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Online Extra: Quanta's New Leap


If you want to see where Barry Lam is taking his business, consider the new name that he uses for it. Today, he calls his suburban Taipei-based company Quanta Group (2382.TW). It's a slight but significant change from the name he had been using since founding the company back in 1988: Quanta Computer. (The Quanta name in Chinese translates into "vast, wide, extensive.")

As its original moniker suggests, Quanta focused zealously on computers, in particular notebook PCs. Like many other Taiwanese computer makers, it was an anonymous producer of notebooks on a contract basis for some of the world's biggest brand-name players.

There's no question that former calculator salesman Lam has succeeded as a computer maker. Quanta last year produced 16% of the world's notebooks, designing and manufacturing machines for the likes of Hewlett-Packard (HPQ) and Gateway (GTW).

BIG BACKING. This year, Lam is likely to see his company's market share increase to 20%, thanks to the addition of several new customers such as NEC (NIPNY) and Acer and increases in orders from old ones like Dell (DELL) and Apple (AAPL). Such results helped catapult Quanta near the top of the world's information-technology mountain, landing at No. 2 in this year's BusinessWeek IT 100.

Lam isn't content to be the No. 1 producer of outsourced notebook PCs, though. He wants to make the company as synonymous with products like servers and flat-panel displays as it is now with laptops. So Quanta has diversified, with one subsidiary -- Quanta Display -- making TFT-LCDs (the thin liquid crystal display screens used in notebook PCs and, increasingly, desktops). A joint venture with Sharp and several Taiwanese investors, Quanta Display has already received $1 billion in investment from Quanta and is due to receive another $1 billion in the coming 18 months, Lam says.

Another subsidiary -- Quanta Storage -- will have an initial public offering this year in Taiwan, Lam says. A few other subsidiaries are less capital-intensive. For instance, Quanta Network Systems develops set-top boxes. And Quanta has also developed a venture-capital arm to help fund startups that can provide technology to support these businesses.

Why branch out like this? "This strategy will make Quanta grow bigger," says Lam. "It's a big market with much bigger value and a much bigger product range. This is something that makes Quanta valuable to customers."

"SWEET SPOT." Lam figures this diversification can help Quanta escape becoming a victim of its own success. As it wins more outsourcing customers thanks to the need for multinationals to reduce costs, the ability to grow becomes more limited. After all, Taiwanese notebook makers already control 60% of the market. It won't be long before there are no new outsourcing orders to win.

Moreover, the merger of Hewlett Packard with Compaq means that Taiwanese are feeling even more pressure to lower prices. So Quanta needs to find businesses with fatter margins.

"The notebook PC is continuously replacing the desktop, so the market will further expand," says Lam. But when it comes to flat panels, servers, and storage devices, "the margins are much higher," he adds. "More than two times higher." Hence Quanta's move into new products that are "value-added and involve a lot of R&D," he says. "This kind of business is really a sweet spot for Quanta."

This strategy isn't unique to Quanta. At the big Computex electronics trade show in Taipei in early June, most of the big Taiwanese players were touting their ability to diversify. Analysts say their chances are good, as Taiwanese manufacturers relying on outsourcing orders have a big advantage as they pursue these new businesses. Unlike North American-based contract manufacturers like Celestica (CLS) or Flextronics (FLEX), which stick largely to manufacturing, many Taiwanese have engineers who do much of the design work for their customers.

BARGAIN TIME? That should help Taiwan's outsourcers as they seek to expand into new types of products, says Sean Debow, Asia tech strategist at UBS Warburg in Hong Kong. Design experience means "they bring more to the table," he says. "That's a big value-added. It's the right place to be a in a difficult tech market -- being able to cut costs and increase design innovation."

Investors focused on the short term, though, might want to be wary about the Taiwanese players such as Quanta. While most of the island's electronics stocks soared in the months after September 11, they have been struggling recently. Quanta's stock closed June 12 at T$90 (that's $2.65), down from a high of T$146 ($4.29) on Jan. 11. That's partially because of growing doubts about when U.S. demand will recover. Indeed, citing worries about weakness in the PC industry, Salomon Smith Barney on June 12 downgraded Quanta shares from a buy to a hold.

Taiwan's computer makers are now trading at an average price-earnings ratio of 16 times next year's earnings, at the low end of the long-term range. That's because many investors are downbeat about the chances of American corporate buyers splurging for new computers in the months ahead. On the other hand, that also means the stocks are now relatively cheap. That could be good news for investors who believe in Quanta's diversification strategy. By Bruce Einhorn in Hong Kong


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