PC Demand is Climbing

Reuters reports that demand for PCs is starting to increase again but argues that the PC manufacturers have defended their market share (and tried to seize market share) with aggressive pricing strategies. According to Reuters:

A gradual bounce back in consumer demand is helping keep the struggling personal computer market afloat, but plunging prices and a shift toward cheaper machines will keep up the pressure on profits.

Globally, consumers are coming back to PCs, but they are doing so at prices as much as one-fifth lower than even a year ago, analysts say.

Hewlett-Packard Co, Dell Inc and rivals Acer and Lenovo have slugged it out to keep sales up and safeguard or take market share: a battle that of late has been waged by aggressive pricing, analysts say.

Pacific Crest Securities analyst Brent Bracelin noted PC prices have fallen for years, but the decline accelerated with the introduction of no-frills netbooks. He said PC makers have plenty of experience managing costs to maintain margins.

"There's always going to be pressure," he said. "The question is how well do you manage the supply chain and try to reduce costs at the same pace as the price decline or faster."

The global PC market is still limping along, with second-quarter shipments falling 5 percent from a year ago, according to Gartner. But that result was better than expected, and Gartner said the continued growth of low-cost laptops was a driving factor.

A bounce back in the PC sector is good for Taiwan. The bounce back, if real, will certainly seep through the supply chain and increase demand from PC component suppliers. This in the long run will have a positive impact on the Taiwanese economy and hopefully ensure people here will be able to find more jobs and opportunities. The other interesting side of this would be to understand who has lost and gained. There was speculation earlier in the year that ACER would climb above Dell to no. 2. Time will tell I suppose but my guess would be that in these times that demand frugality and attention to cost, the Asian suppliers might be better off.

Consumer PC demand is back, but at what price?

ASUS to Reorg Again

In Clashes at Pegatron and ASUS we shed some light on the internal politics at ASUS and the different power struggles that are starting to effect the company. Power struggles are never good especially in an economic downturn and especially in the face of first ever quarterly losses. Well anyway, hot on the heels of the power struggle news comes a Reuters report suggesting ASUS are planning another major reorg, the second this year. The first cut their departments from 12 to 6 and now rumours sugges they might cut their departments to three and lay off between 5% to 10% of their workforce. According to Reuters:

Netbook PC pioneer Asustek (2357.TW) is planning a reorganisation, its second this year, to further streamline its operations, a company official said on Thursday.

No concrete plans or specific timeframe have been finalised, including the possibility of layoffs, said the official, speaking on condition that his name not be used because he was not authorised to speak to the media on the company's behalf.

"Nothing has been officially announced yet, we're still in the process of planning but the current framework is to further cut our business into fewer departments," he said.

Local media reports on Thursday said the company could cut its number of departments to three from six, and lay off 5-10 percent of its staff.

That reduction would come after Asustek said in January it was halving its number of departments to six following its first-ever quarterly loss in the last three months of 2008. [ID:nTPU001101]

The company pioneered the wildly successful low-cost netbook PC in 2007, but has been gradually losing market share as bigger players such as Acer (2353.TW), Hewlett-Packard (HPQ.N) and Dell (DELL.O) enter the market.

It seems all is not well at the founder of the netbook. A couple of years ago (18-months ago) ASUS were riding high on the launch of their Eee PC but now are being hammered in the market. Why? Who knows? They seem to be a ship without a rudder (strategy) right now and when that happens people reorginze the company! Heck you have to appear to be doing something right!

I really hope ASUS pulls through and pulls through fast. Lets face it they are a good company that have produced good products in the past. They are not afraid to innovate organizationally or product-wise. Spinning off their manufacturing to focus on brand-building wasn't a bad idea, but they should have tried to appease everyone in the process and ensure the transition was smoother than what it has been.

I know ASUS is not finished yet and that they are being severely affected by the current economic climate but being reactionary at this point won't suffice. The Eee PC was a sustainable product and their strategy in this market sector was good. One wonders if they have indeed lost direction and if they have when and why?

Reuters: Taiwan's Asustek plans further reorganisation-source

Clashes at Pegatron and ASUS

I was just pointed to an excellent article on TweakTown.com describing the internal power struggles at ASUS and Pegatron. The article makes for interesting reading and provide powerful insight into the internal mechanism of Taiwan business. We quote the first paragraph below. If it tweaks your interest please follow the link below:

Asus' first ever quarterly loss during the first year of its separation of Brand and OEM businesses indicates a major stumble for Johnny Shih, Chairman of Asustek. Tung Tsu Hsien, who used to be the vice chairman of Asustek and who now holds the position of chairman of Pegatron (the breakaway OEM division of Asustek), still remembers the feeling of achievement after building up the Asus brand, however, he was forced to leave the branded business and handle the OEM business a year ago. The break between former master and apprentice is apparent. Asus' internal clashes are on the stage for everyone to see during this cold winter.

Very interesting article: ASUS internal clashes could create a new brand?

Asustek Suffers first Quarterly Losses

Currency variations, overly optimistic forecasts and inventory writeoffs resulted in Asustek reporting their first quarterly losses. Taiwan News reports:

Asustek Computer Inc., the world's largest supplier of boards that connect computer parts, posted its first quarterly loss after the global recession reduced demand and foreign-exchange declines eroded earnings.

The fourth-quarter net loss was NT$2.8 billion (US$82 million), compared with a revised profit of NT$6.6 billion a year earlier, Taipei-based Asustek said in a statement today. The company was expected to post a deficit of NT$2.9 billion, according to the median of five analyst estimates.

