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Pan-industry “beggar/maker-prince/maker” initiatives in supply chains

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Part 1

Enter Intel, a chipset manufacturer that is promoting "white box" (generic PC) and "white book" (generic notebook) devices using generic designs, cases and hardware modules. Intel's intent is said to be the creation of a family of more compliant suppliers and so escape their current vulnerability to the two US giants - Dell and HP. 

Intel seems to be pursuing an approach that mimics the "beggar/maker-prince/maker" process that we see emerging among US automotive OEMs.  (As Intel provides roughly a fifth of the world's server products (at higher margins than PCs) and so competes with their server customers, it may be to Intel's advantage to suppress their current troublesome generic PC vendors while created a wider market for their chip sets.)

For those readers unfamiliar with beggar/maker-prince/maker, we see OEMs in a number of sectors, automotive included, that perceive themselves increasingly captive to powerful Tier One suppliers. To escape that burden, we believe that the OEMs are in the process of elevating smaller suppliers (making princes out of serfs) while taking business away from the leading suppliers for future models (making beggars out of kings).  The result in both automotive and electronic market sectors is to leave the top of the manufacturing tier in stronger control of its supply chains. 

Lenovo, then called Legend, abandoned their PC designs and subbed back to Taiwan (though manufacturing still occurred in China) in order to achieve greater price volume advantages.  While not an expert on the tax matters of foreign subsidiaries I am told that the formation of a new foreign subsidiary in China allows the foreign company to restart the clock on tax relief and other advantages offered to the foreign firm.  This may account for the growing number of subsidiaries formed in China by Taiwanese firms. This is likely one contribution to the significant overcapacity on the manufacturing side that has led to depressed margins for many of the Taiwanese OEMs and ODMs. I should think that Taiwanese manufacturers would look favorably on supporting Lenovo branded line of computers.

Lenovo may actually perceive themselves as a branded marketing channel akin to Dell and HP, taking advantage of excess "Taiwanese" manufacturing capacity and the white box and white book push by Intel.  An unintended consequence of Intel's action could be that Lenovo instantly harvests a world-class PC and laptop design and manufacturing capability that rivals Dell and HP.  The lengthy transition that the market had factored into Lenovo's acquisition of IBM's PC unit could thereby be collapsed into a process of well-under a year.

Extension to other segments: There is an interesting connection between laptop and supercomputer design.  It would appear that the technology in high-end density servers mimics that of laptops in that they all require means to deal with power efficiency, heat management and switching/docking mechanics.  This recognition of thermal efficiency indicates that the push for absolute power has shifted to efficient use of power.  This same skill in thermal efficiency may impact future supercomputer design.  If so, acquiring these skills in laptop design could allow Lenovo a leap into more efficient and smaller supercomputer designs.

Secondary implications: Taiwanese manufacturers have been aware of the coming shift to China as the principal manufacturing center and have been searching for ways to increase their price-volume curves as well as defining replacement industries to enter.  For a number of the major firms, that decision appears to have been made but that is the subject of a future note.

Globalization of knowledge work: Notebook PC design & development
Kenneth L. Kraemer, Jason Dedrick
Personal Computing Industry Center

Sloan Industry Studies Annual Meeting Sloan Industry Studies Annual Meeting

April 19, 2004

Taiwan's ODM/OEM Industry: A few snapshots
Jerome Fourel
22 Mar. 2004

IBM-Lenovo deal said to get national security review
By John G. Spooner
CNET News
January 24, 2005

Lenovo: The making of a legend?
Mary Hennock
BBC News
8 December, 2004

Gordon Housworth



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