Abstract

Key to Capturing Orders

As demand for desktop PC weakens and price and profits drop further, international brand-name vendors are increasingly conducting desktop PC business from a service aspect. While desktop PC business remains necessary, it no longer plays a major in role in creating profits.

In recent years, major vendors have concentrated resources in branding, market survey, and distribution channels. Activities such as R&D, manufacturing, testing, shipment, and even after-sales service are relegated to suppliers. As a result, makers with full system design competencies, worldwide production facilities, and vertical integration are equipped with stronger competitive edges. 

Currently, most of EMS providers are capable of producing full systems as they have numerous production sites throughout the world. Full-system design capabilities and vertical integration, which require experience and economy of scale, thus become key to most system makers when capturing orders.

Taiwanese makers started out as component suppliers and are able to push for vertical integration more rapidly than other EMS providers. They have also built up their system design capabilities from producing full systems in recent years. As a result, international brand-name vendors have outsourced more production to Taiwanese makers, driving Taiwanese share of worldwide desktop PC shipment to 29.1% in the second quarter of 2004 from 25.6% registered in the first quarter of 2003.

Among Taiwanese makers, ASUS and Lite-On have emerged as important players due to their advantages of full system design and vertical integration. Both makers are expected to become barometer of the Taiwanese desktop PC industry in the future.

Benefiting from Competition Between Intel and AMD

After its entry into the Chinese market in 1993, AMD attained success in the DIY market while continuing to suffer erosion from Intel in the branded PC and server markets. With limp shipment performance, AMD has only a 10% share in the Chinese PC market. 

AMD's stagnant PC business in China hit a new turn when it rolled out x64 platforms in April 2003. As international players such as IBM, HP, and Sun began to adopt AMD's x64 platforms, a number of Chinese makers also followed suit. First makers to adopt included Qinghua Unisplendor and Amoi, followed by Digital China, Hisense, and Lenovo.

In June 2004, Lenovo decided to adopt AMD platforms, a move considered as a major success by AMD after aggressively soliciting cooperation from Chinese makers. The loss of its largest customer in China has prompted Intel to work with other major vendors such as Tong Fang, Founder, and Langchao. This strategy is not only to offset the loss these makers incurred from Lenovo, but also to prevent Lenovo from further expanding market presence.

The competition between AMD and Intel in the Chinese market has not only strengthened Chinese makers' negotiation power in procuring components, but also ushered in a low-price era. With AMD's help, Lenovo entered fourth- to sixth-level cities with low-price offerings during the summer vacation. This strategy has helped AMD become a front-runner in this untapped market and strengthened its brand through Lenovo's distribution system. In addition, should Lenovo succeed in expanding market share during summer vacation, the Chinese maker is expected to have more prowess to negotiate with Intel, even with AMD. Although its leadership position in the Chinese market is unlikely to be affected in the near future, Intel is expected to find it increasingly difficult to maintain high profitability and strong growth.

Competing on Shipment Scale

The Chinese PC market peaked in 2002 and its previously explosive growth was put on a low gear. Slowed market growth and product homogeneity led to a plummet in prices. Moreover, international brand-name vendors, such as HP, IBM, and Dell aggressively introduced value-line models to the Chinese market in 2003 and rapidly captured market share. The twin factors dealt a blow to Chinese makers' development. To address the problems, Chinese makes started to adopt several strategies in 2004 as follows.

First, organizational restructuring is carried out to respond to stiff competition. Companies that have taken this approach include TCL, Lenovo, Founder, Tong Fang, Great Wall, Start, Hisense, and Haier.

Second, summer vacation promotions were lengthened. Chinese makers have seen summer vacation a prime period to expand market share and to consolidate their foothold in the home turf. During the summer of 2004, Chinese makers extended their promotional periods from traditionally 20 or 30 days to between 45 and 75 days to fuel shipments.  

Third, market targets were broadened. While still targeting business at first-level cities, most makers are now setting sights on fourth-to sixth-level townships. A case in point is Lenovo, which worked with AMD and rolled out value-line desktop PC in the second quarter aimed at reaching this untapped segment.

These strategies are indicative of intense competition among major Chines vendors to achieve larger shipment scale.  As they continue to expand distribution systems, they are expected to encounter channel management issues. Also, their low-price models were not launched as sub-brands, thus undermining their own brand value.

Gone are the prospects of all makers sharing a massive Chinese market. Chinese makers now have to fight for survival. Gone is the time when PC makers rapidly expanded customer portfolios. They now have to implement cost controls and compete on scale. As price wars are unlike to end with the summer vacation promotions, makers' drive to increase profitability will be undermined. However, amid price competition and the drive for larger market share, PC penetration is anticipated to grow at a rapid clip.

Appendix

Research Scope

The data and analysis contained within this report covers Taiwanese and Chinese desktop PC makers that assemble full systems anywhere in the world.

Definitions

Assembly Levels

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