Over the next few years, the notebook market is expected to grow at a faster rate than the desktop industry for the global market. Goldman Sachs predicts that demand for notebooks will rise to 49.49 million units in 2004, while International Data Corporation (IDC) projects global sales to reach 50.16 million notebooks in 2004, up 26.3% from 39.73 million in 2003.

Taiwan is currently the world’s largest producer of notebook PCs. According to Taiwan's Market Intelligent Center (MIC), Taiwan’s share of the global notebook PC market increased to 60.6% in 2002 from 49.0% in 1999.

In 2003, Taiwan-based companies produced about two-thirds of the 35 million to 40 million notebooks shipped globally. DigiTimes Research estimates in 2004, Taiwan companies will ship more than 40 million notebooks, accounting for over 80% of the total market.

Source: compiled by DigiTimes, May 2004.
(1999-2001 Taiwan notebook shipment data from MIC; 1999-2001 global data from IDC; Taiwan notebook shipment value and ASP data from MIC; 2002-2004 global and Taiwan notebook shipment data from DigiTimes Research.)

Major Taiwanese notebook manufacturers focus on contract manufacturing instead of marketing their own brands. Of the few Taiwanese notebook companies selling own-brand products, perhaps only Acer is among the world’s top 10 brands.

In 2003, Quanta Computer and Compal Electronics – the top two notebook makers in Taiwan – produced about 37% of the global notebook shipments and that number is expected to increase to 42% in 2004, according to Goldman Sachs.

However, according to Taiwan's Market Intelligent Center (MIC), the tremendous growth in the notebook PC market during the fourth quarter of 2003 boosted the optimism of certain brand name vendors such as HP and induced them to pour in massive supply, but they were not able to sell 10-15% of the shipments received in late 2003, sources at notebook makers explained.

MIC noted that shipments of 15-inch and 17-inch models in the first quarter of 2004 declined by 1% to 2% sequentially, while all-in-one models suffered a drop of more than 10%, evidence of the slow-down in desktop replacement demand in the consumer market during the first quarter of 2004. UBS Warburg estimated that January shipments from Taiwan’s first-tier notebook makers dropped 18% month-on-month, compared with a 2% decline it forecast earlier.

Notebook shipments from Quanta and Compal declined on month in January, and only increased slightly in February.

MIC estimates that Taiwan notebook PC shipment reached approximately 6.8 million units in the first quarter of 2004, a slide of 16.3% sequentially due to seasonal effects and less-than-expected demand. However, 2004 remains an important period in the replacement cycle, so shipments grew by 32.9% year on year in the first quarter of 2004, MIC added.

Compal Electronics 1Q shipments declined 10-15% sequentially to between 1.7 million and 1.8 million units. Mitac Technology (MTC), Clevo and Twinhead International, three second-tier notebook manufacturers in Taiwan, also reported revenues for the first quarter of 2004 decreasing on quarter by 28.17%, 14.62% and 9.81% respectively.

Inventec, one of Taiwan's leading OEM notebook manufacturers, was the only Taiwanese notebook OEM maker to enjoy quarter-on-quarter growth. Inventec's notebook shipments and revenues rose around 8% on quarter to 510,000 units and over NT$26.0 billion in the first quarter of 2004. The company saw March revenues exceed its three-year record of NT$9.145 billion generated in December 2003, according to institutional investors.

According to MIC, the heavy inventories among brand name vendors are expected to be relieved in the second quarter. Estimates from institutional investors note that second quarter shipments of notebooks from Taiwan manufacturers are expected to grow 10% on quarter.

Quanta Computer, the world's largest notebook maker, will see its second quarter notebook shipments grow 10% on quarter, with shipments gaining momentum through May and peaking in June, said the sources.

Compal Electronics has said that it expects its second quarter notebook shipments to increase 15-20% on quarter, to 1.8 million units.

Other companies expecting strong growth in the second quarter include Inventec, with 20% growth on notebook shipments on quarter, and Wistron, whose second-quarter shipments are set to expand 30% over the first quarter, due to increased orders from Dell and deliveries on new accounts, said sources.

The second-quarter outlook for second-tier makers, including Clevo, Twinhead and Mitac Technology, is also optimistic, based on their March performances and new orders they received at CeBIT 2004 show in March, according to the sources.

Source: Goldman Sachs and DigiTimes, compiled by DigiTimes, May 2004.

According to the Wistron Corporation, the global notebook PC market is dominated by several large global vendors, as there is a lower degree of standardization of notebooks compared to desktop PCs and a higher degree of consumer brand consciousness in the notebook PC market.

The Taiwan Market Intelligence Center (MIC) estimates that in 2002 the top ten global vendors of notebook PCs shipped nearly 80% of total global shipments of notebook PCs, and over 80% in 2003.

