Big shift for Samsung's device business may bring more production outsourcing

Samsung's DX or Device eXperience business, which handles mobile devices, TVs, home appliances, etc, is facing intense cost pressures.

Samsung Electronics has reviewed the management strategy for this division during its global strategy council this week and we may now see a major shift in the strategy which may increase the outsourcing of certain products to third-party manufacturers.

Samsung has already done considerable restructuring to cut inefficient businesses. Its decision to completely exit from TV and home appliance sales in China was a result of those efforts.

The company faces strong competition from Chinese rivals in the home appliance segment. A report out of South Korea claims that Samsung will counter this by focusing more on its premium Bespoke lineups.

Samsung may also consider discontinuing or outsourcing the production of low value-added home appliances. This means that certain entry-level products may be made by third parties rather by Samsung in its own factories.

This is viewed as a sign that Samsung wants to shift away from its history as a pure hardware manufacturer to a more nimble entity that focuses more on segments in software, services, and new businesses where it doesn't face relentless competition on pricing.

What Samsung is contemplating, handing off the manufacture of entry-level appliances to third parties while concentrating its own factories and engineering resources on premium Bespoke lines, is a quiet but meaningful redefinition of what kind of company Samsung wants to be.

For most of its history, Samsung's identity as a manufacturer has been inseparable from its identity as a company. It made things. It made them at scale, in its own facilities, with its own components, under its own roof. That vertical integration was the source of both its margins and its pride.

The signal couldn't have been clearer when Samsung decided to exit from appliance sales in China. It was a quiet concession that Samsung could no longer win a price war against Chinese manufacturers in their home market. It could not win on hardware terms alone. It may be set to apply the same logic to entry-level appliances globally.

If a product's primary competitive dimension is price, and Samsung cannot make that product cheaply enough to win without sacrificing margin, outsourcing its manufacture is not a retreat. Rather, Samsung is focusing on ensuring its engineering prowess provides the premium that it deserves. That can only be fully realized on more premium offerings.

Outsourced production doesn't necessarily mean inferior quality. Samsung will likely choose manufacturing partners that can ensure its products meet the quality standards that customers have come to expect from products that have a Samsung label on them.

As long as quality issues don't surface, the change in production method will largely go unnoticed by consumers. The vast majority of consumers aren't going to decide which Samsung appliance to buy based on whether it was produced through an outsourcing partner or by Samsung in its own facilities.

They'll mainly look at features, compare them to other options in the market, and the pricing will remain a dominant factor in the decision. What this model that Samsung now seems to be leaning toward will deliver is improved price competitiveness, particularly against Chinese brands, that are aggressively pricing their products relative to all other brands in most markets across the globe.

This shift in strategy may also be driven by Samsung's focus on maximizing the opportunities that exist in the market right now, particularly for memory semiconductors. The company finds itself with a generational opportunity to take full advantage of the memory demand being driven by AI.

This is also raising the prospects for the company's contract chipmaking division, which is increasingly being sought for chipmaking by some of the world's leading companies. Samsung is the only other option for advanced chipmaking after Taiwan's TSMC, and with its capacity being sold out in advanced, anyone that needs cutting-edge chips made has to turn toward Samsung.

These changes would enable Samsung to improve the overall business, as a more nimble division would likely deliver improved financial performance and further compound the impressive gains that Samsung is currently making through its semiconductor division.