Samsung is a Case Study in How Manufacturers Leave China

Driven by both geopolitics and commercial needs, the trend seems likely to pick up further steam: Even Apple, the most visible beneficiary of the “made in China" phenomenon in the tech space, is starting to push its suppliers more aggressively toward India and other alternatives. But the practicalities of even a partial move away from China-based manufacturing are daunting.

Luckily there is at least one conspicuous example of a major high-technology company that has successfully relocated large parts of its production apparatus: Samsung Electronics, the global electronics giant and Apple’s smartphone rival.

Samsung still has significant operations in China, including for its crucial memory chip business. But from a head-count perspective, it has been edging away from China for years. The company had over 60,000 employees in China in 2013 according to its 2014 Sustainability Report, but that number had fallen to less than 18,000 by 2021. Samsung closed its last smartphone factory there in 2019.

Lower labor costs in other Asian countries are a big draw. But geopolitics was probably also an important factor. In 2016 and 2017 Beijing and Seoul became embroiled in a major diplomatic spat over South Korea’s plan to host a high-tech U.S. missile defense radar system. In an early preview of the coercive economic tactics that China has employed against a widening range of countries in recent years, Beijing effectively forced the sale of Korean conglomerate Lotte Group’s China supermarket business and curtailed tourist visits to Korea.

One result is that as Apple and other big manufacturers increasingly scope out Vietnam and India, Samsung is already there in spades—which could add up to a significant competitive advantage given the difficulties of replicating China’s scale abroad. Vietnam, for example, has a population of around 100 million. But China’s Guangdong province alone has over 125 million.

Samsung is now Vietnam’s largest foreign investor. It accounted for nearly a fifth of the country’s total exports last year. The company has also invested big in India: the country accounts for around 20% to 30% of Samsung’s smartphone production, according to Morgan Stanley.

The fact that the world’s largest smartphone maker has managed to ditch China may offer some comfort for other companies looking to “de-risk." But Samsung’s success was also related to market factors that could be hard for Apple, for example, to replicate. Samsung’s smartphone market share in China was battered in the mid-2010s: Strong competition from Chinese companies like Xiaomi that make comparable Android smartphones with affordable prices was one major reason.

On the other hand, Samsung is the top-selling brand in India and Southeast Asia—meaning it can produce and sell a big chunk of its output in the same places. Apple, with its high prices and premium focus, could struggle to achieve that, especially in price-conscious India.

Another issue for both Apple and Samsung is that even if the final assembly of gadgets is moved outside of China, manufacturers will still depend on many suppliers there. During the height of the 2020 Covid-19 outbreak in China, Samsung also found itself scrambling to secure suddenly-scarce Chinese components. Chinese suppliers have moved rapidly up the value chain in recent years and now make many high-tech electronic components too.

Samsung’s success in relocating its smartphone business is instructive—but it also had a major first mover advantage and a product mix suitable to lower income Asian nations. Others will now try to follow in its footsteps, at least in part. But for Apple and many other top manufacturers, China will loom large in the global supply chain for a long time.