Samsung plants shifted to Vietnam to protect margins

Samsung Electronics Co. has managed to build the largest smartphone business in the world by taking advantage of the cheap and abundant workforce in China. This, however, will not last much longer, because the company is shifting its production to Vietnam. This decision was prompted by the fact that Vietnam offers even cheaper workforce, which will allow Samsung to defend its profit margins even when the sales growth of high-class handsets slows.

By 2015, when the new plant is expected to reach its full production capacity, Vietnam will be producing more than 40% of phones, which generate the majority of Samsungs operating profit. This is the reason why the company is shifting to its new 2-billion-dollar plant. Samsung managed to reach to the top of the mobile-phone industry thanks to the fact it offers innovative devices at reasonable prices, which helped it surpass Apple Inc. However, in order to be able to keep the prices low, especially when its Chinese rivals drive prices even lower, Samsung is forced to shift a part of its business in Vietnam, where wages are estimated to about one-third of the ones in China.

The new foreign direct investment projects that have been approved by the Vietnamese government are estimated at 13.8 billion dollars, which is 73% up compared to the ones approved only a year earlier.

By 2015, Samsungs new plant is expected to manufacture 120 million handsets annually. The company however is still keeping these matters privately and refused to comment when asked for clarification. Some analysts expect that it may eventually produce as many as 80% of its phones in the Vietnam-based plant.

Lee Jung Soon, who leads a business-incubation team of the Korea Trade-Investment Promotion Agency in Ho Chi Minh City, commented for Bloomberg: “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. Vietnam is really aggressive in fostering industries now.”

Samsung set foot on China for the first time in 1992. Currently, the company has 13 manufacturing sites and seven research laboratories there, plus more than 45,500 employees who make up nearly 20% of the companys global workforce. The country currently has the second-largest economy worldwide, which has influenced on wage inflation. In addition, the economy growth there has created a new class of potential buyers, who are looking for higher quality at lower prices.

Globally, smartphone sales are expected to reach 1.7 billion units by 2017, which is about two times more than the current ones, making the moment for such a vital strategic shift well-timed. The geographic factor also has a great influence on the companys expectations. On one hand, Vietnam is close to the already existing Samsung production bases in China and South Korea, and on the other hand, the tax breaks and cheap workforce in India and Indonesia seem to be quite attractive to the company.

Samsung Electronics Co Ltd shares settled 0.70% lower in Korea at 1 410 000 KRW on Thursday and its one-year return rate is down 4.86%.

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