Abstract

Intense competition in the global server market has led brand-name vendors such as Dell, HP, IBM, and Sun to outsource their value-line server production. The previously more closed market is thus open to the Taiwanese makers. Although overall global demand for servers is much lower than that for PCs, the large number of competing makers and the intensity of the competition have been pressing OEM/ODM prices steadily downwards and shrinking profit margins. contract server makers worldwide have been finding themselves in an increasingly more difficult situation.

Leading international EMS (Electronic Manufacturing Service) providers such as Solectron and Samina-SCI have managed to secure more than 30% of global server OEM/ODM business. With strong global logistics capabilities and the ability to provide service from close at hand, the EMS providers constitute a growing threat to the Taiwanese server makers. The challenge currently facing Taiwanese makers is to find ways to boost competitiveness in the contract manufacturing market and to keep profit margins from shrinking.

Two possible strategies are open to first-tier Taiwanese makers. They can raise the assembly level of OEM/ODM production from serverboard to barebone, or even to full-system. However, new production facilities in individual regional markets would be needed to meet vendors' global logistics requirements.

The other strategy would be to broaden their product range by accepting orders for new form factors, such as blade servers, or new types of CPU architecture, such as AMD Opteron or even IBM Power CPU models. This means that Taiwanese makers will need to leverage their advantages in R&D and design to win vendor favor. Overall, first-tier makers are faced with several problems in further development.

Lacking the strong production capabilities of first-tier makers, second-tier makers are at a disadvantage in securing contracts. However, this gives second-tier makers more control over their own product specifications than the first-tier makers, who have their hands tied by vendors' contracts. Taiwanese second-tier makers have thus been able to focus on developing their branded businesses and niche products such as four-way AMD CPU servers and blade servers, enabling them to maintain reasonably high profit margins and competitiveness.

In the future, while seeking to maintain the price advantage Taiwanese makers have traditionally enjoyed, second-tier makers may consider integrating their products with storage equipment or providing a comprehensive application environment.

An emerging trend is taking form towards establishing cluster computing environments with value-line servers. Given this trend, shipments of x86 servers and value-line RISC-based servers are anticipated to become the main drivers of growth for the worldwide server industry.

With component prices falling steadily and product architecture more or less standardized around open standards, x86 servers are moving towards modularization and lower prices. These are areas in which Taiwanese makers excel.

For value-line RISC-based servers, although the growth momentum in this market has waned, and the global market for these servers has contracted slightly, unit prices and profit margins remain high. With the Intel Itantium architecture failing to take off as quickly as expected, server vendors are anticipated to start outsourcing more of this type of server to bring down production costs; many of these contracts will fall into the hands of Taiwanese server makers.

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