Inventec_Wednesday

CASE STUDY:INVENTEC

CORPORATION

Fiona Chia Wei Lin .Frank Poh .Jiang XinYan .Neo Li Yun Yvonne.Ng Ee Huang Yvonne. Ng Yi Hui Kyna

AGENDA1. Introduction2. Drivers of profitability of ODM Industry 3. Factors accounting for Inventec low

profitability4. Key factors for above-average profits5. India software VS China ODM6. Strategic advice

Introduction

Introduction Q2: Drivers of average profitability

Q1: Factors accounting for Inventec’s low profitability

Q4: Indian SoftwareIndustry

Q3: Key factors to be managed

Q5: Strategic advice

DEFINITIONS

Original Equipment Manufacturer (OEM) – Brand firms, the original manufacturers prior to outsourcingE.g. Hewlett-Packard, Dell, Apple Original Design Manufacturing (ODM) – The designing and manufacturing of electronic products for client companies (OEMs) that market them under their own brand

Electronics Manufacturing Services (EMS) – Manufacturing of electronic products based on clients’ designs

ODM firms usually own the intellectual property rights to their designs.

Introduction






1975 Began as contract

manufacturer of

telephones &

calculators

1991Began shifting some

operations to China

1996IPO on

Taiwan’s stock

exchange

1999Established

4 subsidiaries

to specialise in various industries

2004Nearly 27,000

employees worldwide,

revenue exceeding

$6 billion

Introduction






Summary of the Case

• Inventec is part of the ODM industry that started with the proliferation of motherboard companies in Taiwan during the 1980s.

• Over time, manufacturers added design staff so they could add more value and increase margins.

• Eventually they were designing entire computers, then computer peripherals (servers, cameras, mobile phones, PDAs, MP3 players)

• Since the 2001 easing of Taiwan government restrictions of high tech investment in China, all major ODM firms had shifted some of their operations to China due to lower operating costs.

• In 2005, in at least 10 Taiwanese PC factories in and around Shanghai, thousands of PCs were produced daily.

Introduction






Problems Inventec faced• Fierce competition in a saturated industry• Increasing labour costs due to higher demand for Chinese

engineers• Notebook PCs became the mainstay of Inventec since 1995, but

gross margins had dropped below 4% by 2004• Inventec was excessively reliant on HP-Compaq’s business, which

accounted for 75% of Inventec’s notebook production in 2004

LOW PROFIT MARGINS

ODM Industry






What are the drivers of the average profitability of the Original Design and

Manufacturing (ODM) industry?

ODM Industry






ODM Industry Profitability

Bargaining Power of Buyers

Rivalry Among Existing Firms

Threat of New Entrants

Threat of Substitute Products

Bargaining Power of Suppliers

ODM Industry






Rivalry Among Existing Firms : High

• High competition as existing firms compete for the same client pool, which often awards contracts on a split basis

• Industry is fragmented and firms engage in serious price competition• Contract only lasts for the product life cycle which makes the switching cost

for clients low

ODM Industry






Threat of New Entrants : Medium

• Low due to high barriers of entry from exploitation of large economies of scale and the low profit margin within the industry does not serve as an attractive incentive for new entrants

• However, EMS firms are making their transition into the ODM market and do have the necessary knowledge to leverage on

ODM Industry






Threat of Substitute Products : N.A.

• Irrelevant to the ODM industry

ODM Industry






Bargaining Power of Buyers : High

• Generally low switching cost for OEMs as technology only lasts for that particular life cycle

• Price sensitive as PC industry had matured and end consumers are less brand-influenced

• Consolidation among OEMs and reduced reliance through multiple partnerships have increased their bargaining power

ODM Industry






Bargaining Power of Suppliers : High

• Labour and component parts are the major costs for an ODM firm• More and more organizations (including ODM firms) have shifted operations

into China, leading to substantial increase in demand for engineers• Microsoft and Intel had almost exclusive share of the operating system and

the processor industry, ODM firms have little bargaining power

ODM Industry






ODM Industry

Profitability


*HIGH*


*HIGH*

Threat of New Entrants

*MEDIUM*Threat of Substitute ProductsBargaining

Power of Suppliers*HIGH*

Inventec’s Low Profitabilty






Despite its growth and size, why is Inventec not very profitable?







Industry-related Factors

Competitive nature of ODM industry• Players have to constantly underbid each other to win design and

manufacturing contracts from a handful of PC firms• EMS firms are also competing for the same client base.

OEMs reticent about their ODM use• Some OEMs fear that too much outsourcing can risk their reputations• Fear of losing control over intellectual property• Fear of ODM firms becoming direct competitors (BenQ and Motorola)







Industry-related FactorsClients of Inventec are in extremely competitive industries• Notebook computers, the single largest ODM product, had poor profit margins of 3-4%

in 2001, and below 1% for second tier ODMs• Louis Woo, senior advisor for Inventec, “Our customers have been squeezed left and

right. The only way they can do business is to squeeze us.”