Asustek missed its low-cost Eee notebook computer and standard laptop shipment targets, while sales of motherboards fell more than forecast on the deepening global recession. The company's earnings were reduced by as much as NT$2 billion by the dropping euro, in which most of its revenue is paid.

"Their own forecasts were too high, they were too aggressive in the outlook," said Bamboo Lin, who rates the company "sell" at Sinopac Financial Holdings Co. in Taipei. Lin estimates larger rival Acer Inc. overtook Asustek's market share in the low-cost notebook market during the period.

Asustek was forced to write off excess inventories of computer monitors and laptops during the period, while a falling euro, which accounts for half its sales, also reduced earnings.

"The worst has probably passed," David Chang, chief financial officer, said at an investors' conference today. The company is "disappointed" with the results, he said.

Asustek said it plans to ship 1 million Eee PCs, 800,000 standard laptops and 4.5 million to 5 million motherboards in the first quarter. Last year, it shipped 4.9 million Eee PCs, 5.9 million laptops and as many as 23 million motherboards, according to the statement.

Fourth-quarter Eee PC shipments of 1.4 million to 1.5 million were lower than the company's Oct. 30 target of 1.6 million to 1.8 million. Asustek shipped about 15 percent fewer standard notebooks than forecast, it said in a statement Jan. 8.

Managing foreign currency risk is always an issue. We have seen Toyota in Japan has also been exposed to a strengthened Yen which has helped contribute their dismal earnings. For Asustek, a weakening Euro has had a large negative impact on their earnings since 50% of their business is there. They could use some financial instruments (e.g. forward contracts) to hedge against the risk. It would be interesting to see what their foreign exchange risk management policies are.

Also, from the article it was interesting to see that Acer passed Asustek in the low cost notebook market. Acer and Asus are traditional rivals and it isn't too surprising Acer has taken over. It is unfortunate for Asustek they lost their first mover advantage, but one would imagine they will still be strong in this sector.

Of course the largest cause of concern for Asus would be a drop in demand which reflects the broader economy and shows consumers are becoming more conservative in their spending habits and are probably considering electronic products to be luxuries. Sustaining demand in this economy might be impossible for Asustek (and other computer manufacturers) and all they will be able to do is ride out the recession.

Taiwan News: Asustek logs first quarterly loss as demand falls

Are Desktop PCs a Spent Force?

Reuters has a very interesting article on the decline of the desktop PC market and the rise of notebooks (laptops). According to Reuters:

The age of the desktop PC appears to be over as its more portable cousin, the laptop, surges ahead with consumers clamoring for light-weight computers in funky designs for use at home, in cafes and on the train to work.

Not a single desktop model figured on online shopping portal Amazon.com's top 10 selling PC and hardware list the weekend before Christmas, while seven laptop models made the list.

It was yet another sign that the former dominance of desktop PCs is fading as wireless advances and lower prices make laptops the preferred option for millions of PC users around the world.

"On both price and performance, laptops are so competitive now it's surprising they weren't able to catch up with desktops even earlier," said iSuppli analyst Peter Lin.

Of course, if this is true, its good for Taiwan. Reuters continues:

Many companies eagerly awaiting the era of the laptop are in Taiwan, maker of about 80 percent of the world's laptop PCs. They include the world's top two contract manufacturers, Quanta and Compal Electronics, and two of the most aggressive laptop brands, Acer and Asustek.

While those firms have seen their market share rise, the world's top two PC makers overall, Hewlett-Packard and Dell, have seen their share shrink.

Other companies that produce parts such as motherboards for bulky desktop PCs are already switching production to parts for other electronic gadgets such as iPhones.

While laptops used to cost more than double that of a desktop with equivalent processing power, advances in technology and economies of scale have dragged prices down so much that little price differentiation exists today for most consumers looking for a daily use PC, analysts say.

"It's just evolutionary I suppose," said Gartner analyst Tracy Tsai. "Things have reached a point where the price difference is no longer as pronounced as before for many consumers, and the average person is more likely to choose the option that offers him portability over the one that doesn't."

The growth in the notebook PC market is good for Taiwanese companies since they do dominate the market globally. Of course there are a few other companies that manufacture notebooks including Inventec. HP and Dell will have to become far more competitive in the notebook market to be able to compete effectively with Asus and Acer, who seem to respond to market demand very quickly.

Reuters: As laptops dominate, desktop PCs face obsolescence

Netbooks Rising

The Wall Street Journal (WSJ) has an excellent article on the rise of netbooks:

A new breed of low-priced laptops called netbooks have been thriving during the downturn -- so well, in fact, that many high-tech companies are scrambling to adapt.

The responses by these high-tech companies will be a hot topic at this week's Consumer Electronics Show. They include not only new netbooks -- which typically cost $300 to $500, and often use Intel Corp.'s Atom chip -- but products that address shortcomings of the new category and other portable PCs.

Netbooks, for example, tend not to be very good at displaying graphics and playing videos. So Hewlett-Packard Co., for example, on Tuesday introduced a $699 laptop that beefs up those capabilities with chips from Advanced Micro Devices Inc. H-P's new dv2 model is less than one inch thick and offers many features found in higher-end products such as Apple Inc.'s MacBook Air, which starts at $1,800.


Hewlett-Packard
Hewlett-Packard's thin new dv2 has features of high-end laptops but a price closer to low-end netbooks
Another problem with netbooks, and other laptops, is that they tend to start up too slowly and run out of power too quickly. Phoenix Technologies Ltd. is trying to address those issues with a downloadable layer of software, called HyperSpace, that lets users do simple chores such as calling up Web sites without waiting for an operating system to boot up.

