The country is politically stable and has a young, increasingly well-educated workforce,” LG said in an e-mailed statement. “Like Korea, Vietnam understands what it takes to rebuild an economy after a devastating war.”
Samsung’s new plant is expected to make 120 million handsets a year by 2015, said two people familiar with the company’s plans, who asked not to be identified because the matter is private. That would double the current output from the country and compares with the 400 million global total Samsung shipped last year. In an e-mailed response to questions, the company declined to comment.
With about one-third of the global smartphone market, Samsung may eventually produce as many as 80 percent of its handsets in Vietnam, said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul who has been tracking the company for more than a decade.
“The handset business is all about assembling well-sourced components,” Lee said. “The most important thing is manpower.”
After setting up in China in 1992, Samsung now has 13 manufacturing sites and seven research laboratories there, according to its June sustainability report. The 45,660 employees in China make up more than 19 percent of Samsung Electronics’ global workforce, the largest source of labor outside South Korea, it said.
Record economic growth that made China the second-biggest economy has fueled wage inflation, pricing many workers out of low-end jobs. The base monthly salary for a factory worker in Beijing was $466, compared with $145 in Hanoi, according to a 2012 survey of pay by the Japan External Trade Organization.
While this growth has created an emerging class of potential Chinese buyers of Samsung products, consumers wants more for less. Features once reserved for top-end devices, such as high-definition screens and faster processors, are being added to cheaper handsets.
China last year surged past the U.S. as the biggest smartphone market, and sales there will reach 350 million units this year -- more than double U.S. demand, according to estimates by industry analysis firm IDC. In China, though, three-quarters of devices sold for less than $250, compared with a fifth in America, IDC said.
Globally, smartphone sales will more than double to 1.7 billion units by 2017 at the same time average prices will drop to $265 from $337, IDC said in a Nov. 26 report.
“The rule of the game is now changing to how much market share you can win over rivals,” said Hong Sung Ho, an analyst at LIG Investment & Securities Co. in Seoul. “Many companies are now scratching their heads to figure out how to cut manufacturing costs.”
Samsung’s complex in the Yen Binh Industrial Zone of Thai Nguyen province, north of Hanoi, will pay no tax for the first four years, and half the full rate the following 12 years, the local government’s website shows.
A $1.2 billion Samsung Electro-Mechanics Co. (009150) factory announced making camera modules and circuit boards, along with other Samsung plants, will get half their infrastructure rent subsidized. Under a so-called strategic partnership, Samsung said it will also help Vietnam build social infrastructure, and nurture key industries such as petrochemicals and shipbuilding, according to the South Korean conglomerate.
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Shares of Samsung have fallen 7.4 percent this year, compared with a 1.5 percent drop in the benchmark Kospi index, and the stock is headed for its first annual decline since 2008.
While tax breaks and cheap workers are lures that other countries such as India and Indonesia could offer, Vietnam’s location closer to existing Samsung production bases in China and South Korea is an extra incentive, according to Than Trong Phuc, managing director of technology-focused investment fund DFJ VinaCapital LP in Ho Chi Minh City.
“Other countries can match or even beat the incentives that Vietnam is offering, but Vietnam is very close to Samsung’s supply chain,” said Phuc. “You see Korean companies everywhere you look in Vietnam, right and left.”
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