Abstract

In the last few quarters, Taiwan's first-tier makers have been able to maintain respectable shipment growth due to contracts awarded by the leading international vendors. For the second-tier and unranked makers, on the other hand, shipment volume growth has been flat; the level of concentration in the industry is thus increasing.

Server production requires heavy investment in R&D, and this investment takes a long time to recoup. It has been estimated that, in order to remain profitable, a server maker needs to achieve annual shipment volume of at least 300,000 units. What is more, with the intense competition in the industry continuously pushing prices downwards, the level of shipment volume needed to remain competitive is rising steadily. The second-tier and unranked Taiwanese makers thus find themselves in a difficult situation. Some makers, such as MSI, ASUS, and Gigabyte, have been able to maintain a reasonable level of revenue by supplying serverboards. The smaller makers have found it very difficult to develop their server business; some of them are now just passively trying to hang on to their existing customers without making any serious effort to develop new business opportunities.

Although the first-tier makers are able to secure contracts for value-line server models from the brand-name vendors, the intense price competition in the value-line segment ensures that profit margins are slim. While continuing to squeeze costs in order to prevent profit margins on ODM/OEM business from falling too far, in the long-term the first-tier makers are working to strengthen their technical capabilities so as to be able to secure contracts for high-end servers. Currently, the branded vendors either manufacture their medium-range and high-end models in-house or outsource production to EMS (Electronic Manufacturing Service) providers such as Solectron and Samina-SCI. These EMS providers have established close relationships with the server vendors, and they possess strong logistics systems and service capabilities. Recently, some EMS providers such as Solectron have been expanding the scope of the service that they provide to include product design. The Taiwanese makers will need to improve if they want to compete effectively against the EMS providers.

Following aggressive promotion by IBM and HP, blade servers have become the "hot" product in the server market; this trend has been reflected in the recent growth in the Taiwanese makers' blade server shipment volume. As there is no unified standard for blade servers, there are still problems with interoperability between different brands.

Following the rollout of the 64-bit Opteron CPU by AMD, Intel has announced that it will be launching the Nocona, a new Xeon processor for two-way servers, in the second quarter of 2004. Intel is targeting the value-line market, creating segmentation from its Itanium II series. With both AMD and Intel launching 64-bit CPUs, 64-bit processors are anticipated to become the mainstream in the value-line server market.

Appendix

Research Scope

Servers referred to in this report include machines that are manufactured, sold, and marketed as servers, and employ standard networking operating systems such as NetWare, NT, Linux, and Unix.

Servers mentioned in this report include Intel-based CPU (Central Processing Unit) core and RISC (Reduced Instruction Set Computer) CPU core servers, as well as servers containing other core CPU architectures.

Production volume and production value statistics encompass both full system and barebone servers. Full system servers are products that are ready for use; barebone servers refer to products that include a motherboard, but do not include a CPU, DRAM module, or HDD (Hard Disk Drive).

Definitions

Business Types

OEM

The OEM 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.

EMS

EMS providers focus on the manufacturing and after-sales service end of the value chain; some providers also offer design services. EMS is alternatively called CEM (Contract Electronics Manufacturing); however, the CEM business model mainly focuses on the manufacture of subassemblies, rather than the production of complete products or logistics.

Glossary of Terms