The activity is the latest sign that technology segments are converging at an accelerating rate, driven by competitive pressures that the recession is amplifying. Companies including Phoenix are trying to help netbooks and other portables work as simply as cellphones, just as makers of those pocket-size devices are improving their ability to tap into the Web.

In another tactic, Qualcomm Inc. and Freescale Semiconductor Inc., which make chips for cellphones, are discussing plans at CES to offer their technology for netbooks, too. Henri Richard, Freescale's senior vice president and chief marketing officer, predicts that new entrants such as cellphone makers will join the race to make portable computers. "Netbooks change the paradigm for how you enter the computing space," Mr. Richard says.

The new products, sometimes called mini-notebooks, were exemplified by the success of the Eee PC that Taiwan's Asustek Computer Inc. introduced in 2007. Its initial models started at $299, had a seven-inch screen, used Linux rather than Windows and had no disk drive. The portables stored a small amount of data on flash memory chips.

Since then, companies such as H-P, Dell Inc. and Acer Inc. have introduced machines with a range of features, including larger screens, disk drives and Microsoft Corp.'s Windows XP software.

One of the biggest cheerleaders has been Intel, which helped popularize the term netbooks and this past spring introduced the low-priced Atom chip as a calculating engine for the new devices. "Suffice it to say, demand turned out to be much larger than we anticipated," says Bill Calder, an Intel spokesman.

Gartner analyst Mika Kitagawa estimates that more than 10 million netbooks were sold in 2008, surpassing the research firm's earlier estimate of eight million -- and leaping from the hundreds of thousand believed to have been sold in 2007.

Some companies initially predicted that netbooks would find their biggest audience as a first computer purchase for customers in emerging economies. Now, though, many industry executives agree that netbooks are mainly being purchased as a second or third computer in more affluent households -- good for quickly checking Web sites, but not powerful enough for chores such as burning DVDs.

Another issue has been whether netbooks are expanding the PC market, or taking sales from more expensive laptops. "This is a class of PC devices that is much more incremental than it is cannibalizing," argues Brad Brooks, corporate vice president of Windows consumer product marketing.

Mr. Brooks estimates that more than 80% of netbooks now ship with Windows, compared with less than 10% when the devices first went on sale. But most run XP, and analysts believe that Microsoft receives less revenue and profit from that product than the newer Windows Vista software that comes with other laptops. Intel has said its prices and profit margins on Atom also are lower than on some other chips.

Any line between netbooks and higher-end laptops stands to get even blurrier, as competition causes companies to add more features to their products. Dell, for instance, now sells a $499 netbook with a screen measuring 12 inches, essentially a scaled-up version of an earlier product with an 8.9-inch screen. H-P, in addition to its higher-priced dv2, at CES is introducing a $499 extra-durable netbook with a 10-inch screen that is aimed at business customers.

Jonathan Kaye, the marketing director for H-P's consumer notebooks division, said that until recently, PC companies have been building machines that conform to "a fairly strict definition of what a netbook is," set largely by Intel's specifications. But, he adds, "that could change over time" as manufacturers add more sophisticated features.

Roger Kay, an analyst at Endpoint Technologies Associates, says H-P's new laptop is evidence that netbooks and the competition they have spurred are dragging down PC prices and taking sales from more-expensive models. PC makers are "eating their children," he says.

Chip makers certainly don't intend to let Intel run away with the market. Via Technologies Inc. is expected to discuss its competing microprocessors for netbooks at CES.

AMD, though not selling a chip for netbooks, says that most consumers will prefer machines like the dv2 that use its microprocessors and more powerful graphics circuitry, in a combination code-named Yukon that it is announcing Tuesday. Nvidia Corp., another maker of graphics chips, wants to convince netbook makers to use one of its graphics chips alongside Intel's Atom -- providing what it estimates to be 10 times the performance of the accessory chips Intel offers with its microprocessor.

Then there is the issue of the time it takes to start Windows. Phoenix, which sells PC makers built-in programs that control the boot-up process of their systems, estimates that its HyperSpace software can let users start surfing the Web in a few seconds, save energy and avoid security problems associated with Windows. The software comes in two versions, priced at $39.95 and $59.95 for a year of use.

We have pondered previously whether or not netbooks would indeed cannabilize the PC market (Will Netbooks Cannibalize Notebooks? and Impact of Low Cost PCs ) and we also noted some executives did not see netbooks as a threat (Wistron Chairman says Netbooks not a Threat). It was therefore interesting to read the the Microsoft corporate vice president as saying netbooks are "incremental" machines. Netbooks were launched over a year ago and the playing field is admittedly becoming more clear.

I also thought it was interesting to note how the technologies are converging. The world is definitely becoming an interconnected mobile world with communications available to anyone, anywhere 24/7.

My final thought on this article, and probably the greatest lesson we can learn, is that the next big product hit might be just round the corner. Who would have thought that a little over a year after launching the netbook, the market sector would be so significant for the players therein. Asus should really be congratulated on their innovation and their willingness to try selling these low power, cheap computers. For two long the standard perception in the computer industry was faster, more powerful machines are better. No one really thought portability could be a significant purchasing choice for some people. Asus really did a wonderful job of changing the face of an industry that was becoming increasingly stagnant and commoditized.

