Why Samsung opening 'world's biggest smartphone factory' in Noida is big news
On July 9, 2018, Samsung, opened the gates to the "world's biggest mobile manufacturing plant" in Noida.
With billions of dollars in investment, the promise of thousands of new jobs, and no less than Prime Minister Narendra Modi and South Korean President, Moon Jae-in joining hands to inaugurate the factory – even as Uttar Pradesh chief minister Yogi Adityanath and commerce and industry minister Suresh Prabhu patiently sat in attendance – the event turned out to be high on optics, as well as political significance.
Shortly after the inaugurating the 35-acre Noida manufacturing plant, PM Modi declared it as a major achievement for the government's flagship "Make in India" program and thanked "South Korea for its participation in creating employment opportunities in India."
Speaking about the possible impact of the factory which is expected to churn out 120 million mobile phones a year by 2020 – 30 per cent of which Samsung plans to export out of the country – the prime minister said: “Today is an important day in making India a global hub of manufacturing... This 50 billion-rupee investment will not only strengthen Samsung’s business ties in India, it will also play a key role in India-Korea relations."
But besides being a great endorsement for PM Modi's Make in India campaign, and the obvious political mileage that Modi sarkaar is set to derive out of it ahead of the Lok Sabha polls in 2019, Samsung's new factory also holds the potential to fundamentally change the landscape of the second largest smartphone market in the world.
Battle for market supremacy
Samsung, which for the last few years had remained the undisputed king of the smartphone market in India, was recently dethroned by Xiaomi. The Chinese smartphone maker overtook its South Korean counterpart to become India’s top smartphone maker by volume in the fourth quarter of 2017.
Though a number of factors are responsible for Samsung being knocked off its high perch, the biggest of them, however, has been the ability of Xiaomi to bring new smartphones at totally disruptive price points. This is especially true for the mid and budget segment where Xiaomi has excelled by launching a number of competitively priced devices, like the Mi A1 and the Redmi Note 5 Pro which have been wholeheartedly accepted by the buyers.
Economies of scale
But how did Xiaomi manage to price devices like Mi A1 and Redmi Note 5 Pro so competitively? The answer is economies of scale.
Having only entered the Indian market in July 2014, Xiaomi quickly started expanding its operations in the country. Over time, it opened manufacturing plants and started making more and more of the same smartphones, thus bringing down the production cost of every subsequent smartphone it manufactured in India.
Case in point, the Redmi Note series. Over the years, Xiaomi has managed to refresh the devices from the series in terms of design and hardware, but without substantially tinkering with the price tag.
By setting up the "biggest smartphone manufacturing unit in the world" – one that's estimated to churn out over 120 million devices a year – Samsung appears to be using the same trick to counter the growing dominance of Xiaomi in the smartphone market.
Will smartphone prices come down?
Samsung saving on production cost will most likely not result in the company bringing down the prices of smartphones it sells in the country.
Though the device maker has been "Making in India" for a while now, we are yet to see it substantially pass down the benefits of such operations down to the end buyer. To date, most of Samsung's smartphones from the budget segment come bearing higher price tags than competing devices from Xiaomi and other Chinese manufacturers. And quite frankly we don't expect it to change in the near future too.
So where will the money go?
In the long run, the saving from production cost may help Samsung maintain the price points of its devices across various segments, but the real use of the new manufacturing plant – and the money Samsung makes of it – will be in improving Samsung's footprint in the burgeoning smartphone markets in tier II and tier III cities that Xaiomi and its ilk are trying hard to penetrate.
Samsung is one of the few big name smartphone makers that predominantly banks on brick and mortar stores and armies of third-party retailers to take its business to the consumers. Though not ideal for the Tier-I cities where a significant number of buyers depend on online channels for making purchases, Samsung's strategy is ideal for Tier-II and Tier-III cities where buyers still depend on word of mouth and the retailer's recommendation while making a purchase.
However, managing such an army of loyal third-party retailers that place your product above the competition is not an easy task. By reducing the cost of production of its phones, Samsung will effectively be better able to support this ecosystem that it has created over the years.
Another area that the savings could help Samsung with is in improving after sales. Samsung is one of the few companies that boasts of a good after-sales support. As the smartphone market expands to newer destinations in the country, the savings in cost of production will also come in handy in providing good after sales.
As such, the new manufacturing plant, in the long run, could end up changing the landscape of the smartphone market in India that currently looks to be facing an onslaught by Xiaomi and other manufacturers from its country.