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.

“Compal manages their component cost more efficiently than Quanta,” says Tseng of Morgan Stanley. “Normally, components prices fluctuate, and if you can take advantage of the time lag, you can achieve better pricing overall.” In short, Compal seizes the opportunity of buying more parts than it needs from suppliers when prices drop, whereas Quanta gets them as needed—a move that Tim Li says keeps inventory risk at bay.”

Quanta Mechanics

Despite all of its advances, Compal, analysts agree, is not likely to catch up with Quanta in terms of revenues in the next three years simply because of the latter’s scale. Compal this year is expected to ship about 5 million notebooks, 3 million short of Quanta. “Compal only exceeded Quanta’s shipments for one month last year—and since then the gap has been widening,” says Tseng of Merrill Lynch.

As such, Quanta’s position as laptop king is nowhere threatened. And while its current margins are in question, its future direction—into servers, storage and home networking—though also questionable in present market conditions, increases its chances of continued dominance in the industry. “Quanta has a very clear vision compared with Compal, and you can see that in their investments in other businesses,” says Su of BNP Paribas. “For Compal, I don’t see that long-term goal for the group; it is still focusing on catching up with Quanta.”

Asked about Compal’s long-term strategy, CFO Lu says it is expanding into high-end consumer products as well. For example, it expects to be the first in Taiwan to ship out LCD televisions. “But even then, this business doesn’t fall into one kind of concept, unlike Quanta, which has only one—home networking,” says Su.

In the meantime, Li is consolidating the financial position of Quanta to enable it to pursue its future endeavors, at little cost to itself and its shareholders, through fiscal conservatism and inventory management.

Li takes offense at suggestions that Quanta has an inferior materials management strategy. In the first place, its sheer scale already allows it to buy components on the cheap. More importantly, you will not find more than a few days’ worth of parts inventory in a Quanta warehouse—that is the point of keeping suppliers on call within the same complex. Inventory risk is off its balance sheet, but supplies are still literally just a stone’s throw away.

Li works on the assumption that although prices fluctuate, they inevitably fall. “Don’t forget that once you keep a lot of inventory, you keep a lot of risk,” he says. “CPU (computer processors) prices always go down, and the customers will not share the loss with you.” As such, he keeps a tight lid on materials purchases.

That doesn’t make him popular with his sales and procurement teams. Internally, Quanta makes “very aggressive” business forecasts on a three-months rolling basis. Typically, CFOs will look at their cash-conversion cycle to analyze their cash flow, “but personally, I don’t buy that story,” he says. “I always think about the worst case scenario.”

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