Sat, Nov 13, 2004 page10

• Analysts divided about notebook makers' margins

  PROFITS The decline in manufacturers' profit margins could ease up as they move their production bases to China, which may help drive down costs

  • By Amber Chung / STAFF REPORTER
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  Although nearly 70 percent of all notebook computers are made in Taiwan or by overseas Taiwanese firms, the industry's failure to widen its dwindling gross margins has become a major headache.

  What makes the situation even worse is that some second-tier players like Inventec Co (英業達) and Hon Hai Precision Industry Co (鴻海精密) are also making plans to compete directly with first-tier companies, which could make it unlikely that ailing margins would recover.

  Market watchers appeared to have mixed views about whether the margin decline would level out next year.

  "We expected to see the margins rebound slowly from the current 4 percent or so to about 6 percent by the end of next year," Simon Yang (楊勝帆), a senior researcher at the Topology Research Institute (拓墣產研), said at an industry forum earlier this week.

  Yang said manufacturers' growing realization that lower margins are hurting their R&D capability may suggest that the persistent margin decline could reach its bottom soon.

  Signs of steady margins are also likely to surface as Taiwanese manufacturers continue moving their production bases to China, which will help drive down costs while beefing up margins, the Taipei-based analyst added.

  Quanta Computer Inc (廣達), the world's largest notebook maker, saw its margins slide to 4.61 percent in the third quarter from 5.33 percent in the second quarter and 5.72 percent in the first. Its nearest rival, Compal Electronics Inc (仁寶電腦), also reported margins of 5.75 percent in the third quarter, down from 6.45 percent and 7.13 in the previous two quarters.

  Yang forecast that Quanta may begin to see margins steady at 4.8 percent from this quarter until the end of next year, with Compal's expected margin at 5.75 over the same period.

  Yang's view was echoed by Ray Chen (陳瑞聰), president and chief executive officer of Compal. Last month, Chen told investors that the deteriorating margins could ease and become stable next year, considering declining prices of key components, such as panels and semiconductors.

  Compal's margins are expected to stay at around 5.7 percent next year, Chen said.

  The government-funded Market Intelligence Center (市場情報中心) appeared to be more conservative about the industry's outlook for next year.

  "We expect a slower growth of global laptop shipments in light of the weakening replacement demands," said Helen Chiang (江芳韻), a senior analyst with the institute.

  Global shipment of notebook computers is expected to increase 18.95 percent to 54.88 million units next year, compared with an increase of 21.87 percent to 46.14 million units this year, according to the institute.

  Taiwanese manufacturers shipped a combined 8.8 million notebooks in the June-September quarter, up 18.7 percent from the previous quarter. Shipment in the October-December period is expected to increase 12.3 percent from the previous quarter to reach nearly 10 million units, the institute forecast.

  Despite a surge in shipments, the average selling price dwindled to US$653 per laptop in the third quarter from US$656 in the previous quarter, driven by declining key component prices. The institute expects the prices to drop further in this quarter.

  "The declining margins may not ease off soon," Chiang said.

  Yang and Chiang both warned of the potentially negative impact Inventec's ambitious expansion plan next year could have.

  Inventec, reporting an average margin of 4.99 percent for the first three quarters of this year, is undertaking massive expansion in Shanghai's Pudong area to boost its monthly capacity to 1 million laptops next year from its current 300,000 units, Yang said.

  This could make Inventec "another price destroyer, as the company would also slash prices to strive for more new orders from global vendors," Yang said.

  Inventec is expected to ship 4.5 million notebooks next year, up from around 2.8 million this year after the expansion finalizes in the middle of next year. Quanta said it aims to ship 16 million units next year, up from 11 million units this year, while Compal set a target of delivering around 10 million laptops next year from 7.5 million units this year.
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