WSJ: High-Tech Companies Take Up Netbooks

ASUSTek Sees Notebook Shipment Growth in 2009

ASUSTek are predicting growth in sales during 2009. According to the Taipei Times:

Asustek Computer Inc (華碩電腦) expects its annual notebook and netbook computer shipments to total around 12 million units next year, up from 11 million units this year despite the global economic slowdown and sluggish consumer demand, a company official said yesterday.

The specific forecast will be released in December, Jerry Shen (沈振來) Asustek’s chief executive officer said in a media briefing yesterday.

The company’s notebook sales are expected to reach between 6.2 million and 6.3 million units, Shen said, adding that the Taipei-based company wants to expand its customer base and enter into the middle
and high-end notebook market early next year.

Isn't it great to see optimism by some companies in these dark times of financial market metldowns and credit market concerns? ASUSTek have done well since the launch of the netbook last year and are growing in competitive strength. It is also interesting to see they are broadening their customer base and will be targeting a new market segment next year. The high-end notebook market is certainly where the higher margins can be made but it will be a little more difficult to penetrate this sector I feel. However, if they can use their pre-existing channel to bring these products to market there is no doubt they can succeed.

Taipei Times: Asustek expects shipment growth for notebooks

The Rise of Acer

Drew Cullen at Channel and Register has an interesting piece on the rise of Acer as a global brand. Cullen writes:

In recent years, sales of PCs have consolidated, big-time. The US and Japan are the only mature economies in which there are many significant ‘local’ PC makers – but they tend to have names like HP and Dell and NEC and Fujitsu.

In the US and in Europe, the national champions of yore have mostly fallen by the wayside. In due course the emerging economies will follow suit – maybe another Chinese PC maker will break out, to join Lenovo.

Acer saw that average selling prices were under price and margin pressure, that without differentiation, things could only get worse, and that raw performance was becoming an inadequate differentiator. The PC market was already becoming the survival of the biggest.

Acer’s prognosis was commonplace. The remarkable bit is that Acer decided to do something radical, over and above outsourcing the tin-bashing.

In brief, the company decided to build a brand business, to major on notebooks, and target small and medium business and consumers in particular. Also, it looked to the developing world – especially the BRIC (Brazil, Russia, India and China) economies as another growth engine.

In the process, Acer has become something of a Global Brand, for which Taiwan is not famous. Remember, the company once was called Multitech, which shows how much it had to learn.

Cullen is absolutely spot on. Taiwan is not known for its brands and the OEM/ODM business is prevalent right through the value chain of Taiwan's hi-tech industry. Acer is unique in that they developed a powerful global brand without anyone really noticing them. ASUS has now followed Acer's lead and spun off their manufacturing into two separate companies (Unihan and Pegatron) and are focusing on building the brand.

Sadly many Taiwanese companies now don't realize that OEM/ODM manufacturing and brand building are in some ways diametrically opposed strategic initiatives and that they cannot do both. ODM/OEM manufacturers are all focused on cost cutting and savings whereas branded products are more interested in creating value added through services and features. Of course they do try to create the value added cheaply but they usually get what they pay for including poor features and bad service which ultimately degrades the value of the brand being created.

At any rate, Cullen's article is a good read and Acer's strategy may be a template or other companies trying to move through to their own brands. Then again, maybe not.

Channel and Register: Acer: We’re comin’ at ya, Dell

ASUSTek Sales Grow in Europe

Reuters reports ASUSTek sales in Europe will grow significantly this year. According to Reuters:

Taiwan's Asustek Computer, the world's top motherboard producer and a laptop PC maker, said on Wednesday sales of its own branded products in Europe would likely rise to $5-6 billion this year. Last year, sales of branded products in Europe totalled $3.8 billion, company officials said. "There will be growth in all our products," Eric Chen, Asustek's regional head of the European market, told reporters.

I guess the addition of the netbook to their product portfolio combined with growth in traditional sectors has helped add to their sales. It would be good to see a breakdown of their sector sales (both geographically and product wise) but I doubt they are letting that out. Anyway, it is good to see another Taiwanese company remaining competitive in the global market, even in these times of financial melt downs.

Reuters: Taiwan Asustek sees higher Europe sales, shipments

ASUSTek Added to Dow Jones Technology Titans Index

The Street Insider reports ASUSTek will replace Electronic Data Systems Corp on the Dow Jones Technology Titans 30 Index. ASUSTek joins three other Taiwanese companies in the index. The three others are Taiwan Semiconductor Manufacturing Corporation (TSMC), High Tech Computer Corporation (HTC) and Hon Hai Precision (Hon Hai). There are now four Taiwanese companies listed on the index. Only the New York Stock Exchange and the NASDAQ have more companies represented. A full list of companies on the index is below:

• Alcatel-Lucent (Paris)

• Apple (NASDAQ)

• Applied Materials (NASDAQ)

• ASUSTek (Taiwan)

• Canon (Tokyo)

• Cisco Systems (NASDAQ)

• Corning (New York)

• Dell (NASDAQ)

• EMC (New York)

• Fujitsu (Tokyo)

• Google (NASDAQ)

• Hewlett-Packard (New York)

• HTC (Taiwan)

• Hon Hai (Taiwan)

• Intel (NASDAQ)

• IBM (New York)

• LM Ericcson (Stockholm)

• Microsoft (NASDAQ)

• Motorola (New York)

• Nokia (Helsinki)

• Oracle (NASDAQ)

• Qualcomm (NASDAQ)

• RIM (Toronto)

• Ricoh (Tokyo)

• Samsung (Korea)

• SAP (XETRA)

• TSMC (Taiwan)

• Texas Instruments (New York)

• Xerox Corp. (New York)

• Yahoo! Inc. (NASDAQ)

The presence of four Taiwanese companies on this index is another indicator of their dominance of the global tech sector beyond the United States. Japan only has three companies represented and Korea one.

