How Samsung plans to fix outsourcing issues in China

Samsung Electronics Co has always focused on keeping most of its manufacturing activities in-house giving very little of manufacturing work to its suppliers. However, recent reports based on the study by China Labor watch (CLW) based in New York has revealed the poor working conditions of the employees at Samsung’s suppliers.

Samsung has emphasized that it would strive towards improving the working conditions of the employees at its suppliers after the company had verified that the employees were indeed treated in a not-so-positive manner.

Samsung on display in a conference

Following the observation of China Labor watch, Samsung had initiated an investigation on its Chinese suppliers in September and found out that the employees in China were subjected to excessive overtime work as well as undue penalties.

Outsourcing issues in China

A team of more than 100 auditors led by Mok Jangkyun, Vice President of Human Resources, was assigned the task of investigating the working conditions of over 105 suppliers of Samsung in China. It found out that a system of imposing penalties was in place to correct late-coming and production of faulty products. This is grossly against the global practices but seemed to be justified under the local regulations.

The investigation team also found out that there were cases of excessive overtime working hours too. Sometimes, the workers had to work on weekends also when the orders increased. This made the overtime work reach up to 32 hours in a week and around 100 hours in a month.

The team under Mok is now working with the suppliers to help rectify the situation by doing away with the outdated practices and bring about a better and constructive work environment. They have already made a number of suggestions and improvements in the system.

  • The team has recommended the suppliers to hire more workers.
  • The suppliers have been asked to introduce automation in the processes and improve production processes.
  • The team is also working on developing guidelines which would gradually reduce overtime working hours.

In-house manufacturing vs. outsourcing

Samsung staunchly emphasizes on the expensive in-house manufacturing strategy as compared to outsourcing as it considers it to be one of its major strengths. The company considers it as the ideal ploy to quickly and effectively adapt to the changes in market conditions.

Samsung renders its success in becoming the leader of chips and displays to its focus on manufacturing competitiveness. The company employs over 200,000 staff all over the world, of which more than half are involved in the manufacturing scenario.

The ratio of In-house and outsourced manufacturing processes of Samsung reiterates the company’s pronounced sway towards the former method of manufacturing process:

  • More than 90% of Samsung products are manufactured in-house. Only peripheral products like feature phones, handset cases, components etc. are contracted out.
  • Samsung’s presence in China is quite pronounced with more than 40 percent of products like the Galaxy S smartphones, chips, and home appliances being produced in the country. However, most of these production activities take place in Samsung’s own manufacturing plants. Outsourcing forms only a small chunk of less than 10% of the total production.

Apple in trouble?

Meanwhile, Samsung’s main opponent relies heavily on outsourcing. As such its industry-leading margins are expected to reduce in this quarter. This is because the building cost of the products has risen exponentially. The company is also finding it difficult to meet the popular demand for the new iPhone 5.

Foxconn Technology Group, which is Apple’s major manufacturer on contract basis, had stated that the company could not meet the huge number of orders for the phone coming in.

Not only Samsung, but many other multi-national companies have Chinese firms working for them on contract basis since labor is considered to be cheap here. Apple Inc., Sony Corp, Hewlett-Packard, Google’s Motorola Mobility, Inc., Dell Inc., Nokia Oyj are some of the companies outsourcing work to China. However, many foreign companies have come under the scanner in recent times for practicing improper work conditions in China.

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