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Matt Kovac

Taiwan's Quanta has landed a mega contract to make 15 million 'US$100' laptops

It was a major coup for the contract computer maker extraordinaire: Taiwan's Quanta Computer,  the world's largest notebook manufacturer, had won a contract to make up to 15 million notebooks, starting at the end of the year.

The sheer size of the order should have had the Quanta executives hopping  with delight -  the order is  the equivalent of almost a third of the number of laptops shipped worldwide last year.

But there were no  champagne corks popping. Why? Perhaps because the contract is for  Third World-style notebooks, the kind  dubbed the 'US$100 laptop'.

These low-end machines are the brainchild of One Laptop Per Child (OLPC), a United States non-profit organisation launched by Nicholas Negroponte of the Media Lab at the Massachusetts Institute of Technology. The idea is to provide low-cost laptops  for children and students in developing countries, such as China and India and across Africa.

That is why there is no celebrating yet. The contract should give Quanta plenty of work, but whether the order will significantly boost profits is the big question.

Quanta and other contract manufacturers are struggling with razor-thin profit margins, and it has not helped that Quanta  had disappointing  results  last year.

According to Nomura Securities, revenue for last year came in at NT$403 billion ($96 billion) with earnings of NT$10.9 billion, a net profit margin of just 2.7 per cent down from 3.7 per cent in 2004.

The squeeze is because the company makes machines for top brands like Hewlett-Packard and Dell, who are relentlessly cutting costs for the cash-conscious customer. This, in turn, has reduced  Quanta's margins to a whisper.

'There are many in the industry who say that it is a pipedream that Quanta will turn a profit from the low-cost laptop,' said Ulrich Krach, an analyst at brokerage Primasia in Taipei.

But Quanta chairman Barry Lam  is a master at generating profits out of cheap computers, and the new contract will present his greatest challenge so far.

In a recent interview, Mr Lam said the company's margins would not be far off what he made on other regular business models, and that the sheer volume of business could add US$3 billion to US$5 billion to Quanta's profits.

With sales like that anyone would be happy. But the perennial issue of razor-thin margins means there has to be more oomph in profits, not just sales.

Mr Lam is on the case with his small army of engineers and R&D personnel. A team at the Quanta Research Institute  has been working on the machine  for the past four months, and will continue to do so for the next two months.

'We still have to put a large amount of research and development into this,' a company executive said. 'Hopefully, we will be ready to make a finished product in the second half of next year.'

The notebook will require significantly less power, flash memory instead of a hard drive, a simplified keyboard and an operating system that will probably be based on Linux.

Instead of the usual  15-inch display, the mainland-manufactured laptop display will be less than 10 inches, and  the suppliers will be from the second- and third-tier range. This will help drive down the cost of the display from the usual US$200  to less than US$35.

'This would be a pretty bizarre-looking laptop,' Mr Krach said. 'But since the components cost twice as much as the machine, they will pressure the suppliers to cut costs.'

And this is exactly  the game plan. If Quanta succeeds - and it could, if the volume exceeded 15 million machines - it would probably try a similar tactic with other PC models to boost weak profits.

'The company feels it can leverage the US$100 laptop as a bargaining tool to drive costs down with all its component suppliers,' a senior analyst said.

Also, the project will use a microprocessor from Advanced Micro Devices (AMD), rather than from Intel. Quanta and other Taiwanese outsourcing specialists rely on AMD because of the frequency at which the US semiconductor maker launches new chips. This would make a difference in costs, but the way to truly  drive down costs is to use older technology.

Would this be enough to upset Intel? Probably not, but big customers such as Dell and HP might be a tad peeved,  especially if orders ratchet up in a big way. Both US PC makers want to expand sales in fast-growing developing economies, which is exactly where the US$100 laptop fits in.

But there is always the chance that Quanta could benefit further from a copycat machine for American PC giants who might want to jump on the bandwagon.

'They [Dell and HP] could be tempted to launch their own version of the US$100 laptop,' said  an analyst at a European bank in Hong Kong. 'There is no reason why Quanta wouldn't be their manufacturer of choice because of the experience and expertise it will have from building the OLPC machine.'

If the project succeeds in  busting through the digital divide, it could have a lasting impact on the commercial PC industry because of  its cost-cutting innovations.

OLPC is planning a launch of the commercial version - subject to the non-profit laptop taking off - probably some time next year.

Combining both versions would help achieve  the 200 million unit target, putting Quanta in pole position. 'The original designer manufacturer has always been a volume player, and that's why Quanta is building the machine,' Mr Krach said.



Quantum leap for notebooks