The global notebook PC market is characterized by intense competition for market share, short product life cycles and intense pressure on costs, resulting in global market concentration around the top ten global vendors and increased outsourcing of the design and manufacture of notebook PCs to manufacturing centers such as Taiwan, according to Wistron.

US-based notebook vendors are the major customers of the notebook makers in Taiwan.

In 2003, Hewlett-Packard (HP), Dell, Gateway and Apple, outsourced over 90% of their notebook production to Taiwanese notebook makers. Dell and HP, the two largest clients, together accounted for close to 60% of Taiwan’s total shipments.

Hewlett-Packard (HP) and Dell fared well in selling low-price notebooks in the global market thanks to mass OEM production by Taiwanese makers, and by the end of 2003 had pushed Toshiba down from the world's No. 1 brand to number three.

At the end of 2003, Toshiba announced a reorganization of its PC business operation, which investors and analysts in Taiwan's stock market think was targeted mainly at Toshiba’s s notebook PC production.

The analysts believe that Toshiba will, like HP and Dell, minimize its notebook production costs by increasing own production at its overseas factories and OEM production in Taiwan. OEM production in Taiwan as a percentage of Toshiba's total notebook output is expected to rise from 30% in 2003 to 50% in 2004, and Compal Electronics and Inventec are said to be the two most likely vendors to benefit.

Toshiba's expected increase in OEM production is similar to the case of Acer, perhaps the only Taiwan brand in the world’s top ten vendors. To be price competitive, Acer adopted outsourced services for making notebooks in addition to its production by Wistron, Acer's subsidiary EMS (electronics manufacturing services) provider. Mainly based on outside OEM production, Acer has succeeded in marketing its own-brand notebooks from 2003, especially in Europe, analysts pointed out.

Source: compiled by DigiTimes, May 2004.

Source: compiled by DigiTimes, May 2004.
* 20,000 – 30,000 per month (estimated)

Source: company sources, compiled by DigiTimes, January 2004.

Source: compiled by DigiTimes, January 2004

In line with the rest of Taiwan’s IT industry, notebook production has been moving across the Taiwan Strait. In 2003, 70-80% of the shipments from Taiwanese manufacturers came from China.

Taiwan’s largest notebook maker, Quanta Computer, currently has capacity to produce 1.2 million notebooks per month, with production capacity of one million being located in China at its two plants in Songjiang, Jiangsu Province. In Taiwan, production capacity is only 200,000 units.

Quanta is now using its China capacity to fulfill all of its orders from Dell, HP, Gateway, NEC and Sony.

Quanta Computer will also build three new factories adjacent to its two existing plants in the Songjiang Export Processing Zone in Shanghai, with an initial investment of US$18.5 million (about NT$630 million), according to filings made with the Taiwan Stock Exchange (TSE).

Other Taiwanese notebook makers seem to share a similar philosophy with Quanta, as many have also projected a significant build-up in their China bases. Backed by its two factories in Kunshan, Jiangsu Province, Compal produced about 80% of the 5.5 million units it shipped in 2003 in China, and the percentage is expected to be even greater this year.

Compal is using its China capacity to fulfill orders from Dell, HP, and Toshiba.

Asustek set up its existing China plant in Suzhou, Jiangsu Province, in 1999. Now that it is running close to full capacity, the company has decided to set up a second plant, according to sources.

Asustek is expected to produce Apple’s iBook at its China plant from the third quarter 2004.

Uniwill, an affiliate of the Sampo group, will have 90% of the company’s 2004 output coming from the company's plant in Suzhou, Jiangsu Province (China), up from 70% in 2003, according to company sources. The Suzhou plant has a capacity to manufacture between 150,000 and 200,000 notebooks per month.

Wistron is the only Taiwanese notebook maker with production lines in Taiwan, China and the Philippines. With a monthly capacity of 100,000-150,000 units, the company's Hsinchu, Taiwan factory produces notebooks for Acer.

Wistron also has a factory in Kunshan, Jiangsu Province (China), and is building another, with completion slated for the middle of 2004. Although the new factory will mainly produce servers and smart handheld devices, the company also plans to expand the first factory's monthly production capacity to at least 300,000 notebooks, up from 150,000 now.

Wistron also has two factories near Subic Bay, the Philippines and also operates a factory in Mexico, though the Mexico plant mostly produces desktops for the North America market.

First International Computer (FIC) plans to increase its production capacity for notebooks at its plant in Suzhou, Jiangsu Province (China) from 1.5 million units to 3.5 million units a year, according to company sources. In addition to the Suzhou plant, FIC currently also operates a plant in Wujiang, Jiangsu Province, which has a production capacity of 130,000 notebooks per month.

