Compal-Lenovo JV is a Global First Between PC Brand and ODM

To build order security and tap new opportunities, Compal Electronics Inc., one of the world’s two largest notebook PC manufacturers by shipment, has announced a joint venture with Lenovo, the largest PC brand in China, setting up the first partnership globally between a PC brand and its ODM (original design manufacturer).

Seeing bright growth prospects in China’s IT product market motivated Compal to set up the joint venture, said spokesperson Gary Lu, with Lenovo investing US$51 million initially and the remainder by Compal. The venture will be established in China’s eastern industrial city of Hefei to turn out desktop, notebook and all-in-one PCs by the end of 2012, including another US$200 million investment bilaterally later on for output expansion.

Industry insiders said that Lenovo had been hatching the partnership for some time. Lenovo likely realized, since moving up to the No.3 notebook PC brand globally by market share early this year, that it would be savvy to tighten relationship with Compal and hence fully tap the ODM’s capacity, especially in its pursuit of the world’s No. 2 brand by the end of the year and then the throne later.

Also Suffering
Compal has been suffering alongside other PC manufacturers amid the souring global market for notebook PCs this year, sapped partly by tepid consumer demand due to apprehensive economic outlook, and partly to replacement of traditional laptops by tablets PCs and smartphones.

Affected by sluggish consumer demand, Compal cut its notebook PC shipment forecast for this year to 48 million units from the previous projection of 50-55 million units for a flat growth compared to a year ago, confirmed by its president Ray Chen at an investor conference in April. The adjustment came after an earlier forecast by Chen that global notebook PC shipment growth will sag to 10% in 2011 from between 20% and 25% seen in the past, the result of cannibalization of tablet models.

Deterioration of the market has forced Compal to again reduce forecast of notebook PC shipment in the second half to only 42 million units, with netbook PCs to account for 5 million units, which industry insiders attribute in part to business downturn of its major customer, Acer Inc., which has not stumbled as badly this year since the global financial tsunami to fall to the fourth place globally in the second quarter.

To cope with an increasingly challenging market, Compal has been improving its product mix and partnering with Lenovo helps to secure stable orders that will rebuild business growth.

Mixed Evaluations
While the Royal Bank of Scotland, Taiwan has rated the Lenovo-Compal joint venture negatively due to the current oversupply of IT products, other institutional investors, however, regard it an effective means to keep Compal’s PC shipment growing.

Among Compal’s three biggest customers—Acer, Lenovo and Dell, whose orders make up 30%, 20% and 18% of its overall notebook PC shipments, Lenovo seems the ideal joint venture partner, backed by brand value and ambition, considering Acer’s disastrous fate this year and Dell’s pessimism towards the global market.

Institutional investors say the joint venture with Lenovo makes practical sense for Compal as it switches attention away from Acer, especially when Lenovo dominates the world’s largest PC market—China—and will likely challenge Hewlett-Packard’s lead in the global market by 2013 or 2014, with the partnership to offer certain potential to drive Compal’s notebook PC shipment.

Nightmare Realized
As if suffering drastic downturn were not enough, Acer’s nightmare has come true in the Compal-Lenovo partnership. Besides squeezing Acer out of the top-three PC brand ranking, Lenovo has also sprinkled salt on Acer’s misfortune, said industry insiders, by poaching Lanci Gianfranco, Acer’s ex-CEO, who has disclosed the ambition to take over Acer’s distribution network he had helped build in Europe.

Most in Taiwan’s PC industry agree that Compal owes its rise over the past few years to Acer, whose considerable notebook PC orders helped the contract manufacturer score annual shipment of 37.9 million notebook PCs to unseat Quanta Computer Inc. to lead as the largest supplier of its kind in 2009. However the Compal-Lenovo partnership may motivate Acer to switch some orders originally pegged for Compal to other suppliers, though Compal stresses that its relationship with Acer remains solid.

Repercussion
The Compal-Lenovo alliance is also worrying the Chinese brand’s other contract manufacturers as Quanta and Wistron Corp., who may be locked out the customer’s supply chain, especially for all-in-one PCs.

Lenovo’s all-in-one PCs are mainly manufactured by Quanta and Wistron, with small quantities by Compal and Taiwan-based TPV-Inventa Technology Co., Ltd., a joint venture between Inventec Corp., a globally top-five notebook PC supplier, and TPV Technology Ltd., the world’s largest TV maker. The Chinese PC brand shipped 1.3 million all-in-one PCs as the world’s second-largest supplier last year, trailing Apple Inc. and is expected to deliver some 1.8-2 million units this year.

Easing anxiety among suppliers, Lenovo won’t cut orders to any of them, stresses Justin Liang, general manager of Lenovo Taiwan, saying the company still counts on these suppliers to produce all-in-one PCs and tablets. Liang adds that Lenovo’s business has been growing steadily, so the company will not likely slash orders due to the partnership with Compal, and instead will raise orders to fuel growth.

Reports are that Lenovo has already ordered from Wistron commercial desktops and notebook PCs for sale next year, proving its alliance with Compal is not impacting other suppliers in the short term.

Lenovo's Global Market Share
Period	Q2,2011	Q1,2011	Q4,2010	Q3,2010	Q2,2010
PCShipment Volume	10.225million units	8.315 million units	9.482 millionunits	9.173 million units	8.349 million units
MarketShare	12%	9.7%	10.1%	10.3%	10.0%

Source: Gartner Inc.

Lenovo'sMajor PC Contract Manufacturers
Company	Main Product Supplied	Proportion
CompalElectronics Inc.	IdeaPad	30-35%
WistronCorp.	ThinkPad	30-35%
QuantaComputer Inc.	IdeaPad	10-20%

Source: institutional investors