Notebook ODMs demanding upstream supply chain shares cloud costs
Aaron Lee, Taipei; Joseph Tsai, DIGITIMES [Monday 4 November 2013]

To increase profits, some notebook ODMs have recently started demanding their upstream component partners share the costs of their jointly developed cloud computing projects. Most suppliers have chosen to pay due to the pressure of losing orders from ODMs, according to sources from the upstream supply chain.

Since such a trend is gradually expanding in the notebook industry, the sources are concerned that if other ODMs follow suit, it will greatly damage their profitability.

The sources said that the ODMs are also demanding suppliers, which are not involved in the cloud computing industry or have landed their orders directly from brand vendors, to also join their cost sharing programs.

The sources pointed out that notebook ODMs are currently facing great pressure on gross margins. Quanta Computer’s gross margins for the first three quarters were down 0.35pp on year to only 4.36% and Compal Electronics’ were down 0.09pp to 4.03%. Wistron and Inventec also had trouble surpassing 5% for the first three quarters.

In addition, as Lenovo and Samsung Electronics are both shifting back their orders for in-house production, the ODMs are expected to see order volumes drop significantly in 2014.

Labor costs have also become a heavy burden for the ODMs. 10 years ago, labor costs only accounted for 5% of product prices, but the percentage has already risen to 10%. Since product prices are also dropping, maintaining stable gross margins has already become a challenge.

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