The Greater Chinese Motherboard Industry in 2Q 2002

The second quarter of 2002 will be a rough time for the Greater Chinese motherboard industry for a number of reasons: the second quarter is historically the slowest season of the year for motherboard shipments, most companies are still digesting excess inventory after over estimating the market in the first quarter of 2002, and Intel release of new chipsets will increase the pressure and urgency for makers to clear their stocks of current generation products. The market will further be muddled by Intel slashing prices of chipsets and CPUs in order to stimulate the market for P4. The slew of new products will instigate a price war, while shipment volume continues to fall. Intel is getting more aggressive in its chipset business, which will increase competition in the chipset industry and further the price erosion of motherboards.

Notebook PC Eroding Desktop PC Market

In 2001, notebook PC makers introduced desktop solutions notebooks, PCs with desktop CPUs in a notebook form factor. This strategy reduced CPU costs and allowed them to lower the price gap between notebook PCs and desktop PCs; the market response was quite enthusiastic. One product that was especially successful was ECS Desknote.

Another development that is encouraging consumers to switch from desktop PCs to notebook PCs is Intel release of a new, cheaper notebook PC CPU. In conjunction with the release of the mobile Pentium 4, this new notebook CPU will further spur on desktop replacement. The price gap between notebook CPUs and desktop CPUs will shrink more by the end of May, encouraging PC vendors to use more notebook CPUs and a higher percentage of consumers to purchase a notebook PC.

Finally, the maturation of wireless environments in industrialized countries is leading to increasing emphasis on portability. The overall result has been diminishing demand for desktop PCs, which necessarily adversely affects the motherboard industry.

Prospects by Form Factor

The slack season in the second quarter will have serious adverse affects for the motherboard form factor in the clone market. However, Intel release of its new integrated chipset, the 845G, will attract the attention of brand name PC vendors, which will bolster the OEM businesses of Greater Chinese motherboard makers.

With many new products entering pilot production in the first half of 2002, OEM clients will tend to shy away from the barebone form factor. In the second half of the year, when these products are more mature, OEM barebone shipments will start to pick up. Therefore, in the second quarter of 2002, the clone market holds more promise for the barebone form factor.

With Taiwanese motherboard makers establishing assembly facilities in all corners of the globe, such as Hon Hai new factory in the Czech Republic, full system shipments will start to increase. Taiwanese makers following this strategy end up competing directly with leading worldwide EMS providers. The Taiwanese companies have an advantage in their ability to do final full system assembly close to the OEM client target market while keeping costs down, because the motherboards and cases are built at their cost-competitive facilities in China. Taiwanese full system makers will also do well in the Greater Chinese market, which is quickly developing into an important market for motherboard players, regardless of whether they sell own brand products or concentrate on OEM business.

Intel New Chipset Strategy

At the close of the first quarter, Intel modified its chipset product strategy. Originally, Intel had planned to only release new chipsets that support its new CPU architecture, but Taiwanese makers came out with several new chipsets offering enhanced specifications, such as upgrading DDR226 to DDR333 or AGP4X to AGP8X. The constant stream of chipset improvements has attracted more consumers to the motherboard clone market, the main outlet for Taiwanese chipset makers. The market share of brand name PCs, the final destination for the majority of Intel chipsets, has experienced a corresponding decline.

In response to the fierce competition in the chipset industry, Intel has adopted the product strategy of its Taiwanese rivals, releasing more versions with slight specifications or distinctions. Intel plans to release chipsets with improved specifications in the second quarter of 2002, such as a chipset that supports DDR333, and coupling with different levels of bridge ICs. Therefore, chipset product offerings will become more diverse. Intel strategy will allow it to compete more effectively with Taiwanese chipset makers, and strengthen its presence in the clone market. However, this trend of diversifying chipset specifications is not beneficial for all motherboard players. Smaller motherboard makers do not have sufficient development resources to rollout products for all the new chipset specifications being released. Also, chipset diversification will increase the complexity of inventory management as well as lengthen cash flow turn around time. Bigger motherboard manufacturers, who have more R&D resources and working capital, will not be affected so severely.

Market Projection

According to International Monetary Fund estimates, China and Asia-Pacific will be the fastest growing markets in 2002, with economic growth rates of 7% and 5.9% respectively. The United States and EU will show more modest growth at 2.3% and 1.5% respectively, while the Japanese economy will be sluggish with a 1% economic growth rate. As a mature product, PC demand will be indirectly bolstered by GDP growth, which will increase consumers?buying power, and make enterprises more willing to invest. Overall, while mainstream markets, such as the United States and Europe, will slowly recover from the latest economic downturn, emerging PC markets will be stronger in 2002, and emerging markets will be the main growth driver in 2002.

The HP-Compaq Merger

The tier rankings of Greater Chinese motherboard manufacturers will be reset following the merger of HP and Compaq. The new HP will mainly stick with Compaq product lines for the commercial market, while both HP and Compaq branded computers will continue to be sold to the home market. Compaq had previously released OEM orders to many Greater Chinese motherboard makers, but HP will cut that number significantly, in order to increase the economies of scale of each order and reduce logistics handling costs and complications. Some of Compaq former suppliers will enjoy increased business from the new HP, while others may be left out in the cold. One other factor that could alter the tier rankings of Greater Chinese motherboard makers is whether or not the new HP can fend off challenges from IBM and Dell and maintain market share during the period when it is consolidating operations.

Dell and HP are putting forth serious efforts to penetrate the Chinese PC market. To this point, Legend has increased its domestic sales, which has also been a benefit to the company motherboard suppliers; Legend released approximately half of it motherboard OEM orders to QDI, the other half are split among Gigabyte, Microstar, and to a lesser extent ECS. In contrast, Dell chief motherboard OEM suppliers are Foxconn, Asus, and Mitac. The new HP has yet to designate which motherboard makers will receive its OEM contracts, but as the world largest desktop PC vendor, it has the potential to dramatically alter the rankings of the entire Greater Chinese motherboard industry.