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Compal will double production

Compal Communications Inc (華寶通訊), a subsidary of Compal Electronics Inc (仁寶電子), said it will double its handset shipments next year from this year as the handset original design manufacturer (ODM) increases its capacity for producing low-end models.

Shipments for next year will rise to 7.5 million units, from 3.5 million units this year, after new factories join the production line, Compal Communications president Henry Lee (李南雄) told reporters yesterday.

"Our shipments are capped by existing production capacity, which is lagging behind market demand," Lee said.

The mobile phone maker operates only one factory, with the capacity to produce about 600,000 handsets per month.

Compal, which in 1999 became the first Taiwanese handset maker to manufacture a high-end mobile phone, is considering leasing a plant with a monthly capacity of 500,000 units. The company also plans to build a new factory with greater capacity that can produce 2 million handsets each month, Lee said.

The two factories will be located in Nanjing and are scheduled to start their operations in respectively the first quarter and fourth quarter of next year, Lee added.

The factory under construction -- a component of Compal's broader plan to build three Chinese plants with a total capacity of 6 million units -- will cost Compal US$12 million, according to Compal spokesperson Sophia Chen (陳美雲).

The lift in capacity will give Compal more leeway to receive orders for entry-level handsets, as it plans to use the two Chinese plants for the manufacturing of lower-priced handsets, Lee said.

Half of the 7.5 million handsets the factories will ship next year will be low-end mobile phones with grayscale screens, and the other half will be high-end models, the company official continued. The percentage of entry-level mobile phones is likely to rise further in the future, Lee said.

"We don't oppose Compal's expansion into the low-end handset market, but we have to point out that the profit contribution from that area will be small," commented Roland Wee (李健仁), an industry analyst with ABN-AMRO Asia Ltd, Taipei branch. Wee recommended a "buy" for Compal shares.

ABN-AMRO expected to see 10 percent long-term handset market growth. Global handset shipment will rise to 510 million units next year, up from 458 million units during this year driven mainly by strong take-up of new subscribers in emerging markets, according to ABN-AMRO's forecast.

As the handset outsourcing percentage remains low, at about 30 percent this year, Wee said he views Compal as an ODM service provider with a high potential for winning more orders.

Compal currently supplies high-end handsets equipped with an integrated digital camera, a color display and other features to global vendors including Motorola Inc and Panasonic Mobile Communications Co.

In a report published last month, Wee said that over-reliance on Motorola will be a risk for investors who buy Compal shares. Compal is expected to earn NT$2.02 billion this year, rising to NT$2.87 billion next year, he forecasted.

To reduce such risks, Compal is aggressively attempting to diversify its customer base to lower the reliance on Motorola, Compal president Lee said yesterday.

"It will be healthier to keep the percentage of the largest customers to around 40 percent of total orders," Lee said. "We're very likely to achieve that goal next year. We're in talks with some potential customers now."

But improvements in customer diversity will depend on how fast Alcatel SA of France increases its orders on the local handset maker, Wee commented.
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