FIC produces notebooks for NEC at the Wujiang plant, while making notebooks for Hewlett-Packard (HP), Hitachi, the Legend Group and other clients at the Suzhou plant.

Micro-Star International (MSI) aims to ship 150,000 to 200,000 notebooks in 2004 – the first year for volume shipments after it began notebook manufacturing at the end of 2003, company sources said. MSI has a joint venture plant set up with LG Electronics (LGE) in Kunshan, Jiangsu Province (China). The plant has a monthly capacity of 30,000 units.

MSI makes notebooks for IBM at the Kunshan plant.

Arima has migrated the majority of its notebook manufacturing to Wujiang, Jiangsu Province (China), with its headquarters in Taiwan handling the production of high-end models and engineering samples of new notebooks, according to company sources.

Source: compiled by DigiTimes, May 2004.

Compared to the world’s top 10 vendors, orders from other companies are relatively small. In 2003, Taiwan shipped about 4.5 million notebooks to non-top 10 vendors, which is about 80% of the global non-top 10 market. The remaining 20% came mainly from Japan and South Korea.

In a move designed to attract distributors worldwide to configure and sell notebooks shipped directly from the manufacturers, Intel and five Taiwanese notebook makers – Quanta Computer, Compal Electronics, Wistron, Asustek Computer and First International Computer (FIC) – were set to begin jointly promoting a new Mobile Value-Added Distributor (MVAD) program initiated by the US chip giant, according to sources at Taiwan's notebook makers.

Channel distributors and DIY users account for over 50% of the global desktop PC market, with the worlds top 10 brands sharing the remainder. Big brands currently control over 80% of the notebook market.

The five Taiwanese makers will be responsible for design, assembly, logistics control and service for notebooks sold under the MVAD program, while distributors will be encouraged to buy barebone systems from the five makers and complete the final stages of assembly before selling fully-configured notebooks to customers.

The first models, to be based on Intel's Alviso chipset, are scheduled to debut in September 2004, the sources said.

In the second quarter of 2004, Quanta Computer, reorganized its clone notebook business, adding clone responsibilities for the US and Europe to its NB2 business group, which previously only handled notebook production for OEM clients like Gateway, Fujitsu Siemens and IBM.

The NB2 group has already secured clone notebook orders from some European channel distributors, including Maxdata and Dixon, with shipments totaling about 10,000 units per month, said company sources.

Quanta also has OEM clients such as Lenovo (the new registered trade name for the Legend Group), Tsinghua Tongfang and Beijing Founder Electronics in China and BenQ in Taiwan.

Quanta aims to boost its total shipments of clone notebooks to 350,000 to 400,000 units in 2004, up from around 200,000 units in 2003, according to sources close to Quanta.

Second-tier manufacturer Uniwill sells notebooks mainly to the clone market through channel distributors, and expects its notebook shipments to increase 38% on year to 1.6 million units in 2004, with revenues reaching NT$35 billion

Arima, which was previously one of the top four notebook contract makers in Taiwan, was looking forward to reaping the benefits from its efforts to penetrate the notebook PC clone market in 2004 after close to a year of testing the market, but first quarter revenues were down 11% on quarter and 55% on year.

However, Arima recently began shipping notebooks to China-based Amoi Electronics, and sources indicated that total notebook shipments to Amoi this year would reach about 20,000 units.

Arima is also likely to become one of Gigabyte Technology's contract notebook makers in Taiwan and the company has landed orders for 15-inch Centrino notebooks from Japan-based Sotec.

Own brand

Acer sold about 2 million notebook PCs and 1.5 million desktop PCs under its own brand in the global market last year. The company originally predicted shipments of 3.5 million notebooks for this year, but has raised the goal to 4 million due to better than expected sales in the first quarter. To be price competitive, Acer adopted outsourced services for making notebooks. Several Taiwan motherboard manufacturers have followed Acer’s lead and are now attempting to enter the notebook market.

Leading motherboard vendors Gigabyte Technology and Micro-Star International (MSI) are pushing sales of own-brand notebooks in China and Europe, and the two companies have adopted the same strategy of cooperating with as many Taiwanese notebook contract makers as they can, with each maker responsible for producing just one model.

Gigabyte has outsourced its G-MAX-branded notebooks to four makers, with First International Computer (FIC) making the NB-1401 series (a Centrino-based 14.1-inch model), Compal Electronics the N501 (a 15-inch model), Wistron the N601 (a 15.4-inch model) and Arima Computer the N512 (a Centrino 15-inch model), according to industry sources.

