Barry Lam is a master at squeezing profits out of cheap computers. As chairman of Taiwan's Quanta Computer, the world's biggest producer of notebook PCs, Lam makes machines for top brands such as Dell (DELL) and Hewlett-Packard (HPQ). And those cost-conscious customers have been relentless in forcing Quanta to keep cutting costs if he wants their business. According to a Deutsche Bank estimate, Quanta this year will earn $368 million on sales of $11.4 billion -- a profit margin of just 3%.
Now, Lam is about to put that ability to survive on razor-thin margins to its biggest test. Quanta has won the right to build an ultra-low-cost machine for One Laptop per Child (OLPC), a new U.S. nonprofit launched by Nicholas Negroponte of the Media Lab at the Massachusetts Institute of Technology (see BW Online, 10/4/05, "Help for Info Age Have-Nots" and BW Online, 10/20/05, "Googling for Charity").
Working for OLPC, Quanta is going to produce a laptop that costs no more than $100 -- about one-fifth the price of even the cheapest notebook PCs on the market. The aim is to sell these machines to millions of students and others in the developing world.
"UNTAPPED POTENTIAL." OLPC and Media Lab believe the key to narrowing the world's digital divide is providing more affordable computing. No doubt there's a need: India, for instance, has more than 1 billion people but just 17 million PCs, according to researcher International Data Corp. And of those 17 million machines, 95% are desktops. "There is a lot of untapped potential from a user perspective," says Bryan Ma, an analyst with IDC in Singapore.
Providing the masses with mobile computers may help reduce poverty, but will it impoverish Quanta in the process? Lam insists that the OLPC deal is no charity project. Negroponte and the others at MIT "promised us that we'll get similar margins as with our regular business," says Lam.
Moreover, he adds, once Quanta gets production up and running, the company will churn out the new machines in huge volumes. "We're talking about millions and millions of boxes," he says. "It's great." Lam estimates that the sub-$100 laptop could add between $3 billion and $5 billion to Quanta's top-line numbers. "It's not a bad business" to get into, he says.
KEEPING IT CHEAP. The sales might be impressive, but how does he plan to actually turn a profit? One important thing to remember is that the sub-$100 machine won't be a normal PC, Lam says. Instead of a 13-inch or 15-inch display, for instance, the Quanta-produced OLPC laptop will have a display that's just seven inches.
The designers are still working out the details, but Lam says he also envisions a lower-power machine with a simplified keyboard and flash memory instead of a hard drive. The operating system will probably be based on Linux, Lam says, and for the microprocessor "the first choice is AMD."
Some analysts, though, say Quanta might alienate some of its best customers with the machines. For instance, Quanta and other Taiwanese outsourcing specialists depend on coordinating with Intel so they can be prepared when the U.S. semiconductor giant launches a new microprocessor. Teaming up with AMD, Quanta might find that Intel is less willing to share information, says Frank Lee, an analyst with Deutsche Bank in Taipei.
Lee also thinks Quanta runs the risk of angering big customers. With growth in the U.S. slowing, big PC-makers want to expand sales in faster-growing markets in the developing world -- which is where OLPC hopes to sell its Quanta-made laptops. "If Quanta goes down this path, Dell and HP aren't going to be that happy," says Lee. As a result, the pair "may be less inclined to give [Quanta] orders."
MEETING DEMAND. Quanta and its MIT partners also risk misreading the market. It wasn't that long ago, after all, that lots of smart people in the PC industry thought they could make money selling stripped down "Internet appliances," which would allow anyone to go online easily and affordably. But the products were too stripped down and never took off. "The IAs flopped," says IDC's Ma, because they "didn't provide the full functionality of the Internet experience."
The computer makers marketed the Net appliances in the West, though, where people already had a pretty good idea of what the Internet was supposed to be like. Lam -- who says Quanta will start making the machines in China but may move production to India if that's where demand takes off -- is no doubt hoping that a peasant in the Indian or African countryside is going to be far less demanding.
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Einhorn is a correspondent in BusinessWeek's Hong Kong bureau
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