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

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

News from the Notebook Market

Acer is targeting 50% revenue growth in India through the sale of notebooks. The Business Standard writes:

PC vendor Acer expects a 50 per cent growth in its revenue from the Indian market in the current fiscal, a top company official said.

"Our revenue in the last fiscal stood at Rs 1,200-crore. This year, we expect it to grow by 50 per cent to Rs 1,800-crore,' Acer India's Managing Director W S Mukund, said on the sidelines of the launch of Aspire One notebook, the company's first Internet device in the Indian market.

The company was pinning its hope on the newly-launched product, Mukund said, adding that, "Acer is aiming to sell 75,000 units of these notebooks over the next 12-months." In the first month of the launch itself, the company is targeting a sale of 5,000 units, he said.

Compal and other downstream notebook component suppliers are expected to benefit from a new notebook model launched by Dell. The new model will be produced by Compal. China Economic News writes:

Despite a rather conservative outlook for the notebook PC market in the second half this year, Compal Electronics and a number of Taiwanese makers of notebook-PC parts and components are expected to benefit from the rollout of a brand new series of business-use NB PC by Dell Computer, the world`s second largest NB PC vendor.

Michael Dell, chief executive officer of Dell, is scheduled to unveil the new model tomorrow (Aug. 13) in New Delhi, featuring light weight and colorful design, in stark difference from conventional business-use NB PCs, which emphasize function and stability, without much variety in design.

The new model will be contract-produced by Compal Electronics and its magnesium-aluminum alloy case is likely to be supplied by Catcher Technology. Other Taiwanese components and parts suppliers for the model include Shin Zu Shing, Simplo Technology, and Dynapack Battery Pack.

Finally, Trading Markets says notebook sales have surged in China. Trading Markets writes:

China's laptop sales surged 47.5% from a year earlier to 1.897 million units in the second quarters of 2008, showed the data of CCID Consulting, a leading IT market research and consulting company.

The top five computer makers led by Lenovo Group Limited (SEHK: 0992) took 71.4% of the Chinese market.

Dual core processors have become the mainstream configuration for laptops. The hardware tended to have big screens, large capacity, and high definition. VISTA was still unable to beat Windows XP in the operating system market.

Laptops are likely to take the place of desktops in the mounting home computer market, where Dell Inc. (Nasdaq: Dell) was enlarging its share after broadening retail channels, and Samsung was consolidating its foothold after product and price adjustment.

The surge in China will definitely benefit Taiwanese manufacturers. It seems the notebook market has a reasonable future ahead.

The Business Standard: Acer targets 50% revenue growth to 1,200 cr in FY 09
China Economic News: Dell`s New NB PC Will Benefit Compal and Other Taiwanese Makers
Trading Markets: China Laptop Sales Surged 47.5% in Q2

Acer Sees No Slowdown in Sales

A few days ago in Compal and Quanta Expect Decreasing Demand we noted that executives from Compal and Quanta were becoming pessimistic about future notebook sales. At the time we noted demand for PCs remains strong but that the executives were expecting the declining global economy to have a negative impact on sales. Reuters now reports Acer has seen a 33% increase in sales in Q2 and sees no slowdown in demand. According to Reuters:

Acer Inc, the world's third-biggest PC vendor, said it had no major concerns about effects on its business of an economic slowdown after posting a 33 percent increase in sales in the second quarter.

Sales rose to 124.8 billion Taiwan dollars ($4.1 billion), Acer said on Thursday, while net profit grew 48 percent to 2.92 billion Taiwan dollars, below the average forecast of 3.13 billion Taiwan dollars in a Reuters poll.

Acer is expanding aggressively into emerging markets and through acquisitions in developed markets and had 9.4 percent of the market in the second quarter, behind Hewlett-Packard and Dell, according to research firm Gartner.

Chief Executive Gianfranco Lanci said Acer expected to continue to gain market share in the third and fourth quarters and to grow at about 5 to 10 percentage points above market rates.

