Quanta's Quantum Leap

The Taiwan notebook maker's business could surge by 50%

When the U.S. halted air traffic for three days after the September 11 terror attacks, one of the many companies around the world caught in the downdraft was Quanta Computer Inc. With American airspace closed, the Taiwan contract manufacturer to Dell (DELL ), Gateway (GTW ), Hewlett-Packard (HWP ), Apple (AAPL ), Compaq (CPQ ), and others couldn't get its notebook PCs across the Pacific. Finished computers were piling up in Quanta's cavernous warehouse in Linkou, 20 kilometers from Taipei. In the end, Quanta's managers improvised. They loaded thousands of notebooks on a plane leased by Dell Computer Corp., which flew them to Texas. And how did Quanta end up faring during Black September? Sales rose 20% year over year.

Even as other computer makers endure the worst crash in high-tech history, Quanta is on a roll, riding global demand for notebook computers to record double-digit sales increases. This year, it became the world's No. 1 producer of notebook PCs, passing Toshiba. "It's definitely a world-class company," says Tim Ariowitsch, an analyst with Goldman, Sachs & Co. in Hong Kong.

The force at the top of this Asian powerhouse is Barry Lam, Quanta's chairman and founder. Lam made the company what it is by building a supply-chain-management system that in the notebook computer industry is second to none. To be sure, superstar Dell Computer Corp., which accounts for half of Quanta's sales, is the global master of just-in-time manufacturing and has pushed Quanta to maintain a high standard. But Dell's mobile-PC business didn't take off until it started working with Quanta's design and manufacturing team. Today the Austin (Tex.)-based PC maker relies on the Taiwanese company to produce 55% of its notebooks. With Dell and others steering more work Quanta's way, the company predicts revenues will jump as much as 50%, to $3.6 billion this year. Merrill Lynch & Co. analyst Tony Tseng says profits will rise 30%, to $320 million.

SHRINKING MARGINS. Quanta has the good fortune of being in the only hot segment of the computer business. According to International Data Corp., total PC sales in 2001 will shrink 10%. But notebooks are heading in the other direction, with International Data Corp. projecting sales growth of 9% this year as companies and consumers continue to move away from clunky desktops. And Taiwan makes about 60% of the world's notebook PCs. Worldwide, one out of every seven notebook PCs comes from Quanta's factories.

In the next few months, however, Quanta is likely to be tested as never before. Notebook sales cannot defy gravity forever, and other Taiwan manufacturers are copying Quanta's innovations in managing production and logistics. Quanta's operating margins, which are now about 10%, compared with 18% a few years ago, are likely to continue to erode as competitors nip at Quanta's dominant position. For instance, local rival Arima Computer recently grabbed a big Compaq order from Quanta. And the proposed merger of Compaq with Hewlett-Packard should lead to even more price-cutting.

Moreover, other Taiwanese companies such as Acer Inc. (ACEHF ) have thrived as contract manufacturers, only to lose their footing as they reached for the next level. Ominously, Quanta's diversification strategy is looking shaky. The company's forays into mobile phones and Internet devices have yielded little profit. And the global tech recession has dampened demand for liquid-crystal display screens just when Quanta has invested $153 million in a 31%-owned affiliate that makes the thin displays.

CLEAN HANDS. So to stay competitive, Quanta is selling itself as the contract manufacturer that does it all. By using Quanta's manufacturing and logistics system, customers can farm out the whole messy process of production and delivery without getting their hands dirty. Companies such as Dell still keep some of the customizing work in-house, but others are willing to let Quanta handle that, too. Many clients "don't even see the computer," says production chief T.J. Fang. "They just sell their brand and collect the money."

One of those is HP. In 1999, it was on the verge of shutting down its notebook division when it decided to try Quanta. Now, the Taiwan company does just about everything for HP's notebook unit, from putting together hardware to installing software to testing the final product and shipping to customers--all in less than 48 hours. Outsourcing to Quanta "saved our business," says Jim Burns, HP's supply-chain director for notebook operations. "It was the biggest turnaround in HP's history."

The Net has a lot to do with why Quanta can fulfill HP's orders in just two days. Not long ago, brand-name computer companies placed a few big orders for thousands of one-of-a-kind PCs with Taiwan contractors, who assembled and delivered them over the course of weeks. But now, thanks to Web connections, orders flow 24-7 and consumers have greater freedom to customize than ever before. "We used to have one purchase order for 1,500 computers," explains Ted Wang, a deputy director on Fang's team. "Now, we have one purchase order for each machine." A year ago, Quanta promised to ship a computer within 72 hours of getting an order. Today, that's down to 48 hours. And 24 hours is the near-term goal.

Tracking all the orders in time requires constant updating of Quanta's supply-management technology. A year ago, it took almost one working day for Quanta's production engineers to determine whether they had enough components on hand to fill all the orders they had received. Now, that's a one-computer job that takes two and a half hours. Relying on forecasts from customers, as well as in-house estimates, Quanta puts out a 13-week schedule for its suppliers that it updates daily on its extranet. But sometimes even the best forecasts are off. "If any supplier has a problem," says Danny Lin, one of Quanta's top production managers, "it will destroy your plan." Then Quanta's managers have to make urgent phone calls to vendors, demanding that they rush over parts that afternoon.

LEFTOVERS. That puts pressure on suppliers, both big and small, as Panasonic Industrial Sales (Taiwan) Co. can attest. Panasonic supplies Quanta with DVD drives, batteries, and capacitors. By working more closely with Quanta, it has cut inventory levels in half, to 15 days. Still, if Quanta gets its forecasts wrong, Panasonic gets stuck with the leftovers, says Richard Shiao, general manager for info-tech systems at Panasonic Taiwan. "Unfortunately," he says with a weary smile, "we are the vendor."

Can Quanta keep leading a charmed corporate life? There's no guarantee--even for next year. The tech slowdown may eventually hit notebooks, and while outsourcing will likely increase, it's unclear how much more business Quanta can attract. "It already has all the major clients," says Merrill's Tseng. Worried about losses on the LCD investment, he sees no earnings growth in 2002.

In the longer term, Quanta faces a challenge from China. So far, Legend Holdings Ltd. and other Chinese companies have thrived in desktops but not notebooks. But that situation is unlikely to last. To keep its lead, Quanta is building up its Taiwan-based R&D team--from 750 now to 2,000 by 2005--so that customers can outsource more of their design work to the Taiwanese. Another answer to the China question, Quanta execs say, is to take the just-in-time model to the mainland. Taiwan's government prohibits notebook companies from doing full assembly work across the Strait. But once Taipei lifts the ban--which is expected to happen soon--Quanta "will be very, very quick" to set up a Chinese production base, says Tim Li, Quanta's CFO. That could cut costs by 3%, a significant savings in an atmosphere of shrinking margins.

Chairman Lam knows he has no time to rest. He sees Quanta moving from its current 48-hour turnaround to 24. Getting there may involve distinguishing between ordinary orders and rush orders, says HP's Burns, who wants one-day turnaround by yearend. So far, Quanta has fought off the effects of the worst tech downturn in history. What happens next will determine whether Quanta retains its title as Laptop King.

By Bruce Einhorn in Linkou, Taiwan

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