According to the Nikkei Asian Review, smartphone manufacturers including Samsung are increasingly choosing to outsource equipment development to maintain cost competitiveness. These outsourced mobile phones currently account for more than one-third of the market share.

Counterpoint's data shows that in the first half of this year, outsourced development of smartphones accounted for 36% of global shipments. This ratio has increased by 14 percentage points from three years ago.

This trend has always been centered on smaller companies, but in the industry has spread to heavyweight companies such as Samsung. This phenomenon highlights the maturity of the smartphone market.

Although this helps to reduce costs and provide consumers with a more cost-effective price, smartphone manufacturers still face the risk of losing out on outsourcing design. This approach also benefits outsourcing companies, most of which are concentrated in China.

Samsung once put everything from design to production of smartphones inside. According to a supplier, this situation changed dramatically in the second half of 2019, when Samsung began large-scale outsourcing. The current figure is 50 million units, accounting for about 20% of the company's annual shipments.

Samsung said that the outsourcing of certain models is to meet market demand, that is, to effectively launch a whole series of smart phones while keeping prices low. Considering that Samsung sells devices in different price ranges to adapt to the global market, it is clear that Samsung believes that it will not be necessary to attribute all its mobile phones to its own development.

Samsung seems to have mainly outsourced the development of the Galaxy M series phones, which cost less than $200 and are designed for India and other emerging markets.

Although iPhone production is completely outsourced, Apple retains internal design work, including component specifications. Before Samsung entered the field of outsourcing, this approach was mainly concentrated on small and medium-sized manufacturers. Xiaomi also outsources its entire product development.

Atsushi Osanai, a professor at Waseda University in Tokyo and an expert in technology management, said that the factor driving the trend of outsourcing is the commercialization of smartphones. Smartphone manufacturers are racing to surpass each other in displays, cameras and other functions, so that devices in the low-end market already have a fairly high level of functionality.

Except for some high-end models, the focus of smartphone competition is shifting to price.

Outsourcing allows manufacturers to control development costs. By applying common components and low-cost design expertise from suppliers, production costs are also reduced.

Data from Counterpoint shows that most of these outsourced smartphones are priced at $150 or less. Global smartphone shipments seem to have peaked: about 570 million units shipped in the first half of this year, and annual shipments in 2019 may be lower than this level. But equipment at these prices is critical to developing emerging markets, where room for growth still exists.

Outsourcing contractors can be divided into design companies and original design manufacturers (ODM), which handle the design and production parts of the process.

Among them, ODM has achieved growth in particular. They accept customer orders in terms of appearance and specifications. These companies are responsible for the structural design and component procurement of the mobile phone, and then deliver the final product that adopts the customer's brand.

The top three outsourcing contractors are all in China, and their total share exceeds 70%. Ranked first is Shanghai-based Hixih Technology, whose shipments in the first half of this year increased by more than 80% over the same period last year, thanks to its business with Samsung. Last year, Hixih raised more than RMB 1 billion (US$150 million at current interest rates) from a number of venture capital groups, including companies under Intel and Qualcomm.

The second place is Wingtech Technology. With the construction of the factory in 2008, it realized the transition from design to ODM, and achieved growth by supplying Xiaomi. According to an analysis by Cinda Securities, Wingtech has expanded its business scope to include wireless headsets and other devices, which is expected to achieve further growth.

The ODM model was established in the personal computer industry in the 1990s. Although ODMs seem to inevitably become a trend in the smartphone industry at first glance, this choice is not easy for manufacturers to stand out.

This shows that smart phone companies need to strike a balance between internal development and outsourcing development, but the appeal of China's emerging device design is obvious.

"China has excellent technology in assembling low-cost components and designing smartphones," said a representative of a Japanese electronic component manufacturer that has business dealings with Samsung and OPPO.