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Taiwanese ODMs Moving in to Serve the Cloud

Web-Servers-on-CloudThe world’s biggest contract laptop manufacturer, Quanta Computer (NASDAQOTH:$QUCCF) reported a drop in sales for the last month of 2012 both sequentially and year-on-year. This would be the third largest year-over-year drop ever for Quanta, who publishes monthly sales figure on its website.  The largest drop this year was in April at 33.4% YoY.  Quanta has not specified any reason for the decline but the changes happening in the PC industry’s market dynamics are pretty apparent.

Not only are PC sales slowing down but leading PC manufacturers such as Dell (in talks, apparently, about going private), Hewlett-Packard (a financial and organizational mess), Lenovo (NASDAQOTH:$LNVGY) andAcer are increasingly moving towards in-house production. This change is going to hurt all the Taiwanese original device manufactures (ODM).

In December, Quanta recorded sales of $2.6 billion by shipping 3.8 million units, dropping from November’s $2.97 billion and from $3.16 billion in December 2011. The delay in shipments of Apple (NASDAQ:$AAPL) iPad Mini and iPad 4 has also hurt revenues. The monthly sales figures are given in the chart below. Notice that except in the month of February, where YoY sales increased by 16.6%, no other month has recorded any significant increase in sales. The declines have come in eight out of twelve months, the smallest in September – 5.8% — and a consecutive fall in sales in the previous five months.

January sales are expected to show an improvement from December due to new orders for Amazon’s Kindle Fire and Google’s Nexus 7 tablets.

Overall, Quanta recorded a total sales of $33.61 billion (NT$ 972 billion) which is approximately 10% lower from last year’s sales of $37.36 billion (NT$1.08 trillion). In terms of NT$, this is a significant symbolic change as the company has lost the trillion NT$ sales mark it achieved in 2011 and 2010. The business is clearly looking at smaller future in the PC market. Yet Quanta has a plan change that. The company is increasing its focus on providing cloud computing solutions, tablet PCs and cloud servers. This non-conventional-PC area has reportedly contributed 30% of Quanta’s total sales and the firm is looking to push it up to as much as 50% by 2015. This change in strategy is going to somewhat insulate Quanta from the falling trends being witnessed by the PC industry.

Quanta’s rival and world’s second biggest contract laptop manufacturer Compal Electronics (NASDAQOTH:$CMPFF) also recorded a 4.1% sequential decline in December sales to $2.1 billion, although this is 15.2% more that its December-2011 sales. However, overall, the company’s consolidated revenues for 2012 have dropped by 4.1% to $23.6 billion. The third biggest contract laptop manufacturer Wistron Corp has been able to maintain its annual sales figures, recording a slight drop of 0.06% from 2011, to $19.74 billion by shipping almost the same number of units in 2011 and 2012. However, Wistron’s future is in even bigger peril. Itsprimary client Lenovo, the world’s second biggest notebook vendor by sales, is aggressively gearing up to do complete in-house manufacturing of all of its laptops in the next three to five years.

Quanta is not alone in switching towards servers and cloud computing. All of its Taiwanese rivals are making similar moves which are increasing competition in this sector. Compal is reportedly ahead of Quanta in server ODM market. The latter has been awarded white box orders from Dell and is working to receive orders from HP as well. Compal, already a major supplier to Dell, is establishing a new office in Kunshan, China to handle all server orders. Although Compal is a late entrant, since Quanta and Wistron have been supplying servers to Google and Facebook since early 2011, it is quickly catching up. However, large multinationals and financial institutions, not just the technology giants, are the main customers of servers. The Taiwanese manufactures are going to compete fiercely in this area in the coming years where HP, Dell, IBM and Sun Microsystems hold most of the market.   

Where this strategy will pay off for Quanta et. al. will be in the emerging markets with smaller firms looking for solutions that the larger players will not touch.  Quanta has already partnered with Microsoft (NASDAQ:$MSFT) to provide ‘cloud servers in-a-box’ that will obviously be running Windows 8.  This creates the kind of turn-key solution that smaller firms want while cutting out the middle man, i.e. Dell or H-P.  Microsoft is now contracting directly with the ODMs.  This is what is likely causing Dell to consider taking the company private as this has been their plan all along.  Build the software on top of the servers and provide full-service to SME’s.  Microsoft already has the cloud-based software and is now using Dell’s ODM to compete with them.  With Microsoft’s announcement the other day of an embedded version of Windows Phone for enterprise this strategy is becoming just a little clearer. 

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Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital.  (read more)

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