Taiwan’s Quanta, the world’s biggest contract PC maker, made more than 50m notebook computers last year and, for the first time in its 23-year history, generated revenues of more than T$1,000bn ($35bn).
But like many other electronics contract manufacturers, Quanta is in a quandary. Rising labour costs in China, rising raw material and oil prices, and a weakening US dollar, are all squeezing profit margins, such that Quanta last year had just T$2.3bn in net profits for a 1.7 per cent margin.
Other contract manufacturers are in a similar bind.
Taiwan’s Hon Hai, an assembler of Apple products, saw its margins fall to a historic low of 2.6 per cent on an unconsolidated basis in the first quarter of 2011, as costs increased due to its wage increase last year and as it moves factories further inland in China.
Compal, the world number two PC manufacturer, last month said it would seek to raise the fee it charges PC brands such as HP and Dell to offset rising costs.
Yet moving to lower cost regions and trying to raise prices, may only be temporary fixes. For Quanta, even though it correctly predicted a decade ago that notebook computers would replace desktops, the longer-term solution lies in identifying the “next big thing”, which it thinks is cloud computing.
It is because of this that Quanta is moving aggressively into data centres and servers, and challenging established groups such as IBM, HP, Dell and Sun Microsystems.
Quanta last month teamed up with Facebook in its Open Compute Project, which seeks to encourage greater innovation and industry dialogue about data centres by making public Facebook’s own custom designs.
The PC maker is also surpassing its usual role as a contract manufacturer by directly supplying Facebook and Google with servers, rather than acting through a branded intermediary such as HP or Dell. By doing so, it can earn much richer profit margins than the standard assembly fee it charges for making notebooks for them.
“In notebook computers, we are already the biggest, so there is not much room for further growth,” said Barry Lam, Quanta chairman.
The company hopes to raise servers’ contribution to overall revenue from about 3-5 per cent to just under 10 per cent by the end of this year.
Cloud computing also implies a construction boom in data centres – large buildings that contain thousands of individual servers – by internet companies such as Google, Yahoo and Facebook.
Since these are tech-savvy groups, they often prefer their own custom designs over the standard packages offered by large vendors to customers in other industries such as banking, governments, or hospitals.
While the scale of this boom is difficult to quantify, Christian Belady, general manager of data centre research at Microsoft, estimated recently that the annual market for data centre construction would reach $18bn in the US and $78bn globally by 2020.
While Asian contract manufacturers such as Hon Hai and Inventec, and Singapore’s Flextronics already produce servers on a contract manufacturing basis, they have not been able to challenge large international brands. While Asian producers are unrivalled in manufacturing high-quality tech hardware at a low cost, servers need to be paired with specialised software – expertise that contract manufacturers typically lack.
Quanta, however, has been quietly building up this capability over the past two years, the first public result of which was last month’s partnership with Facebook and the fact that it would supply servers for Facebook’s Oregon and North Carolina data centres.
So far, HP and Dell appear little concerned that Quanta and Facebook’s open compute design would pose a competitive threat to their businesses.
Dell’s marketing director, Drew Schulke, said Facebook’s open compute design would not harm Dell’s business, because the company brings in significant revenues from services compared to hardware.
HP said that with the explosion of cloud computing services there is enough business to go around and that HP doesn’t need to worry about Quanta.
“We just see it as a huge industry and there’s so many opportunities for everyone out there,” it said.