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Exodus: Samsung’s Major Production Shift to Vietnam and its Implications

Exodus: Samsung’s Major Production Shift to Vietnam and its Implications

Samsung announced that it is planning to move its smartphone production to Vietnam. It plans to open a new $2 billion factory in 2015 that could replace up to 40 percent of its smartphone production. Samsung’s operations have been predominately in China, so this shift represents a significant change that is expected to impact tier I and tier II suppliers which were forced to join Samsung in China. Samsung has done very well in the smartphone market, but recently competition in the consumer electronics market has rapidly expanded, making it a high-value, low-margin business. In the future, prices for such products will continue to decrease, and manufacturers like Samsung will need to offset falling profits by lowering overall costs of production.

Vietnam’s low-wage labor force presents a great opportunity for a company like Samsung. As competition in the market increases, Samsung must reduce its production costs in anyway possible. Previously production was based in China, while sensitive branches such as R&D and new production line design teams remained in Korea under strict security measures. As Samsung transitions its production to Vietnam, we would expect to see a similar model of production and development. Vietnam’s labor costs are estimated to be as low as one-third of those in China; therefore, this transition will increasingly help offset the growing market pressures.

Samsung’s pivot to Vietnam has been successful so far and is likely to continue. Samsung’s initial $2 billion investment generated $1.9 billion just within the first four months of operation. This initial success has lead Samsung to apply for new investments with the Vietnamese government. Just last year Samsung applied for both a $1 billion display module assembly plant and an additional smartphone plant bringing Samsung’s 2014 invest pledges in Vietnam to a total of $11 billion. Revenues from Samsung’s existing plants in 2014 were an estimated $8 billion and this is projected to increase by 67% in 2015. So far its initial investment in Vietnam has been a great success and Samsung is expected to continue to shift its production from China


Samsung’s production shift to Vietnam has been slower than was initially predicted, but this shift has many implications for tier I and tier II suppliers and all the companies surrounding Samsung. Competition among Samsung’s suppliers has always been fierce and Samsung has taken advantage of it. Samsung is known for its bottom line style of negotiation that can push smaller companies beyond their means. This style of business can be ruthless and often leads to the destruction of those companies that are not resilient enough to survive such a one-sided relationship.

This shift is likely to shake the current equilibrium of established tier I and tier II suppliers which were successful enough to be able to follow Samsung to China. Leading up to the beginning of the transition, Samsung has inevitably squeezed lower prices from its suppliers as a way to offset rising competition. The amount of savings Samsung can extract from its supply chain has reached its limit, causing it to now abandon its existing infrastructure for Vietnam. It is unlikely that many of the current Korean suppliers that have followed Samsung to the China, will be able to absorb the costs of such relocation, creating more opportunities for new players wanting to expand out of Korea.

Such companies have already expanded to Vietnam. The more risk averse are still waiting for clearer signs of the scope of the pivot, however for most preparations have already begun. Despite the relocation, most sourcing decisions are still to come directly from Samsung’s headquarters in Korea. Both foreign and Korean companies looking to work with Samsung in Vietnam should not expect these new factories to have much autonomy. Decisions initiated in Vietnam will be relatively slow due to constant micromanagement from Korea; therefore, pitching to Samsung only in Vietnam will likely prove to be ineffective. Instead, outside companies should concentrate their efforts on approaching the real decision-makers in Korea.

Therefore, we have determined that such companies need help. In general, approaching Samsung, as a foreign company, where it has ‘home court advantage’ has never been an easy task, and this recent shift for Samsung to a new foreign land will likely consolidate the number of ‘real decision-makers’ back in Korea. This consequently makes finding the right person more difficult, and yet an absolute necessity. Conversely, intricate physical and social barriers protect these decision-makers from those outside of Samsung’s well-guarded gates. Ultimately, without a deep understanding of Samsung, the knowledge of business culture in Korea, the unimaginable command of the local language and the rare skills required to navigate Korea’s complicated webs of both personal and professional networks, outsiders will fail at reaching those who matter when it comes to implementing new decisions. Intralink was created to serve this very purpose as an ally for companies in need of the precise links that lead to real results.

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