Street Insider: Component Change Made to Dow Jones Technology Titans 30 Index

Free ASUSTek Netbook...

...bundled in a two year 3.5G online service contract. ASUSTek are still working to change the PC landscape!

Last week we noted in Bundling Netbooks with Telecom Offerings how both ACER and ASUSTek are negotiating with telecoms to bundle free netbooks with long term online contracts. Digitimes now provides more details about these contracts. Digitimes writes:

Asustek Computer is cooperating with Orange to push out a free Eee PC bundle in the UK market, according to the company.

Asustek is offering its Eee PC 900, which features a Celeron M processor, 8.9-inch panel, 16GB hard drive and Windows XP operating system, in the bundle deal. The deal requires a two-year 3.5G online services contract with Orange, which will cost an average of £25 (US$46.71) per month.

The bundle deal should help ease Asustek's Eee PC 900 inventory pressure.

First thing to note is how ASUSTek are innovating in the way they sell these netbooks. Although they still sell the netbooks directly into the channel, they are also using the netbooks as a value-added component of a telecom deal. This approach to selling is completely different to the normal way of selling PCs and shows how ASUSTek are positioning the product. The product is being positioned as a mobile internet device (MID) and not as a PC. Of course, there are fears these devices may cannibalize notebooks but by positioning them as MID they are trying to put them into their stand alone market segment or develop them as an extension of their smart phone offerings.

Although bundling computers with internet contracts is innovative, the selling strategy will not be new to ASUSTek or ACER. They have, afterall, been selling their smartphones into this channel for a while now and may therefore leverage the contacts they have made in the sales of the smartphones for the sales of the netbooks.

The netbook revolution may have a long way to go before it runs out of steam.

Digitimes: Asustek works with Orange to release free netbook bundle in the UK

Bundling Netbooks with Telecom Offerings

ASUSTek and ACER are in talks with Telecoms around the world to bundle their netbooks (low cost PCs) with wireless 3.5G services. The bundling will enable the netbooks to be sold for as little as 100 yen or one Euro. Digitimes reports:

In addition to Asustek Computer's cooperation with Japan-based telecommunication vendors to push out a 100 Yen (US$0.91) Eee PC bundled with 3.5G online services, the company is planning to push out a zero or one Euro (US$1.52) bundle with telecommunication vendors in Europe. Meanwhile, Acer is also planning to follow suit and will push out free netbook bundles as soon as the company solves its processor shortages, according to sources at telecommunication vendors.

Currently, Asustek's telecommunication partners are T-Mobile and TNT in Europe, and NTT Docomo and E-Mobile in Japan. Asustek has cooperated with E-Mobile over the 100 Yen bundle with its Eee PC 701 and the company is currently in negotiations with European telecommunication vendors for new bundles in Europe.

Acer has also talked with several telecommunication vendors for cooperation, which could bring the netbook bundle price down to zero which is the main reason Acer is still confident of achieving its shipments goal of five million units in 2008, the sources believe.

This is similar to the way phone manufacturers bundle their phones with telecom packages. For example my mobile phone was valued at NTD10,000 but on a two year package with my provider it only cost around NTD2,000. The bundling of the netbooks with 3.5G offerings is an impressive and innovative packaging deal that will continue to change the personal PC landscape. It seems this sector has a long way to go before their innovations run out of steam.

Digitimes: Asustek and Acer to cooperate with telcos for low-price netbook bundles

Impact of Low Cost PCs

Digitimes has a very interesting commentary on the impact of low cost PCs (netbooks) on notebook sales and also on the LCD panel market. The netbook market is expected to grow rapidly over the next couple of years and this growth will especially impact both the screen manufacturers and possibly the sales of the high-end notebooks.

The expected staggering growth is tempting for panel suppliers. Panel makers will typically roll out netbook panels from 5G lines, with a single substrate producing 45-54 8.9-inch or 10-inch panels. That means a panel maker would only need to devote 10,000-20,000 5G substrates per month to achieve a monthly output of one million units for the segment.

Producing the panels may be easy, but selling them not so much. The market may not be as big as expected. And judging from the panel makers' shipment goals for the segment, the total apparently exceeds the expected size of the market this year, which could mean a price slump because of over-supply.

Netbooks are chiefly targeting users shopping for a second notebook. But under the present economic downturn, the low-cost models are also cheaper alternatives to regular notebooks for first-time buyers.

The regular notebook market, excluding the 5-10-inch segment, has a size of more than 100 million units a year. If netbook shipments in 2008 really jump to 15 million units, it will not be difficult to imagine the impact they may have on the regular notebook market.

The problem for low cost PC manufacturers is the impact on profit margins and net profit. I can't imagine the manufacturers are making much off these computers (I don't know what the margins are) but despite the tremendous success of the low cost PC and especially the Eee PC, ASUSTek profits still showed a 18% decline in Q2. Reuters reports:

Asustek Computer, the world's top PC motherboard maker, said on Wednesday its second- quarter net profit fell 18 percent but expected a stronger third quarter for its laptop PCs.

Asustek's net profit was T$5.644 billion ($183 million), lower than T$6.846 billion a year ago and also down from T$7.23 billion in the first quarter.

The result was slightly above a consensus forecast of T$5.23 billion, according to eight analysts polled by Reuters Estimates.

