Hardware

Quanta Seeks Profit in the iPad Era


The good news for Barry Lam: His Taiwan-based company, Quanta Computer (QUCPY), is the world’s top contract manufacturer of laptops. It makes hardware for Hewlett-Packard (HPQ), Lenovo (LNVGY), Sony (SNE), and other big brands. The bad news: He’s still dependent on the laptop business. The problem, in a word, is tablets. The wild success of Apple’s (AAPL) iPad has prompted a slew of competing devices that have eaten into sales of PCs, according to research firm IDC. Lam, who founded Quanta in 1988, dismisses most tablets as iPad copycats. “We only work with customers who have a unique business model,” he says.

Lam’s big bet in the tablet market is Amazon.com’s (AMZN) Kindle Fire, which goes on sale later this month for $199. Quanta is making the device and may churn out as many as 5 million of them in the final quarter of 2011, according to Samsung Securities analyst Steven Tseng. Lam won’t comment on his relationship with Amazon because of nondisclosure agreements. “From what you have read about the Kindle Fire in the press,” he says, “the business model is very effective.” Quanta also makes the PlayBook for Research In Motion (RIMM), says Tseng.

Tablets could prove to be a higher-margin business for Quanta than making laptops. In that business, where there’s very little to differentiate an HP laptop from a Dell (DELL) or a Lenovo, Quanta’s customers have focused on squeezing nearly every bit of profit out of their contract manufacturers. Such margin pressure made it crucial for Quanta to churn out as much hardware as possible. “It has been a volume-game story,” says Tseng. “In the past, getting squeezed was O.K. because the volume growth was there. Not anymore.”

Amazon isn’t looking to make much money on the hardware; Chief Executive Officer Jeff Bezos figures his tablet, which has a 7-inch screen, will be a handheld shopping machine that encourages consumers to buy more music and sweaters and everything else from Amazon. Bezos’s vision takes some of the pressure off Quanta, says Alberto Moel, a senior analyst in Hong Kong with Sanford C. Bernstein (AB). If you are Barry Lam, “the PC guys are all over you like a cheap suit,” he says. “Every dollar they extract from Quanta is a dollar of extra profit. With Amazon, the incentive to get the bare-bones price isn’t as high because it can make its money elsewhere.” Moel estimates Quanta is making a gross profit margin of 4.6 percent on the Kindle Fire, compared with 3.2 percent for laptops. “This,” says Moel, “could be a nice profit driver for Quanta.” Bernstein predicts earnings will grow 21 percent this year to $765 million, on sales of $37 billion.

There are limits to what Amazon’s new tablet can do for Quanta, though. Amazon is already getting ready for an additional Kindle Fire model, this one with a 10-inch screen, but that business is going to Quanta’s rival Foxconn (HNHPF), according to Samsung Securities and Bernstein. For Quanta, annual revenue from the Amazon tablet could go as high as $2 billion by 2015, according to Bernstein’s Moel, but that would still be no more than 8 percent of Quanta’s revenues.

Hence the need for Lam to consider his options. He speaks enthusiastically about cloud computing and has moved faster than other Taiwanese manufacturers to meet the growing demand for servers and storage devices from customers like Amazon, Facebook, and Google (GOOG). In the past, companies would buy their servers from major brands such as Dell or HP, but Lam argues they can do just as well buying lower-priced servers from Quanta. Such customers “don’t care about the brand name, don’t need the after-sales service, and don’t want the salesman overhead,” says Lam. On servers, Quanta has gross margins of greater than 10 percent.

Still, Quanta probably won’t see massive, laptop-like volumes for tablets or no-name servers anytime soon. That’s leading Lam back to his first love. He’s hopeful that ultrabooks—a new category of superthin laptops intended to resemble Apple’s sleek MacBook Air—will hit big with consumers. Major PC vendors such as Acer are coming out with their first ultrabooks this year and plan to introduce many more next year. Despite the rise of the iPad and its many imitators, Lam rejects suggestions the laptop era is over. “No, no. We still have very strong demand,” he says. “The laptop computer is a workhorse. The tablet is just a display.”

The bottom line: Quanta, which may produce 5 million Amazon Kindle Fire tablets this quarter, still depends on laptops for most of its revenue.

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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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