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.

Quanta, on the other hand, had to literally bring its suppliers there. Of the 14 buildings constructed and under construction in its Shanghai Manufacturing City, several are earmarked for its suppliers—all of it at Quanta’s cost—and are being rented out “at very little cost”, says Li, who considers the arrangement as the price of good partnership. “How do you convince your suppliers to come with you?” he says. “You have to make sure that they have a profit too. Just because I get supplies from you, doesn’t mean I should squeeze you.”

Second, analysts attribute Compal’s ability to win over clients from Quanta to its early move to China. Whatever the company saved on cost, part of those savings was “fed back to their customers,” says Su of BNP Paribas, “and that’s why they were able to grab market share in the notebook business, and prevent their margins from falling too fast.” All this, Su adds, suggests that Compal “tends to react to the whole macro environment more rapidly than Quanta.”

Li, however, disputes the disadvantage that some analysts see in Quanta’s tardiness in China. To prove his point: the company was able to ramp up its production in China from 25 percent to 70 percent in a year, exceeding Compal’s 60 percent. “Although Quanta was behind Compal in terms of moving to China, they have been ramping up their scale very fast, so it shouldn’t be an issue any more,” says Ellen Tseng, a Morgan Stanley analyst.

“Customers are not looking at your China production, but at your overall service—design capability, manufacturing capability, and logistics support,” adds Tseng. Another reason this advantage is unlikely to last is that in the latter half of the year, Compal will begin to push up production for HP, which, after its acquisition of Compaq, has been known to squeeze its suppliers to save costs. “They can’t improve their margins from now on,” says Tseng of Merrill Lynch. “The only thing they can do is manage the margin trend or improve internal efficiency.”

And Compal has not lost sight of this. Lu says Compal buffers its margin losses through product diversification. Though its core business is laptop design and manufacturing, it reaps handsome revenues from cell phones and Pocket PCs, which in turn generate gross margins of 14 to 18 percent, as opposed to notebooks’ 6 to 8 percent. This trend is likely to continue, say analysts. Lu adds that in the next three years, only half of Compal’s turnover would come from laptops. During that time it would also shift up to 50 percent of its handheld and Pocket PC production to China.

Quanta, meanwhile, only began to expand its mobile phone business when it won contracts from Panasonic and Siemens this year. “Quanta was late for the mobile phone business, but it’s kind of catching up,” says Tseng.

On internal efficiency, Compal’s materials management differs from Quanta’s, and analysts support Lu’s claim that it has enabled the former to have a better margin. Considering that materials account for more than 90 percent of total product cost—labor, China’s main cost attraction, accounts for only 3 percent—this is a big advantage.

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