Asustek also expected its third-quarter notebook shipments to rise 25-50 percent from the second quarter to 1.5-1.8 million units.

An increase in notebook shipments in the current environment may not translate to an increase in the net profit. Reuters (and I haven't found any other sources either) do not show if the 25% - 50% expected increase in shipments is accross the board (for both low cost and traditional PCs). If the low cost PCs are cannibalizing demand for the traditional higher-end models (as argued in the Digitimes commentary), profits may take a hit.

The low cost PCs were meant to target existing PC users and were meant to be used as second PCs. Of course this does open a brand new market and certainly makes it easier for new first-time buyers to purchase a PC without spending a whack of money, but what if PC users like myself replace their older, outdated machines with a netbook? People might argue the storage space is limited, the screen is too small and the keyboard uncomfortable! But there are ways around these problems! What does this mean for the company profit margins?

The problem is an interesting one. Many companies face the same difficulties in making choices for radically different product offerings. Windows XP is the direct competitor to Windows Vista with many users not prepared to switch to Vista. Intel was rumored to delay their quad-core rollout because there was no external competition and they did not want their quad-cores to compete with their other processors.

ASUSTek may have unwittingly launched a substitute for the high-end notebook computers. For them and other manufacturers this may provide challenges. For the screen manufacturers, well they will probably continue to roll along making their screens for whatever model is needed. Of course their profit margins may be impacted too as the higher-end, higher-margin products may see a decrease in demand.

Time will tell, time will tell.

Digitimes: Commentary: The impact of netbooks on the LCD panel industry
Reuters: Taiwan's Asustek Q2 net profit falls 18 pct

Eee PC Online Services

In order to boost demand for their low cost Eee PC, ASUSTek already offer a range of downloads and internet storage options. Digitimes writes:

In order to strengthen demand for Eee PCs, Asustek Computer recently launched Eee Storage, a 20GB Internet hard drive service, and Eee Download, to provide Eee PC users more additional features, according to Jerry Shen, president of the company.

Currently, Eee Download has around 3,000 free software and game titles available for Eee PC users to download. Asustek is planning to expand the service into an online store enabling users to download music and various other content. The service will initially target the Chinese-language market and will be rolled out for Eee family, as well as Asustek's notebook and motherboard products.

I think this actually makes good sense considering the storage limitations of the Eee PC (Linux models have, as I recall a maximum of 20 GB). Also, the download center offering a bunch of additional benefits and an online store will certainly make the offering more complete and more appealing. I haven't heard of any other low cost PC companies willing to offer such a complete service for their low cost PCs (netbooks).

However one feels this is mixing business models and requires significant divesification on the part of ASUS. Online storage companies already exist and users can buy as much or as little as desired. Online storage companies also have features such as and directory sharing. Online stores are also two to a penny and ASUS will have to offer significant benefits as compared to the current e-commerce vendors spawning the internet to generate a successful site.

ASUS should be commended for adding value to their brand and trying to develop comprehensive product offerings, but I feel they are just reinventing the wheel. Or perhaps they are copying the Apple iPod where the hardware and online services were viewed as an integrated solution. Time will tell whether or not these online services can drive demand.

Digitimes: Asustek launches Eee Storage and Download services

Low Cost PCs....The March Continues

A few days ago in The March of the Low Cost PC we noted how Quanta had won an order from Sony for low cost PCs. We also commented how the advent of the lost cost PC caught everyone off guard.

Yesterday the Taiwan based research firm Market Intellingence Center (MIC) predicted the sales of low cost PCs in 2009 would increase by 128%, from 8 million units in 2008 to 18.3 million units in 2009. According to MIC:

According to MIC (Market Intelligence Center, Taiwan), an ICT industry research institute based in Taipei, worldwide low-price mini notebook PC shipment is expected to reach 8.02 million units in 2008. In 2009 shipment volume is forecasted to reach a scale of 18.3 million units, growing 128% annually.

According to MIC Senior Industry Analyst Chris Wei, "the low-price mini notebook PC market was dominated by the Asus Eee PC in the first half of 2008. Acer rolled out the Aspire One notebook PC which is very competitive on price, and Acer has shown an aggressive attitude towards developing the low-price mini notebook PC market. In the second half of 2008 price competition is expected to emerge in the market, and product specifications could be improved by vendors in order to better compete in the market. Consumers will be the beneficiaries of these developments."

Yesterday CNET added to the low cost PC buzz by showing some leaked slides from ASUS suggesting ASUS will develop a family of 23 Eee PCs. According to CNET:

Are you a travel explorer, an editor, or student? Then does ASUS have the Eee PC for you! According to this slide image taken by Engadget Chinese, it looks like ASUS will soon have a total of 23 differently configured models of the widely known Eee PC Netbook series--this includes previously released models, as well as "coming soon," and "who knows when."

And yesterday Digitimes reported Synnex will also join the low cost PC (netbook) fray with their Lemel Q PC Smart deluxe nettop. This will be in direct competition with ASUS's Eee PC and the Wind PC from MSI. Digitimes writes:

Synnex's upcoming 3-liter Lemel Q PC Smart deluxe nettop is based on the Intel Atom 230 processor and priced around NT$13,900 (US$455.7). The nettop will also be offered bundled with a 19-inch LCD monitor for NT$18,888.

This market is growing fast. More and more competitors are jumping into the fray. It seems there is also a lot of growth potential in the sector and that the companies currently in the game will be able to continue to have high margins for a while. Price competition in the future will drive the margins down but at least for now, some PC manufacturers in Taiwan are smiling!

