LENOVO/IBM DEAL MEANS BUSINESS AS USUAL FOR

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
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