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HP, Dell, and Cisco Face Threat of Cheap Servers From Their Suppliers

The old guard’s manufacturers are getting into the game
Quanta’s factory in Taiwan’s northern Taoyuan County
Quanta’s factory in Taiwan’s northern Taoyuan CountyPhotograph by Sam Yeh/AFP via Getty Images

The risk of relying on another company to make your product is that at some point it will start selling its own version without you, at a discount. Now it’s happening to Silicon Valley, as contract manufacturers that tech companies rely on to build high-end computing hardware sell servers directly to customers. In some cases, the manufacturers are making use of the Open Compute Project, a collection of relatively cheap, energy-efficient data center designs shared online by a group of companies, led by Facebook. This has been a boon for customers that need lots of inexpensive servers—such as Facebook—and bad for established IT brands such as Cisco Systems, Dell, and Hewlett-Packard.

The generic servers, which don’t require expensive R&D or licensing fees, typically cost one-third to two-thirds less than those of the big brands. Customers have noticed: Leading generic manufacturers, including Taiwanese computer maker Quanta Computer and Fremont (Calif.)-based IT equipment specialist Synnex, made one in seven of the 8.8 million servers shipped globally last year, researcher IDC estimates. That’s triple what they made three years earlier, when they mostly did contract work for the HPs and Dells of the world. Mike Yang, who runs Quanta’s U.S. subsidiary, says his company saw demand for this type of data center equipment rise almost tenfold this year from 2013 but declined to elaborate.