Market Intelligence Center: Global Low-price Mini Notebook PC Shipment Forecast to Reach 8.02 Mln Units in '08, According to MIC
CNET: And the Eee PC hits just keep comin'...
Digitimes: Taiwan market: Asustek, MSI and Synnex to enter nettop war in August

The March of the Low Cost PC

Quamet reports Taiwan's Quanta computers has won a big order from Sony for low cost PCs. According to Quamet:

Quanta Computer Inc (2382.TW) has secured contracts for 10-inch budget personal computers (PCs) from Sony Corp, the Commercial Times reported.

Without identifying sources, the report said the Sony laptops will adopt the C7-M microprocessor from VIA Technologies Inc (2388.TW) and liquid crystal display panels from AU Optronics Corp (2409.TW).

This is indeed good news for Quanta and further highlights the strength of the new low cost PC market. In ASUSTek Changes the Game we noted how ASUSTek "changed the perception of what a computer can and should be." Indeed. The market still has legs.

iStockAnalyst has a nice piece describing the evoloution of the low cost PC market:

Last October, when Taiwan's Asustek Computer launched its first Eee PC - whose new acronym stands for "Easy, Exciting and Economic", instead of the earlier "Easy to learn, easy to play, and easy to work" - it did not expect the low-cost PC to become the latest buzzword in the PC industry.

Bigger rivals such as Acer, the world's No. 3 computer maker, also underestimated the threat from smaller, lower-margin laptops, casting doubt over whether users would buy such "simple-functioning machines".

But then, the US$200 (RM660) Eee PC 701 is much cheaper than the US$1,000 price tag for an entry-level laptop.

Well, figures say it all. Asustek statistics show that it has sold one million units of the Eee PC since its debut until March.

The new Eee PC 900 has an 8.9-inch screen, 1.3-megapixel camera and 12- gigabyte or 20GB solid-state drive. At NT$15,988 (RM1,705), this model comes with either the Linux or Windows operating system.

Surprisingly, the Linux model, which accounted for 60 per cent of the first sales, is well-received by Taiwanese consumers, said Asustek's product manager Jose Liao.

"The overall user-friendliness and other applications bundled in will matter more to consumers when choosing low-cost computers. We leave the choice to them." Indeed, Asustek has a slew of rivals closely tailing its back. Other Taiwanese computer makers such as Elitegroup Computer Systems, Micro-Star International and Gigabyte Technology have all unveiled plans to grab a slice of the pie.

At the recent Computex Taipei trade show, Acer introduced its first ultra-low-cost laptop armed with Intel's Atom microprocessor. Also lighter than 1kg, this machine makes a good fit for those looking for a handheld device with PC-like Internet experience, said company president Gianfranco Lanci.

Foreign bigwigs have not been spared from the frenzy either.

In early April, US-based Hewlett-Packard introduced its first low- cost notebook, the 2133 Mini-Note, aimed at the education market. Hitting stores with prices that start from NT$17,900, the machine weighs 1.2kg, is 33 millimetres thin and has an 8.9-inch screen. Wireless is built-in, and Webcam is optional.

Yes, many companies it seemed did underestimate the threat from the low cost PC model. The early-mover advantage gained by ASUSTek in this market has helped them strengthen their position in the global PC market and helped them to become more competitive than ever. What amazes me is no one thought of this idea earlier! Well, perhaps they did, but no one ever took the initative to develop these platforms. This sector is rapidly becoming as competitive as the other PC sectors and ASUSTek will have to continue to innovate to stay ahead.

But for now, the rapid growth in the low cost PC markets is good news for the notebook contract manufacturers like Quanta, Wistron and Inventec.They will surely receive a lot of orders.

Quamet: Taiwan's Quanta wins Sony order for budget laptops - report
iStockAnalyst: Low-Cost Computers Gaining Ground

ASUSTek Changes the Game

From a 5 June article on Business Week:

While computer makers have pushed to build faster, more powerful laptops in recent years, the executives at Taiwan's Asustek Computer decided to try something different. They thought some people wanted a simpler computer. And they were right. Since its introduction last October, Asustek's Eee PC—a mini-laptop that retails for as little as $300—has become a huge hit around the world. The company expects to sell 5 million units this year. "We changed the concept," says Chief Executive Officer Jerry Shen.

Yes, AUSTek have changed the perception of what a computer can and should be. Low cost PCs are useful devices to those of us who do not require the full power of a PC. Gamers and other high-end consumers need powerful processors and huge storage capacity to play games and store videos and photos. But what about those of us who don't care about games? Why pay for processing power and capacity we will never use?

I guess ASUSTek wisely realized many people only want to be able to type docs, access the net and answer emails. Not all computer users are tech-junkies with a desperate need to over-clock.

Business Week does highlight that ASUSTek is not an international brand like HP, Dell or Lenovo but they do acknowledge the Eee PC has helped to establish their brand. The article also focuses on some of the things ASUSTek has done to become more profitable and competitive including focusing on design and spinning off their manufacturing plants.

Of course standard economics dictates when a product is as successful as the Eee PC, other players will also jump into the market and, according to Business Week,

Asustek still faces some big challenges before it can join the tech industry's elite. Some caution that the mini-laptop's success could erode profitability at Asustek, which made $910 million last year on sales of $24.9billion. Daiwa Institute of Research analyst Calvin Huang estimates the Eee PC's margins are 10% to 15%, compared with gross margins of 21.5% for the whole company. With Hewlett-Packard, Acer, and Dell gearing up to start selling similar machines, margin pressure is likely to grow. "The Eee PC is a significant innovation in the PC industry," Huang wrote in a report last month, but "its success is unlikely to be sustained."

