HP spin-off plans affect Taiwan ODM's supply chain

TAIWAN: HP recently announced its plans to spin off or sell their Personal Systems Group (PSG) and also discontinue WebOS tablet and smart phone products, shifting their focus to more profitable endeavors such as Service, IPG (Imaging and Printing Group) and ESSN (Enterprise Server, Storage and Networking). The announcement has shaken up the global PC market.

According to the survey conducted by TrendForce, the Personal Systems Group was the largest revenue generator for HP, with a contribution of $9.592 billion in 2Q11, accounting for 30.8 percent of total revenue. However, in terms of operating profit margin, PSG was in last place with 5.9 percent (all other businesses above 10 percent).

TrendForce believes that while PSG is HP’s largest revenue generator, its contribution to the company’s bottom line is minimal. Other contributing factors for HP’s spinoff or potential PSG sale decision includes: an unclear PC’s market outlook as well as compromised PC sales due to the rise of tablet popularity.Source: TrendForce, Taiwan.

With a market share of 18 percent in 2011, TrendForce anticipates HP to rank first in the global PC market. If HP sells the PSG to Samsung, Samsung’s market share would soar from 4 percent to 22 percent. It will not only complement Samsung’s Desktop sales and expand their market shares in DRAM, NAND, LCD and battery sectors, but also significantly affect Taiwanese component manufacturers.

On the other hand, if Lenovo purchase HP’s PSG, their market share would rise from 12 percent to 30 percent, surpassing Dell and Acer’s combined market share. (Dell and Acer currently rank second and third in market share, respectively.) The purchase would also consolidate Lenovo’s market shares in mature markets. If HP sells to Dell, Dell’s market share would surge to 31%, which would surpass the combined market share of Lenovo, Acer and Asus.

According to TrendForce’s research, Inventec, Quanta, Foxconn and Wistron, the major ODMs for HP’s notebooks, account for 25~30 percent, 30 percent, 20~25 percent, 5 percent of HP’s shipment in 2011, respectively. If HP sells its PSG, Inventec is expected to suffer the most severe setback, because HP totals 60 percent of Inventec’s NB shipment, and their Japanese and American clients make up for the rest.

In addition, HP’s has announced to terminate the production of their WebOS tablet TouchPad, which is exclusively manufactured by Inventec. If HP divides and sells part of its PSG, the potential client order decline is expected to mar ODMs’ revenues. On the other hand, since Quanta possess the greatest client diversity among the ODMs, regardless of the final buyer for HP, Quanta will most likely continue to receive orders from this new client.

In Foxconn’s case, HP and Dell account for almost 70 percent of its NB shipment in 2011. In 2012, however, the NB shipment ratio from HP is expected to increase while Dell may decrease. Consequently, if HP’s orders also drops in 2012, it would affect Foxconn drastically. Foxconn’s efforts to leverage its component supply chain strength in breaking into the NB market, increasing its competitiveness and raising it added value would be significantly undermined.

Out of more than a dozen of its production divisions, Foxconn dedicates one of them exclusively to the HP product line. If Foxconn were to purchase HP’s PSG, they have to take into account of both their other clients’ reactions and whether or not Foxconn has sufficient capital, due to the recent low stock price. That being said, if Samsung purchase HP’s PSG, it will inevitably jeopardize Foxconn. On the other hand, Compal and Pegatron, both not currently included in HP’s supply chain, will mostly likely benefit from other companies’ acquisition of HP’s PSG.Source: TrendForce, Taiwan.

HP’s PSG sale will not affect Taiwanese NB ODM’s businesses as a whole, because the cooperative system between brand vendors and ODMs has been established for years. Regardless of the final buyer, be it Samsung, Lenovo, Dell or other NB manufacturers, they will most likely outsource their production orders to Taiwanese ODMs. However, in the long run, it may change the dynamic between Taiwanese NB ODMs and affect the global PC ODM industry.

From HP’s perspective, TrendForce believes HP has disclosed its intention to sell its PSG in order generate a bidding competition among the potential buyers and maximize the company profit while ensuring the information security of the United States.