Abstract

Affected by lower than expected consumer demand, second quarter motherboard inventories were quite high. Although price reductions brought levels down to normal, with chipset makers such as Intel aggressively using bundling strategies, combined with the impact of lower than anticipated sales, most motherboard players have experienced high component inventories. Such developments impacted first half financial reports, and first tier makers such as MSI and Gigabyte experienced inventory-induced losses. The impact even spread out to second and third tier motherboard makers.

Chipset makers, when inventories are overfull, will adopt aggressive pricing or other strategies over a certain period of time, typically a half a year. Graphics chip makers ATI and nVidia are using their design advantages to extend out to integrated PC chipsets and even have worked to roll out discrete chips. Yet the alliances with Intel and AMD are expected to gradually recede starting in the fourth quarter of 2004. For example ATI has planned to launch offerings to support AMD platform chipsets in the fourth quarter, while nVidia is expected to produce chips to support Intel platform chipsets in 2005. Taiwanese chipset makers are thus highly likely to bring on price competition to hinder the spread of graphics chipmaker market share.

For motherboard makers, the above trends will produce a more diverse product mix and increased branded shipments. Cost pressures will also be somewhat alleviated, which will help pad profits. However this rests on the assumption that motherboard makers will be able to build enough price negotiation power. If performance continues to be weak in the second half of 2004, the inventory pressures seen in second quarter are likely to resurface.

In order to meet intensifying competition, motherboard makers have adopted various strategies. In addition to bolstering marketing, they have been using bundling strategies through their channel systems. At present the most prevalent method is to bundle graphics cards, while some players have bundled both graphics cards and memory. Some makers are even cooperating on bundling plans with Intel and AMD.

There are two chief strategic implications behind these moves. On Intel's part, the main motivation is to accelerate the transition to the next generation platform. The chipmaker also hopes to effectively generate demand among other customer groups, which is why in the most recent case plans are targeted at small-scale system integrators. Speeding up the generational platform transition will help Intel boost share of its branded motherboards as well stimulate sales of its CPU and chipset lines.

For motherboard makers, motivation is derived from the increased control over quality, which translates in lower inspection and repair costs. Bundling also allows greater freedom in price adjustments, which not only can stimulate consumer demand, but accelerate the penetration of new-generation platforms as well. Furthermore, these makers have graphics card lines. Developing cooperative ties with graphics chip suppliers or memory makers can boost the competitiveness of their graphics card offerings.

Yet the latest release of motherboards sporting Intel's 915/925 series has demonstrated departure from the previous trend, where high-end offerings typically enjoyed a three-month honeymoon period. Rather, price cuts were necessary within two months of introduction. Although these steps can achieve the goal of driving demand over the short term, industry ASP and profits will continue to be hit as the industry runs through the gauntlet of another price battle.

Appendix

Research Scope

The Greater Chinese desktop PC industry includes two main segments. The first segment is the Greater Chinese motherboard industry, which includes Taiwanese, Chinese, and Hong Kong manufacturers producing desktop PC motherboards in Taiwan, China, and Mexico. The second segment is the Taiwanese desktop PC industry, which includes Taiwanese manufacturers producing full system and barebone products in production locations all over the world.

Definitions

Assembly Level

Motherboard

The motherboard form factor indicates a motherboard shipped without a CPU (Central Processing Unit) or DRAM (Dynamic Random Access Memory) module.

Half System

Half system includes housing, power supply, and FDD (Floppy Disk Drive), and do not contain a motherboard.

Barebone

The barebone form factor indicates motherboards that are delivered in a case, contain a switching power supply, and include a FDD and an optional optical disk drive. Barebones do not have a CPU, a DRAM module, or add-on cards.

Full System

Full system indicates products that, in addition to barebone specifications, are also shipped with a CPU, a DRAM module, add-on card(s), and an HDD (Hard Disk Drive). A full system does not include peripherals.

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