NB component matters in 2010, integration will be accelerated

TAIWAN: According to DRAMeXchange, given the new products launch by OEMs, demand for components has been elaborated and we believe supply chain issue will impact on the shipment schedule.

With the emerging competition from EMS, ODMs will face more price challenge. That is, DRAMeXchange think component control and supply chain management will be determined in 2010 and more integration or strategic alliance will show up latter this year.

According to DRAMeXchange, given the rising component cost and EMS competition, ODMs will speed up the supply chain integration at the purpose of profit maintaining. Also, capacity of component vendors has been stunk from 2H07 to 2009, which result in the tight supply facing the recovering demand.Meanwhile, both ODMs and component vendors face the labor shortage issue in costal area of China. The mix of labor and component shortage has impact on the shipment schedule.

As per DRAMeXchange, ODMs has aggressively approach component integration from last year and try to enhance total supply chain management. With the M&A or equity investment in small component vendors and JV (joint venture) with large scale component vendors, ODMs try to secure the component supply, increase the self-sufficiency and raise bargain power.

Current integration case are most lied in mechanical parts ( such as casing, connectors and passive components). Since key parts procurement is still controlled by OEMs, we believe ODMS will try to provide competitive price in leverage with the synergy of component integration. Small scale component vendors will receive the stable orders from ODMs while large independent vendors will face the risk of order re-allocation or lower margin.

EMS vendors also initiate the NB production penetration at the leverage of their component cost competitiveness. However, since EMS vendors still lack of new case development and product design capability, OEMs only release netbook and other “ticket” regular notebook orders to EMS.

DRAMeXchange expects EMS will eventually turn to the potential threat to ODMs once product design capacity is fully equipped. Meanwhile, ODMs will also accelerate the speed on component integration to enhance the cost control.

Influence by the declining NB ASP, OEMs face the great challenge in margin maintain. OEMs tend to transit price pressure to ODMs. Key component (i.e. CPU, memory, HDD, panel, etc) procurement power still lies in the OEMs while “Consign-In” and “Buy&Sell” will be used on key part procurement negotiation.

Key components account above 70 percent of total cost while OEM also be fully aware of non key component price structure. That is, ODM margin is strictly limited to certain level. ODM’s average GP margin is 5-6 percent and only can be raised by economic sales enhancement and expand product lines to other products such as LCD-TV.

According to DRAMeXchange, 5-15 percent shipment impact is determined by the supply shortage issue. Since NB shipment is expected to be near 30 percent in 2010, currently we see the double-booking volume from ODM are around 20-25 percent.

Given the long lead time that component vendors have and less movement in aggressive capacity expansion, any extra urgent demand will deepen the challenge of supply management. That is, we think the supply tight circumstance will become more challenging if component vendors can not fulfill the demands from the end demand. However, it worth the concern on end market sales. The inventory adjustment pressure will likely turn to the serious issue if there’s any accidents in macro economy.


Besides the component shortage, labor shortage also impact on the industry. Most of ODM manufacturing facilities are located at the costal area of China such as Shanghai, Kunshan, Suzhou, and Taizhou. However, given the minimum wage enhancement law enforced by China government in 2010, the rising labor cost will impact on the cost control.

DRAMeXchange see more damage on component vendors due to:

1) Comparably higher labor cost portion for component vendors rather than ODM vendors;
2) Component vendors are unlikely match to the welfare and salary provided from ODMs due to comparably small company scales;
3) Component vendors will be likely forced to move as ODMs move to the area with lower labor cost. Meanwhile, surging metal cost will also increase the possibility for cost increase.

At the end market, DRAMeXchange thinks that many OEMs will likely adopt aggressive pricing strategy due to the less product differentiation. Besides HP and Acer, other OEMS will also launch better cost/performance NB to grab more market share. That is, the used communication on component price and assembling fees will be way different from the past. 2010 will be determined to be the very challenging years for NB industry.