The Underdog Nipping at Quanta's Heels
In the ultracompetitive Taiwanese tech industry, few rivalries match that of Quanta Computer Inc. and Compal Electronics Inc. Both have the same focus: designing and manufacturing notebook PCs for other companies. The two compete for business from major laptop makers and count Dell Computer Corp. (DELL ) as their leading customer. And they're both diversifying into new markets such as cell phones and handhelds. To top it off, Quanta Chairman Barry Lam used to run Compal: He quit to launch Quanta in 1988, when Compal was reeling from a factory fire. "The company almost collapsed--and he left," says Compal President Ray Chen, still angry at the departure of his old boss.
The competition is about to get even fiercer. Since founding Quanta, Lam has built it into Taiwan's biggest producer of notebook PCs, while Compal has had to settle for second place. But now, Compal is coming on strong: Taipei brokerage KGI Securities PLC expects Compal to boost laptop sales by 70% this year, to 3.9 million units, compared with a 20% increase, to 5.2 million, for Quanta. KGI says Compal will see overall sales of $2.8 billion for 2002, up 30%, while it expects Quanta's sales to grow by 27%, to $4.1 billion.
Better yet, Compal's share price is surging. It's up by 10.4% since July, compared with a 24.9% fall for Quanta. Now, Chen isn't going to settle for also-ran status anymore. "We believe we are the best," he boasts. Lam isn't losing sleep. "Compal makes a lot of noise," he says. "It doesn't mean a lot."
The biggest driver of Compal's success has been Dell. In early October, the Texas dynamo announced its third-quarter revenue would grow 22% from last year. While that's good news for both Taiwanese rivals--Dell accounts for about half of sales at each--Compal has benefited more, says UBS Warburg analyst Sharon Su. The reason: Dell has made a strong push into consumer PCs this year, and the bulk of Compal's sales to Dell are consumer machines. Quanta concentrates on corporate laptops, a sector that remains weak.
Another competitive edge for Compal is its expansion into China. Since early last year, Compal has been making computers on the mainland, where costs are about one-third what they are in Taiwan. Now, Compal makes 60% of its notebooks in China. Quanta, meanwhile, leased a small China plant last year but didn't open a big factory until July.
Still, Compal has a way to go before it can topple Quanta. KGI analyst Angela Hsiang points out that Quanta serves 9 of the 10 biggest notebook makers. Compal, in comparison, focuses largely on Dell, Toshiba, Hewlett-Packard, and Apple. And, she says, with Quanta's new plant coming on line, Compal can't rely on its head start on the mainland much longer. "Quanta will catch up in China," she says.
The Quanta-Compal competition now extends beyond laptops. Compal makes handsets for Motorola Inc. (MOT ) as well as up-and-coming Chinese players such as Eastcom Corp. and Haier Corp. By next year, Chen says, phones will account for 25% of sales, up from 10% today. And like Quanta, Compal has diversified into liquid crystal displays. It has a $1.1 billion venture with Taiwanese foodmaker Uni-President Enterprises Corp. to produce the tiny screens used in next-generation cell phones and handheld computers.
It's a risky move, given the volatility of the phone business, but Chen is convinced the bet will pay off once the industry's funk lifts. "Next year, when there's a shortage in the market, [LCDs] will be a very strong advantage," he says. And nothing gives Chen more pleasure than gaining an advantage over Barry Lam.
By Bruce Einhorn in Taipei, with Susan Zegel in New York