The drive to develop a Vietnamese production base demonstrates the twin pressures of higher Chinese labor costs and the spiraling tariffs resulting from the trade war between Washington and Beijing. The U.S. internet giant plans to eventually move production of most of its American-bound hardware outside of China, including Pixel phones and its popular smart speaker, Google Home, according to the sources. The Vietnam production lines will be an important part of Google's drive for growth in the smartphone market. Google intends to ship some 8 million to 10 million smartphones this year, double from a year ago, sources told the Nikkei Asian Review. While Google's Pixel smartphone brand is still a minor player in the industry - not even rating in the global top 10, according to tech research firm Counterpoint - it is growing swiftly.

 

The mid-priced Pixel, released in April, helped Google become the fifth largest mobile brand in the U.S. for the second quarter of 2019, grabbing market share despite a broader industry slump. Google's aggressive hardware campaign is supposed to heap pressure on second-tier mobile makers such as LG Electronics and Sony, which are struggling as the industry confronts its third consecutive year of slump.

 

By diversifying its production into Vietnam, Google hopes to ensure that sustainable production of the Pixel range, a showcase for its Android operating system. Installed in 80% of the world's smartphones, Android is encountering a challenge from Chinese rival Huawei Technologies, the world's second largest handset maker, which in August unveiled its own mobile platform, Harmony OS.

 

In 2018, Google delivered some 4.7 million smartphones, which only accounted for 0.3% of global market share, research company IDC said. However it has already shipped 4.1 million units in the first half, according to IDC, thanks to the Pixel 3A, priced at $399. Approximately 70% of Google's smartphone sales in 2018 were in the U.S., its biggest market, followed by the U.K. and Japan, as reported by IDC. For smart speakers, the U.S. accounted for some 64% of shipments.

 

Under current plans, Google will shift some production of the Pixel 3A phone from China to Vietnam just before the end of this year, the people said. For its smart speakers, some production is very likely to be moved to Thailand, sources said. But the company's new product development and original production for its hardware lineup will still be in China, they said.

 

'Google are likely to keep some activities inside China. The U.S. company knows that if it is going to be serious about making hardware, it could never give up the massive Chinese market,' one of the sources said. 'However, they also understand that, due to rising costs and the macro-environment, they need to have production outside China for the long term in order to support their hardware manufacturing.'

 

Google is the latest to seek safety by diversifying its production as the trade war escalates. HP and Dell have moved their server production away from China to dodge Washington's punitive tariffs, while also shifting some notebook production to Taiwan and other Southeast Asian countries such as Vietnam, Thailand and the Philippines. Apple also has begun to analyse how it might diversify its supply chain, though it remains highly reliant on China with more than 90% of its hardware manufactured in the country.

 

Google initiated dabbling in the smartphone market as early as 2008, when it collaborated with Taiwan's HTC to operate the first-ever Android operating system on a mobile device under the Taiwanese company's brand. By 2017, Google had greatly accelerated its hardware business, hiring 2,000 handset engineers from the financially embattled HTC. It has also been scooping up hardware engineers and supply chain specialists from Apple.

 

But the relatively small scale of the Pixel handset production makes it easier for Google to think about shifting out of China at this stage, said Mia Huang, a smartphone analyst at the Taipei-based TrendForce. 'Any potential capacity shifting for [Google] would be easier than Apple.' Google, like many internet technology companies, sees hardware as a means of locking users into its ecosystem of software products. Amazon of the U.S. and China's Alibaba Group Holding are also using voice-activated smart speakers to drive customers to their e-commerce services. ByteDance, the parent of TikTok, the world's most popular short-video sharing platform by downloads, newly introduced its first smartphone to expand its influence outside software.

 

'For Google's smartphone business, it's still less about selling hardware but is really to demonstrate how powerful its mobile system and software could be,' said Joey Yen, an analyst at IDC. 'The main goal of Google's hardware business is to help the expansion of its core software, data, and advertisement business and to grow its ecosystem.'

 

However, Google's smartphone sales could benefit if Huawei gradually lost access to Android as a result of Washington's crackdown on the Chinese company, Yen said. Outside China, 'it still challenging for Huawei's new Harmony OS to grow into a mature and complete ecosystem soon,' she said. 'A new OS requires so many developers' accumulated efforts for a long time. So some Android phone makers such as Samsung and Google could benefit from that ban in the near term.' Google did not respond to requests for comment for this story.

 

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