Abstract

Inventory Pressure Eased

The serious inventory problems affecting the notebook PC market in the first quarter of 2004 have more or less been solved by the second quarter, leading to an increase in the volume of contracts for the Greater Chinese notebook PC makers. In the first quarter, several of the leading vendors, including HP, had been overoptimistic about demand; as a result, inventory rose to excessively high levels, with an inevitable knock-on effect on ODM/OEM shipments. In the second quarter, however, demand began to pick up again, as brand-name vendors cut prices to stimulate sales growth. It can be anticipated that this easing of inventory pressure will have a substantial positive impact on the performance of the Greater Chinese notebook PC industry in the second half of 2004.

The Japanese Response

One of the most significant developments in the second quarter of 2004 was that Japanese vendor Toshiba began outsourcing more of its notebook PC production. Of the world's top ten vendors, Dell, HP, and Acer outsource all notebook PC production, while most of the others outsource 60% or more. Only Japanese vendors, Toshiba, Fujitsu, and Sony, have continued to undertake a high percentage of production in-house. In-house production's share of total notebook PC shipments is 60% to 70% in the case of Toshiba, and over 95% in the case of Fujitsu. Given the intense price competition that characterizes the global notebook PC market today, these percentages seem exceptionally high.

The main reason for Japanese vendors' insistence on performing so much of their notebook PC production in-house is to ensure rigorous quality control; another reason is the desire to improve products through market feedback. Customers' comments can be used immediately to make changes in the production process, thereby ensuring that the vendors' products always conform to market requirements. This characterizes one of the biggest advantages of the Japanese vendors.

However, beginning in the second quarter of 2004, the Japanese vendors, particularly Toshiba, began outsourcing production previously performed in-house. The main reason for the change was that given the fierce price competition in the notebook PC market and the high wages that characterize the labor market in Japan, Japanese vendors were no longer able to compete effectively against HP and Dell. Acer was also coming on strong, achieving significant success in the European and Asia Pacific markets, particularly in the value-line and clone segments If Toshiba continued to implement its long-standing in-house production strategy, it would be in danger of losing its third place position in the global notebook PC vendor rankings. Not only has Toshiba increased the share of production outsourced, it has also modified its product mix to give greater emphasis on value-line models. These changes represent an unavoidable response to market trends.

It can be anticipated that where Toshiba has shown the way, other Japanese vendors will follow suit. In the long term, given that wages in Japan can be expected to remain high, increasingly intense price competition will force the Japanese vendors to make further changes. Should the Japanese vendors become more competitive on price, other branded vendors such as Dell and HP will find themselves facing fierce competition.

Appendix

Research Scope

The "Greater Chinese Notebook PC Industry" refers to an industry dominated by Taiwanese notebook PC makers that manufacture in China and the Philippines. At the present time, back-end final assembly operations set up by major notebook PC vendors such as Toshiba, Sony, Dell, and IBM, or the small-scale production of Chinese makers, are not considered to be within the scope of this definition.

Definitions

Assembly Level

Full Systems

A full system is a finished notebook PC ready for use at time of shipment.

Barebone

Barebone systems range from motherboards that have been assembled with any other piece of notebook PC equipment, such as a case, to a product that contains all but one element of a full system, such as a CPU (Central Processing Unit).

Product Architecture

One-Spindle

A notebook PC that only includes an internal hard disk drive. Optical disk and floppy disk drives are attached as peripherals.

Two-Spindle

A notebook PC that only includes an internal hard disk drive and an optical disk drive. A swappable bay for a floppy disk or second optical disk drive may be provided.

All-In-One

A notebook PC with at least one internal hard disk drive, one internal floppy disk drive, and one internal optical disk drive. Alternatively, an all-in-one machine can contain two optical disk drives and no floppy disk drive. Additional disk drives may also be attached.

Desktop Solutions Notebook PC

A notebook PC manufactured with a desktop CPU and other desktop components.

DeskNote

A type of desktop solution notebook PC that is similar to an LCD PC. However, a DeskNote more closely resembles a notebook PC physically because it has a foldable case that fully protects the LCD display, and is highly portable. A DeskNote also uses desktop PC components, but does not have a built-in battery.

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 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