VideoEvery day, at three o'clock in the afternoon, an eerie silence falls upon the spotless workshop of Taiwanese laptop maker Quanta Computer. On all six floors of the factory located in Linkou, a Taipei suburb, workers, many of them women in their early 20s, take an obligatory quarter-hour nap, their heads laid next to the plastic casings of notebook PCs in various states of assembly. Lulling them to sleep is the soft drone and rhythmic click-clack of a sequence of machines—machines that eat motherboards at one end and produce the bare bones of computers at the other.
But even when the workers wake up, there is only the sound of rolling carts delivering hard disks and optical drives to break the silence. In fact, the halls of the once bustling factory are now sparsely populated. The action is now taking place in a shiny facility 420 miles away. Like many electronics companies that consider Taiwan home, Quanta has moved much of its production to mainland China. This year, the notebook PC maker—which serves customers from Dell to Apple to Sony—is expected to ship 70 percent, or 5.6 million notebooks, of its output from its Shanghai factory. Last year, the figure was just 25 percent.
To many CFOs, moving to China is an act of expediency, a conscientious effort to cut costs and raise profitability in an age of cutthroat competition and demanding shareholders. Likewise, to any business that wants to sell its goods to China's vast and expanding market, making these goods there is almost a no-brainer. As Sharon Su, an analyst at UBS in Taipei, says: "Over the long term, making a move to the mainland is not just an advantage; it's a must."
But to CFO Tim Li, the move to China represents something more meaningful: the evolution of Quanta. The company has been making notebook PCs for 15 years, earning its place as the leading laptop manufacturer in the world in terms of output, with sales this year expected to top US$7 billion. As the product becomes a commodity, margins are naturally shrinking. As such, Quanta is on a quest to develop post-PC products that would reverse the trend. "We're transferring the mature technology and products to mainland China," says Li, an industrial engineer who joined Quanta in 1989 initially as a design adviser to its chairman, Barry Lam.
"Our engineers there will just focus on upgrading existing technology and lowering the costs of existing products. In Taiwan, we have to design from zero to new product." In short, by moving laptop operations to China, Quanta is showing that it is graduating from a commodity industry, and marching into a new, untested territory. Its eyes are now set on high-end, low-volume corporate products such as storage and servers, as well as what it calls home gateways—futuristic set-top boxes that combine the functions of the television, computer, video player, game console, and remote control for all other home appliances.
"Every buyer knows that it is just a matter of time, maybe a couple of years, before computing, communications, and consumers will converge," Li says. "You cannot just survive on PCs."
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.
Reader Comments» Post a comment