Abstract

High-end Technology and Production Capacity to Drive Mergers and Acquisitions in the Industry

With the rise of emerging markets and the barriers for vendors to enter into the industry becoming lower, the worldwide Smartphone product development has tendency towards price-friendly and high-specs. In addition, with customers have easier access to product specs, they can easily compare the price-performance ratio among different products and those who fail to keep up are easily being left out. Nevertheless, the supply of high-end key components adopted by high-end products such as processors, panel displays and camera modules are left in hands of few. Therefore, for branded vendors that are lack of stable supply chain, sufficient market sales, and solid partnerships with suppliers, competing with first-tier brands may not be feasible in the short-term.

In addition, first-tier branded vendors also sense the importance of emerging markets. It is anticipated that they will expand product lines in the entry-level segment in 2013, thereby eroding the market share of second- and third-tier vendors. The reduced profit margins will force those vendors to re-set the direction with corresponding strategies. Against such a backdrop, it is anticipated that vendors with relatively small shipment volume, less than 10.0 million units, will seek opportunities to merge with others in order to gain higher negotiation power for key component purchases.

Consolidated Resources for Securing More Branded Orders

As for the Taiwanese Smartphone industry, HTC continues to focus on grabbing a larger piece in the global market by competing head-to-head with Samsung and Apple whereas other Taiwanese makers still focus mainly on providing OEM (Original Equipment Manufacturing) and ODM (Original Design Manufacturing) services. In the future, in the face of the situation in which the market will continue to be dominated by the few and latecomers will continue to initiate mergers, it is expected that those contract manufacturers will inevitably face the challenges resulting from the reduced number of potential clients. Other than enlarging the share of orders outsourced by one single client, they should place focus on vertical integration for key components and horizontal integration for product lines to help them secure more orders in the future.

As for vertical integration for key components, the best practice will be the close collaboration between Foxconn and Apple where Foxconn is able to provide a one-stop supply chain to provide Apple camera modules, PCB (Printed Circuit Board), connectors and chassis. Samsung, however, has ensured the stable supply of key components by strategically cultivating Korean key component suppliers.

Regarding the horizontal integration of product lines, with the rise of convergence of Smart handheld devices, the boundary between Smartphones and tablets has become blurrier which has led to a rather intensified cross-industry competition. In general, in order to reduce the running-in phase, branded vendors tend to outsource their orders to the same contract manufacturers making their other Smart handheld devices for the sake of a long-term relationship with them. For instance, Taiwanese contract manufacturers such as Foxconn, Wistron and Compal all have orders placed by the same client for different branded products under the same name.

For contract manufacturers in charge of assembling mobile phones or personal PCs, they are prone to relatively high risk of losing orders. For this reason, increasing the possibilities of developing or integrating with other product lines coupled with the mergers and acquisitions with other contract manufacturers specifying in the same field are key factors to help them increase production and market scale to win the heart of branded vendors.

Appendix

Research Scope

This report covers major companies manufacturing mobile phones in China. Output from companies inclusive of domestic makers, foreign direct investment, and joint ventures that manufacture handsets within China for domestic sale or export are thus contained in the statistics presented herein. Shipment statistics are exclusive of digitally enhanced cordless telephones such as PHS.

Definitions

Business Types

OEM

The OEM (Original Equipment Manufacturing) business model entails carrying out product manufacturing or assembly according to specifications supplied by the customer. The OEM business model emphasizes production efficiency; thus, in order to lower costs, customers outsource manufacturing to OEM providers. This cooperation forms a division of labor among design, manufacturing, and sales.

ODM

The ODM (Original Design Manufacturing) business model entails undertaking product design and manufacturing, but not direct retail sales or brand promotion. ODM providers either collaborate with customers on product specifications or independently design products according to customer specifications; the ODM provider then receives manufacturing orders upon customer approval. The ODM model links the sales capabilities of the ODM customer and the design and manufacturing capabilities of the ODM provider, developing a cooperative division of labor throughout the product's value chain.

Glossary of Terms

List of Companies