Separately, Acer Chairman J.T. Wang said the company expected third-quarter net profit to be higher than the previous three months as the U.S. housing downturn and global inflationary woes had little impact on its business.

"We weren't really affected by the subprime crisis and global inflation problems," Wang told reporters on the sidelines of a business event in Taipei.

"We expect profit to be higher also due to new products being launched after we acquired Gateway."

As the article notes, Acer are focusing on selling into emerging markets hence making them less vulnerable to economic swings in the developed economies. A few years ago a downturn in the US economy would definitely have seen an equivalent downturn in PC demand the US market was dominant but I think more and more companies are diversifying their geographical target markets and are therefore able to hedge against a downturn in any single economy.

Reuters: Acer Q2 sales up 33 pct, no concerns about slowdown

Compal and Quanta Expect Decreasing Demand

Despite the global economic downturn, many reports have said the demand for PCs is stable and will continue to remain stable. Part of the reason is the introduction of low cost PCs. However, the PC industry is not immune to the economy and some executives from big contract manufacturers are predicting a downturn. Reuters reports:

Quanta (2382.TW: Quote, Profile, Research) and Compal (2324.TW: Quote, Profile, Research), the world's two largest laptop contract makers, turned cautious on laptop PC demand for the second half of the year due to a global economic slowdown, a local newspaper said on Tuesday. The Economic Daily News quoted Compal Electronics Inc President Ray Chen as saying the subprime woes have caused an impact on global demand for laptops, while the Chinese-language newspaper said Quanta Computer Inc Vice Chairman C.C. Leung had expressed concerns over the laptop market if the global economy deteriorates.

Leung's comments came after Quanta Vice President Elton Yang said earlier this month that his company had yet to see a negative impact on its sales from the global economic slowdown.

Interesting. PC sales have remained strong, but how long this will continue is, at best, uncertain for now. Macroeconomic factors will eventually weigh in and if those factors are negative, PC sales will indeed go down.

Reuters: Quanta and Compal cautious on H2 laptop demand - paper

VIA Processors Making a Comeback

According to Digitimes, VIA processors are making a comeback on low cost PCs. Digitimes reports:

With Hewlett-Packard (HP) said to have ordered 100,000 C7-M ULV processors for its initial mini-note low-cost PC launch, (which is expected to reach 500,000 units in total in 2008) while Gigabyte Technology's new M700 series UMPC (ultra mobile PC) will also adopt VIA Technologies' CPUs, the Taiwan-based chipmaker may have a chance of recover from its long series of losses, according to industry watchers.

In addition to HP and Gigabyte, more hardware vendors are said to be evaluating VIA's CPUs for their UMPC and low-cost PC products.

The Atom processors recently lauched by Intel have certain limitations and therefore are not attractive to low cost PC manufacturers.

I also managed to dig up an old 2001 interview with Wen-chi Chen, VIA' s CEO. In that interview he argues for the development of the low cost processor. When asked why focus on cheap processors he argued:

We think that the value-line product will be the fastest growing in the whole PC space. It can easily grow another 20% higher than the whole market. That's the market where people want the products. People are looking at [a] second or third PC for the home, and the value line serves that purpose better..

When asked why, he replied:

The Internet will be the biggest driving force. For Internet applications, the processor is not the main requirement -- the pipe is more important than the engine. It's like the auto industry: It used to be that people build bigger and bigger engines. But the road was only so wide, and car drivers were more limited by the road than by the engine. So people started looking at efficiency of the engine and went to smaller engines..

It seems his 2001 optimism about this market is about to pay off. No doubt however AMD and Intel will respond and, even though the Atom has limitations, if there is money to be made they will readjust their strategy to ensure they stay ahead of the pack.

Article 1: VIA CPUs to stage comeback in low-cost PC market
Article 2: Wen-chi Chen: Taiwan's Answer to Andy Grove? [PDF File]
C7 2006 Press Release: New VIA C7®-M ULV Processor Family
C7 Product Page: VIA C7®-M ULV Processor