Analyst says notebook makers must merge to survive

While major domestic notebook computer makers saw sales grow in the third quarter, profits continued to shrink with declining gross margins, prompting market watchers to suggest a consolidation as a cure.

"The notebook computer sector needs to consolidate to reduce the increasingly slimmer gross margin," Daphne Cheng (程守善), an analyst at Nomura Securities Co in Taipei, said in a phone interview yesterday.

Gross margins started to fall after major players began cutting prices to compete for orders from global vendors such as Dell Inc and Hewlett-Packard Co.

Competition might heat up even more as second-tier players plan to slash their prices to vie for more orders with first-tier companies in the next two years, Cheng said.

Quanta Computer Inc (廣達), the world's largest notebook maker, saw a gross margin in the third quarter as low as 4.7 percent, down from 5.33 percent the previous quarter, despite sales growing 14 percent to NT$78.86 billion over the same period. Quanta planned to ship 11 million units this year,

Compal Electronics (仁寶電腦), the world's second-largest laptop maker, reported a margin of 5.7 percent in the third quarter, down from 6.41 percent in the previous quarter, while setting a record quarterly shipment of 2 million laptops and a 10.8 percent increase in sales of NT$54.99 billion in the same time. Compal set a target of delivering 8 million units this year.

Inventec Co (英業達) -- which saw record high quarterly revenue of NT$38.68 billion between June and September, an increase of 24.9 percent from previous quarter, had average gross margin as low as 4.99 percent for the first three quarters of this year.

But instead of trying to consolidate, laptop manufacturers have resorted to price cuts and cost controls, as well as diversification.

"Diversifying into liquid crystal display monitors and TVs remains the first choice for the major players to improve their margins, although these efforts don't appear to have paid off," Cheng said.

Mergers may not to occur in the next year or two, she said, adding that mergers also depend on the attitudes of chief executives.

"Not many of them want to succumb to others," she said.

Overestimated price-earnings (PE) ratio of shares in the sector, which could be as high as 13-fold of the earnings per share (EPS) compared with a PE ratio of around 11 times in the semiconductor sector, would lead to high consolidation cost, Cheng said. So lower margins may continue to be a drag on the industry for the next few years.