MSI has joined hands with US-based Averatec (formerly Sotec America) to promote ART-branded notebooks in China, with FIC supplying the ART 5100 (a Centrino-based 15-inch model), Twinhead producing the ART 3200 (an AMD-based model) and Uniwill making a 15-inch model, according to the sources.

MSI aims to ship about 300,000 own-brand notebooks in 2004.

Some Taiwan notebook makers, such as Clevo, focus their sales on own brand sales. Clevo set a shipment target of 600,000 notebooks for 2004, an increase of 20% over shipments in 2003. In light of growing sales in Japan and China, the company said it could sell as many as 700,000 units this year. Although Clevo’s revenues were down 14.6% on quarter in the first quarter of 2004, its sales were up 38.5% on year.

Asustek is the only major notebook maker in Taiwan that produces OEM, clone and own-brand notebooks.

The company shipped between 1.85 million and 1.9 million notebooks in 2003, more than doubling from 900,000 units in 2002 and moving the company past Wistron to rank as Taiwan's third-largest notebook maker.

In 2003, Asustek also shipped 650,000-700,000 own-brand notebooks, according to sources, which would have propelled the company past Gateway to rank as the world’s tenth-largest notebook vendor for 2003.

Asustek refrains from commenting on own-brand notebook shipments as it also contract manufactures notebooks for Sony, Samsung Electronics, Apple Computer and Medion.

Asustek aims to ship over one million own-brand notebooks in 2004, company sources said.

Source: company estimates according to sources, compiled by DigiTimes, January 2004.

Source: compiled by DigiTimes, April 2004.

About 54% of notebooks shipped by Taiwanese manufacturers in the first half of 2003 adopted Intel mobile CPUs and 28% adopted the leading chip vendor’s desktop processors – a total of around 82%. Advanced Micro Devices (AMD) was the second-largest CPU supplier, with processors in almost 14% of the notebooks, followed by IBM, whose PowerPC was in just 4%. VIA’s C3 was used in a negligible number of notebooks, although this may pick up if low-cost notebooks from a couple of the manufacturers take off.

Among the top 10 vendors, HP, Sony, NEC and Acer have all produced products with AMD processors.

According to sources, Intel began pressuring three Taiwanese companies in the beginning of 2004 not to launch new AMD notebooks, but the vendors – Acer, Asustek Computer and BenQ – seemed to stand firm on their decisions to launch notebooks built using the processors.

The companies believe that new AMD-based products are essential to their efforts to boost sales of own-brand notebooks in the global market, particularly in Europe, said industry sources.

While the US market is already controlled by leading vendors such as Dell and Hewlett-Packard (HP), Europe offers a better chance for Taiwan vendors to expand sales of own-brand notebooks, and consumers there seem to be more inclined to accept AMD-based models.

Buoyed by rising sales of AMD-based notebooks, Acer became the second-largest notebook brand vendor in Europe in the third and fourth quarter of 2003.

Asustek is using AMD-based notebooks to penetrate the European clone market, while BenQ is expected to launch its first AMD-based notebooks in the second quarter.

All three of the companies plan on launching both AMD's 32- and 64-bit processor based notebooks in the first half of 2004.

64-bit notebooks

Notebook computers with 64-bit processors could become mainstream within one or two years, ushering the industry into a new era and heralding a new battle among leading notebook vendors, according to sources at Taiwanese notebook makers.

Such a scenario could happen as prices of 64-bit notebooks drop to as low as US$1,500 per unit in the future, the sources said.

eMachines, which recently agreed to merge with Gateway, is the world's first PC maker to use the AMD mobile Athlon 64 processors for its notebooks, the M6805 and M6807 models, outsourced to Arima Computer.

The impact of 64-bit notebooks on the market will become more significant since Hewlett-Packard (HP) began delivering its entry-level notebook models, built using the AMD mobile Athlon 64-bit processors. HP outsources production of the entry-level models to Compal Electronics.

Two other Taiwanese PC makers, Asustek Computer and BenQ, are both gearing up efforts to promote their own-brand notebook PCs, and are expected to roll out their first 64-bit notebook PCs by the end of the second quarter.

Due to increasing supply and competition, many of Taiwan’s major notebook manufacturers have struggled to maintain their gross margins. As the manufacturers have moved production to China, international brand customers have been taking the opportunity to aggressively slash prices at every turn.

Apart from Clevo, the companies showing better margins since 2003 did so through the success of non-notebook products. Asustek’s gross margin of over 16% was largely thanks to its core motherboard business. Compal’s 7% came on the strength of other products, such as mobile phones and PDAs, for which gross margins can still be maintained at over 10%.

Source: companies, compiled by DigiTimes, May 2004.
*Based on unaudited monthly revenues.