ASUSTek is used to operating in a competitive environment. They may lose some market share in the low cost PC sector but they should be able to hold their own. I think they are doing a great job and should be complemented on their innovation and foresight.

Article: The Mini-Laptop Changing the Game

Contractors Increasing Prices

Both Compal and ASUSTek spin-off Pegatrong are set to increase their notebook computer costs. Both companies have started price negotiations with their clients. According to Digitimes the cause for the increases include increased component costs and a fluctuating exchange rate. Digitimes also notes Compal president Ray Chen's observations

With 95% of the world's notebooks in 2009 expected to be manufactured by Taiwan-based makers, Chen said it is time that Taiwan players stop the cut-throat competition among themselves.

I imagine most of these price increases are being catalyzed by the rising costs of doing business in China, which have increased due to a high inflation rate, increased minimum wage and a decrease in tax incentives. All three factors will have a significant effect on these contractor manufacturers since they presumably have their manufacturing bases in China and many of the notebook components are probably sourced there. Ray Chen did say they had persuaded their component suppliers not to increase prices for a short period of time but that now the component prices will in fact increase.

Perhaps Compal have started a trend and notebook contract manufacturers will start to scale up their pricing. However, I don't expect the cut-throat nature of the business to stop

Article 1: Compal in talks with notebook clients for price increases
Article 2: Pegatron to increase manufacturing quotes in 2Q08, says paper

Taiwanese Companies and XBox

The China Economic News (CENS) reports TSMC, ASE and Nanya are benefitting from Microsoft orders for chipsets for the latest XBox360. CENS reports:

Microsoft began in April farming out production of 65nm graphics chips and north-bridge chips for its latest version of XBox360 game consoles to Taiwanese foundries Taiwan Semiconductor Manufacturing Co. (TSMC), Advanced Semiconductor Engineering Inc. (ASE) and Nanya PCB Corp.

CENS continues:

TSMC is chosen to make the 65nm graphics chips and north-bridge chips for Xenon chips, ASE is contracted to package and test the two chips, and Nanya has won orders to supply flip-chip packaging substrates. The contract has booked a total of foundry capacity for around 10,000 300mm wafers at TSMC, currently the No.1 player of silicon-foundry industry worldwide.

People familiar with the contracts said Microsoft ordered 50% more contract packaging and testing capacity as well as flip-chip substrate in the second quarter than the first one, giving a boost to Nanya and ASE in their revenue growth this quarter.

Microsoft has also contracted two Asustek spinoffs to manufacture the actual consoles. According to Digitimes:

Pegatron Technology and Unihan Technology, two OEM makers spun off from Asustek Computer, have reportedly secured OEM orders for Xbox 360 consoles and will undertake the production at their factories in Suzhou, China, with an initial monthly shipment volume of about 500,000 units, according to industry sources in Taiwan.

The same Digitimes article also continues saying Wistron, the original contract manufacturer for the XBox, has declined to continue manufacturing them because of a reduction in the gross profit margin.

Article 1: Microsoft Contracts Taiwanese Foundries to Build Latest XBox360 Chips
Article 2: Asustek subsidiaries reportedly land OEM orders for Xbox 360 consoles

Growth of Low Cost PCs

ASUSTek has recently launched an 8.9-inch Eee PC. China Economic News (CENS) predicts shipments for these products will reach 1.3 million in Q2 and 5 million for the year. CENS notes this is ASUSTek's first low cost Intel platform. Intel however do have a competing product yet, according to CENS:

Asustek indicated that Intel, though already launching Classmate PC, a competing model against Asustek`s Eee PC, concentrates more on its sales of CPU (central processing unit) and hence has helped Asustek garner numerous governments` tender projects so far.

Digitimes notes that ASUSTek is very optimistic about these products and plan to launch a 10-inch display model later in 2008. Digitimes also notes that while ASUSTEk is aggressively pursuing this market, other players are being far more conservative.

Asustek is believed to have ordered 2.5-3 million Atom processors from Intel, while Acer has ordered around one million and may place another one million unit order depending on market demand for corresponding low-cost PCs in the later half of the year, according to industry sources. Meanwhile, Dell has been more conservative in only ordering around 300,000-500,000 Atom CPUs, while previous reports indicate Hewlett-Packard (HP) has placed an initial order for 100,000 VIA Technologies C7-M ULV CPUs to be used in its Mini-Note products, which will increase to 500,000 units by year's end. Other players including Micro-Star International (MSI) and Gigabyte Technology are even more conservative, ordering far lower volumes than their competitors, according market watchers.

Low cost PCs are also breaking into the industrial PC market with Digitimes reporting that Nexcom will also be launching a medical tablet PC based on the Atom processor.

Watching the growth of this market sector will be interesting. Currently 50% of all demand is in Europe and it will be interesting to see how the regional mix changes over the next year or so. I am personally thinking of buying one of these low cost PCs. I think they are perfect. Light, easy to carry and easy to hook-up to a big external hard drive at home. I guess the real question is why do you need to carry all the storage capacity you don't really use or access? Of course some people will prefer the high-end notebooks but these low price PCs are definitely carving out their own market sector.

Article 1: Asustek Unveils 8.9-inch Eee PC
Article 2: Intel Atom-based Eee PCs in June, 10-inch displays later in the year, says Asustek president
Article 3: Nexcom planning Atom-based industrial tablet PCs