That means he assumes revenues will hit targets, but profits will not. “If sales say we’ll have a 50 percent revenue increase, that means I will have to buy a lot of material—cash out,” he says. “But if I assume I have no profits—no cash in—what will my cash flow template look like? How much would my cash gap be?” In effect, as CFO, Li acts as the brick wall to eager sales forecasts and procurement. The final decision falls on chairman Lam, whom Li meets every week with sales and procurement staff.
So far, it has worked. Although Quanta keeps inventories low, its good, solid relationship with suppliers means it hardly ever runs into a shortage. As such, it has a near-perfect record of order fulfilment. Currently, from the time a US-based customer gives an online order to HP, for example, it takes Quanta five days to fulfil it—two days to manufacture, two days to ship it, and one day of allowance. In Europe, the total is seven days, and in Asia, three.
In contrast, Compal suffered a backlash in the second quarter when Sars hit China and sales of mobile phones dropped, and the company had to deal with an inventory overhang. This is not to say that Li ignores market trends. Ultimately, his goal is to keep better track of his cash flow—making sure that the company has enough money for growth opportunities. For now, he is comfortable having a cash level—his “template”—equal to one month’s revenues. “I have to prepare for our future growth, so I keep around one month of revenues,” he says. For a company that is enjoying sequential revenue growth, that amount, currently US$700 million—is increasing.
To be sure, there is no reason for Li to be complacent. A subsidiary, Quanta Displays (QDI), will play an integral part in its future strategy, since QDI will supply the panels for its future products. Currently, QDI, a Quanta joint venture with Sharp of Japan, is still in the red. Asked how soon he expects it to turn a profit, Li gives a lengthy headshake. “Not in the next year,” he says.
For now, his cash flow seems to be working well. Although Quanta raised funds from the Euro convertible market in June, it currently enjoys a net cash position. If this is sustained, then maybe, in the foreseeable future, Quanta will be able to move its post-PC products to China, and start cranking yet more next-generation ones in Taiwan.
Abe De Ramos is executive editor, Hong Kong, for CFO Asia.
The Magic Behind Dell
Behind every American computer brand’s success is a Taiwanese contract manufacturer doing the dirty work. The tiny island has been known for years for supplying everything that goes into a personal computer, but in recent years its manufacturers have been climbing up the value chain, taking advantage of the pressures on the big brands to lower their costs, by offering designs and logistics to go. No longer are they simply contract manufacturers or OEMs; they now call themselves IDMs, or integrated design manufacturers.