US embassy cable - 04TAIPEI4051

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 004051 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 12/21/2014 
TAGS: ECON, EINV, EIND, CH, TW, Cross Strait Economics 
SUBJECT: LENOVO/IBM DEAL MEANS BUSINESS AS USUAL FOR 
TAIWAN'S IT INDUSTRY - FIERCE COMPETITION 
 
Classified By: Classified by AIT Director Douglas H. Paal, Reason 1.5 ( 
D) 
 
Summary 
------- 
 
1. (C) In the short term, Taiwan's information technology 
sector will not feel much impact from the Lenovo acquisition 
of IBM's PC division.  However, over time Lenovo's increased 
bargaining power will increase competition among Taiwan's 
contract PC manufacturers and component suppliers.  Some 
Taiwan suppliers may have difficulty working with Lenovo 
because of concerns about trade secrets and Lenovo's approach 
to business.  Taiwan's own PC brands are ready to compete for 
former IBM customers and are not ready to concede any ground 
in the PRC's domestic PC market.  End Summary. 
 
Short-Term Impact ) Business as Usual 
------------------------------------- 
 
2. (U) The main impact in Taiwan of Lenovo's acquisition of 
IBM's PC manufacturing division will be felt among the firms 
that manufacture PCs on contract and supply components to 
IBM, Lenovo and their competitors.  In the short term, most 
firms and analysts expect little change.  Lenovo has 
indicated that it will not change IBM or Lenovo suppliers in 
the near future.  This is consistent with industry experience 
after other mergers, such as the HP's takeover of Compaq. 
Lenovo's current contract PC manufacturers include Wistron 
Co., Quanta Computer Co., Compal Electronics and Mitac 
Technology Co.  Wistron and Quanta also supply IBM, as does 
Hon Hai Precision Inc.  Lenovo's major Taiwan component 
suppliers are Elitegroup Computer Systems Co., Micro-star 
International Co., and Giga-byte Technology Co.  In addition 
to Elitegroup and Giga-byte, IBM's major suppliers include 
Universal Scientific Industrial Co. 
 
Long-Term Impact ) Pressure on Suppliers 
---------------------------------------- 
 
3. (U) As Lenovo integrates the newly acquired IBM operations 
with its own, it is likely to reduce gradually the number of 
contract manufacturers and suppliers.  The effects of 
consolidation should start to appear in the second half of 
next year.  Component suppliers will face pressure to lower 
prices due to Lenovo's greater bargaining power.  Analysts 
expect Taiwan producers of motherboards to be particularly 
strongly affected.  According to media reports, some 
suppliers in Taiwan -- including Hon Hai Precision, Taiwan's 
biggest electronics company by sales, and Asustek Computer 
Inc., the world's biggest motherboard supplier -- are well 
positioned to increase orders.  Other firms such as Wistron, 
which have been key suppliers to IBM, are particularly 
vulnerable.  Wistron produces about half of IBM's laptops, 
and IBM sales account for 30 percent of Wistron's revenue. 
 
4. (C) However, Quanta's Deputy Group Spokesman, Jason Lin, 
told AIT/T that many Taiwan contract manufacturers and 
component suppliers are waiting to find out whether Lenovo's 
manufacturing strategy will focus on in-house manufacturing 
or outsourcing.  According to Lin, many Taiwan producers 
don't trust Lenovo.  He says that Lenovo has spread its 
contracts among many different firms and has made excessive 
demands to view manufacturing processes.  Some producers fear 
that Lenovo wants to steal trade secrets to improve its own 
manufacturing ability.  Jonathan Tsang, President of 
Asustek's Sales and Marketing Group, echoed Lin's concerns in 
a conversation with AIT/T econoff.  He emphasized that 
Asustek is very selective about the firms that it chooses to 
partner with, pointing out that it had turned down offers to 
supply components to Compaq and Nintendo.  He expressed 
respect for the way IBM does business and concern about 
Lenovo's approach, speculating that Asustek would have 
problems working with Lenovo. 
 
Long Term Impact ) Competition for Taiwan's Brands 
--------------------------------------------- ----- 
 
5. (SBU) Most analysts predict that while the Lenovo/IBM deal 
will strengthen Lenovo's position in China, it will lose some 
IBM customers throughout the world due to quality and service 
concerns.  As a result, Taiwan's own PC brands such as Acer, 
BenQ, and Asustek may lose market share in the domestic PRC 
market.  Nevertheless, Asustek's Tsang told AIT/T that his 
firm, which has the sixth highest market share in the PRC 
laptop computer market, still expects to double laptop sales 
in the Mainland in 2005 just as it doubled sales in 2004. 
 
6. (SBU) Taiwan firms are also ready to compete for IBM's 
former customers in other markets.  Acer in particular is 
well placed to increase sales in Europe and the United 
States.  In Taiwan's internal market, domestic brands stand 
to substantially expand market share.  HP Taiwan's Personal 
Systems Group General Manager Dennis Chen told AIT/T that in 
Taiwan's commercial PC market, Acer, which has the second 
highest market share, will move aggressively to pick up 
former customers of IBM, which has the third highest share. 
Asustek and Acer, numbers one and two in Taiwan laptop sales, 
stand to gain customers from number three IBM in that market. 
 But according to Chen, BenQ, a relative newcomer, is 
particularly well placed to make gains in the laptop market 
since a former IBM Taiwan General Manager joined the firm a 
few months ago. 
 
7. (U) Because IBM's main competitors internationally, 
especially HP and Dell, stand to gain market share, Taiwan 
suppliers to these firms stand to win as well.  Quanta, for 
example, could lose its sales to IBM, which account for about 
two to three percent of Quanta's laptop sales.  However, it 
may be a net winner if Dell and HP, which account for more 
than half of Quanta's sales, gain new customers. 
 
Opportunity for Taiwan? 
----------------------- 
 
8. (C) In the past few years, there has been much public 
discussion about the need for Taiwan's firms, which have 
clearly demonstrated their ability to compete internationally 
at manufacturing high-tech products, to increase earnings by 
developing their own brand names.  Asustek, BenQ and 
especially Acer have made progress in this area.  According 
to Quanta's Lin, IBM offered to sell its PC division to at 
least two Taiwan firms, but both turned IBM down.  Lin told 
AIT/T that even after cutting the price in half to about the 
same price Lenovo paid, the Taiwan firms were still not 
interested.  Analysis in Taiwan reflects skepticism in the 
U.S. that Lenovo will be able to overcome the challenges that 
stand in the way of a successful acquisition.  Taiwan firms 
passed on the chance to buy IBM's PC division and take 
advantage of the IBM brand, but the IBM/Lenovo deal may 
present an even better opportunity for Taiwan firms to 
enhance their own brand names. 
PAAL