Difficulty in establishing product differentiation for notebook PCs• Technology of PCs was in the processor and OS (Intel and Microsoft)• ODM firms were unable to produce any meaningful differentiation, and forced to rely

on low costs to attract customers







Company-related FactorsOver-reliance on HPQ• Until 2002, Compaq had been Inventec’s only notebook client• In 2004, HP-Compaq still accounted for 75% of Inventec’s notebook production• But, HPQ distributed its manufacture of notebooks amongst 4 ODMs (Arima, Asustek, Compal, Inventec)• HPQ relied on aggressive pricing strategies

Failure in building up meaningful relationships with its OEM clients• In 2004, initial exclusive production of iPods spread out to 3 ODM firms• Loss of Cisco’s phone business to a competing ODM• Inventec did not fare well in establishing and maintaining meaningful relationships with its OEM clients, thus resulting in low switching costs for them







Company-related FactorsFailure in capitalising on its strengths• Inventec executive C.W. Lin, “Software is our strength. The core of our product is

the software that provides differentiation.”• However, Inventec seems to have failed to fully capitalise on its software

expertise to differentiate itself

Failing to develop a low cost strategy that is sustainable• With the 2001 easing of Taiwan govt restrictions, ODM firms moved into China• All firms adopted the same cost structure






Key Factors

What are the key factors that a company like Inventec needs to manage to earn above-average

profits in this industry?






Key FactorsCost

Enjoy higher margins

Price elastic demand – increase sales volume

Might trigger price war






India Software Industry

Why is the Indian software industry, on average, so much more profitable than the

Chinese ODM industry?







Started Mid-20th Century World's top 5 Software Supplier, second only

to U.S. Fastest-growing software industry

According to rankings by the World Bank, Size of India's software exports, Quality and Cost composite index – Ranked First in the world







Indian Software Industry



Threat of New EntrantsThreat of

Substitute Products



Rivalry Among Existing Firms : Medium

• Industry is concentrated, with a few publicly listed firms leading the industry

• Less head-on competition as services are customer-specific Software is designed to suit client requirements







Threat of New Entrants : Medium

• High capital outlay Lowers threat

• Government policies encourage growth of industry Increases threat• However, high abnormal earning profits together with government efforts to

develop the industry increases its attractiveness of the industry







Threat of Substitute Products : N.A.

• Generally not applicable







Bargaining Power of Buyers : Low

• Quality Assurance and ISO9000 authentication• High switching cost for buyers as they require customised applications and

maintenance Lowers buyer power• Less price sensitive as product is unique to the requirements of the buyer







Bargaining Power of Suppliers : Medium

• Labour forms the major cost for the Software Industry• India Education system focuses on Communication & Math Skills – essential

for software industry

• Abundance of highly-skilled engineers Lower supplier power

• But talented engineers are non-substitutable Increase supplier power






India Software v.s. ODM Industry

ODM Industry Profitabi

lity

Bargaining Power of

Buyers*HIGH*

Rivalry Among Existing

Firms*HIGH*

Threat of New

Entrants*MEDIUM*


Bargaining Power of Suppliers*HIGH*






Indian Software Industry

Bargaining Power of

Buyers*LOW*

Rivalry Among Existing

Firms*MEDIUM*

Threat of New

Entrants*MEDIUM*



*MEDIUM*

Strategic Advice






What strategic advice will you give Inventec to improve its profitability?

Strategic Advise






Enter new PC Market• Target Rural China (80% of the population)• Untapped Market

Build up Brand for Non-PC/Laptop products• Inventec’s best seller in local market – Electronic dictionary• Inventec software focused on multimedia educational programs specializing in language

training

Provide Consulting services• Help companies create Customised Software Solutions• Design Information System & Manage IT operations and resources• E.g. IBM

Focus on Software development• Separate its proprietary software from hardware products• Provide customised software that is designed to meet clients' needs

Cost Benefit

Sell at Lower price Bigger market size

Lower Profit Margin Greater quantity

Risk Brand dilution Increase brand awarenessCost BenefitMarketing Cost Less risky compared to increasing

proportion of branded sales which may risk alienating its own clients

May incur additional R&D cost Build on its strength in Multimedia educational programs

Less Demand for electronic dictionary compared to Demand for PC

Avoid competition with Lenovo, Toshiba or HP-Compaq in the saturated PC market

Cost Benefit

Marketing cost Alternative source of revenue

Additional Labour cost Has the Expertise and labour to provide such services

Cost Benefit

Additional R&D cost for developing or personalizing new Software

Experience in developing software solutions for over 2 decades

Faced stiff competition from Indian IT firms

Able to go after a larger Software-centered market

Change of Focus – Majority of its Software is embedded in its Hardware products

Software has higher profit margin compared to Hardware

THANK YOU!

Q & A

Inventec_Wednesday

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