Mon, Dec 13, 2004 page11

• Lenovo new deal ruffles PC feathers

  • By Amber Chung / STAFF REPORTER
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  China's largest personal computer (PC) vendor Lenovo Group Ltd's (聯想集團) acquisition of the iconic Big Blue's OC business has sent shockwaves through Taiwan.

  The deal not only turned IBM Taiwan's employees overnight from staffers of an eminent foreign company into the nation's first batch of workers employed by a communist Chinese enterprise, but also caused a potential reshuffle in and further consolidation of Taiwan's PC manufacturing business. Taiwan supplies 70 percent of the world's computer notebooks and 30 percent of all desktops.

  According to Steven Tseng, (曾緒良) chief analyst on downstream electronics at Yuanta Core Pacific Securities (元大京華證券), the deal will have the most impact on IBM's major suppliers such as Universal Scientific Industry Co (USI, 環隆電器) and Wistron Corp (緯創), due to a potential shift in orders after Lenovo takes control.

  Tseng said that the Big Blue contributes nearly 70 percent and over 30 percent of Universal Scientific and Wistron's revenues, respectively.

  However, Lenovo's suppliers would not necessarily benefit in the long term, he said.

  Given the high-quality brand image of IBM, Levono's second-tier and even third-tier suppliers, such as Elitegroup Computer Systems Co (精英電腦), could lose orders to their bigger rivals by 2006, Tseng said.

  Lenovo's Taiwanese suppliers include Elitegroup, Gigabyte Technology Co (技嘉) and Micro-Star International Corp (微星), which manufacture the vendor's 3.8 million desktop computers a year, as well as Quanta Computer Inc (廣達電腦), Wistron and First International Computer Inc (大眾電腦) which supply it with 350,000 laptops annually.

  IBM's Taiwanese suppliers include Quanta and Wistron, which manufactured half of 4 million laptop shipments this year and USI, Gigabyte, Elite and Micro-Star which made 5 million desktops.

  Hon Hai Precision Industry Co (鴻海精密), the nation's biggest electronics company by sales, and Asustek Computer Inc (華碩電腦), the world's biggest motherboard supplier, are expected to be the major beneficiaries of the deal, given their in-house component capability and footprint in both China and Eastern Europe, Merrill Lynch said in its latest report.

  In the meantime, Quanta and Compal Electronics Inc (仁寶電腦) would also benefit, as their client Dell Inc could post incremental share gains through the merger of Lenovo and IBM's PC division, according to Merrill Lynch.

  price wars

  The decrease in the number of customer-end products would in turn spark another wave of price wars in the supply chain, causing already slim margins to deteriorate, Tseng said.

  "The sector will see more consolidation through natural market elimination," he said.

  "Only companies who are big enough, such as Quanta and Compal, or those focusing on niche markets, like Mitac Technology Corp (神基科技) that makes computers for military use, will survive in the future," he said.

  The deal also indicated vendors' efforts to reposition themselves amid declining profitability and slowing growth in the PC sector, which could drive further consolidation in the foreseeable future.

  "With about 40 percent of the global market share captured by the top three players, namely Dell, Hewlett-Packard Co and Lenovo-IBM, we expect consolidation in the PC industry to accelerate," Merrill Lynch's report said.

  "We might only see five meaningful players in two years' time," it said.

  Taipei-based Acer Inc has a chance to take one of the remaining market positions, given its successes in European countries and penetration of the US market, Merrill Lynch said.
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