Quanta’s Leap

The contract manufacturers that move to China aren't simply cutting costs and raising productivity. They're moving up the value chain -- and forever changing the way that big brands run their businesses.

Soon, the buzz at the Linkou factory will be supplanted by the noise that will come from the next building. Last spring, Quanta opened its NT$5 billion (US$140 million) research and development center. Currently, it only houses the 2,000 engineers that Quanta employs for itself and its TFT-LCD subsidiary, Quanta Displays. Within the next three years, the engineering population will be increased by 3,000, all working on the design and manufacture of new products. “The mainland is perfect in terms of cost, but technology-wise, they can’t catch up,” Li says. “They’re still at elementary-school level; we are on master’s degree level.”

If Li sounds excited, he’s probably counting potential margin gains in his head. The new direction “should offer better margins because of high-entry barriers, and huge outsourcing opportunities for those products,” says UBS analyst Su, “but the question is how much it would account for in their combined revenues.” Returns, too, are not likely to be instantly visible. “The direction is right, but the environment is not good,” adds Tony Tseng, analyst at Merrill Lynch in Taipei. “Corporate spending on IT remains sluggish.”

Margin Erosion

Without a doubt, the notebook PC sector is still in its heyday. “The market is still growing very rapidly,” says Frank Su, analyst at BNP Paribas in Taipei. According to technology research firm International Data Corp, globally shipments are expected to grow an average of 17 percent from this year to 2007, as more people ditch their desktops in favor of laptops. US investment bank Morgan Stanley estimates Quanta’s sales this year will soar 83 percent, to a record NT$261 billion (US$7.6 billion), largely due to strong demand from US-based Hewlett-Packard (HP).

But to understand why Quanta is seeking a different path, it would help to look at its history and the competitive landscape. Lam founded the company in 1988, after resigning as president of Compal Electronics, then a contract manufacturer of computer monitors, while it was in the thick of a crisis after a fire broke out in its factory. To this day, Ray Chen, the incumbent president of Compal and Lam’s former right-hand man, harbors resentment against this act of abandonment.

Lam concentrated on making Quanta the first Taiwanese company to focus on notebook computers, and it has since taken a leadership position in this field. It first started as an OEM, or original equipment manufacturer. As prices of components went down—think Moore’s Law—the business of making products for foreign labels, designed by foreign labels, was becoming less and less profitable. To enhance its margins, Quanta invested in R&D to come up with its own notebook designs that it could sell and make for its clients. Currently, its engineers are able to generate 50 models a year, or four to five models a month.

As customers demanded just-in-time inventory management, Quanta enhanced its supply chain model to include the direct shipment of products ordered by its customers, say HP, to the products’ end users, say an HP retailer. This model, however, has been replicated by Quanta’s competitors, including Arima, Inventec, Wistron—and Compal, which has caught up to become the world’s second largest laptop producer. “There is nothing that Quanta does now that its competitors aren’t able to do,” says Tony Tsai, an analyst at Taiwan Ratings, in Taipei. In fact, they all tend to produce for many of the same big-label clients.

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