Electronics Production | September 05, 2007

Acer/Gateway Merger to Spur Consolidation of ODM Providers

Following its acquisition of Gateway Inc., Acer Inc. is likely to undertake a consolidation of its Original Design Manufacturer (ODM) supply base, iSuppli Corp. believes.
by Jeffrey Wu - Analyst, EMS and ODM Services

On Aug. 27, California-based Gateway agreed to be acquired by Taiwan's Acer at $1.90 per share for a total value of $710 million in cash. The newly merged companies will alter their supply chain to achieve greater efficiency, a move that will have major implications for contract manufacturers and component suppliers participating in the PC industry.

Acer's and Gateway's manufacturing partners In 2006, Acer and Gateway were the globe's No. 3 and No. 10 notebook PC OEMs with shipments of 9.2 million units and 1.7 million units, respectively.

Figure 1 presents the share of Acer's mobile-PC production conducted by its various contract manufacturers. Figure 2 presents the same information for Gateway.

Both OEMs outsourced 100 percent of their laptop PC production to ODMs in 2006, with Taiwan-based Quanta Computer Inc. and Wistron Corp. serving both companies. Compal Electronics Inc. was Acer's biggest ODM, accounting for 36.8 percent of Acer's shipments while Arima Computer Cop. produced 52.7 percent of Gateway's shipments in 2006.

When the manufacturing profiles of these two OEMs are merged to depict the “what-could-have-been" scenario for the newly combined entity, Quanta, Compal and Wistron become the three biggest ODMs, while Arima's role dwindles significantly to 8.2 percent of the two OEMs' aggregate shipments in 2006.

Figure 3 presents the mobile PC manufacturing partners and shipment-share splits for the combination of Acer- Gateway in 2006.

Acer's outsourcing strategy
Acer tends to outsource its laptop PC production to ODMs by platform, maintaining a balancing act among its various contract manufacturers. Acer aims to work with the biggest ODMs and to ensure that it is listed on each ODM's Top-3 customer list to leverage these leading ODMs' economies of scale while retaining its bargaining power.

Therefore, although the pressing issue for Acer at the moment is to incorporate Gateway's operations and overcome challenges associated with the difference in corporate cultures, iSuppli expects Acer to consolidate its ODM supply base in the near future, which may put Arima's existing relationship with Gateway in jeopardy.

As for material sourcing, Acer maintains control over strategic components such as CPUs, LCD panels, memory modules, hard drives and optical drives, and will continue to do so. Therefore, the Gateway acquisition will give Acer heightened supply-chain power over makers of these components. In terms of non-proprietary parts, however, the purchasing power in the hands of Quanta and Wistron will remain at its current level given that these two ODMs serve both Acer and Gateway. However, there may be shifts away from Arima to other ODMs as Acer strategically adjusts its supply chain.

Jeffery Wu is an analyst for EMS and ODM services at iSuppli Corp.
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