November 29, 2016 1:05 am JST
Interview

Quanta to expand US operations following Trump election

Taiwanese tech company sees US factory advantage

CHENG TING-FANG, Nikkei staff writer

Mike Yang, senior vice president of Quanta Computer, is in charge of the rapidly growing data center business at the world's leading contract notebook maker (Photo by Cheng Ting-Fang).

TAOYUAN, Taiwan -- For Quanta Computer, Donald Trump's victory in the U.S. presidential election is a boon.

The Taiwanese tech company, which supplies data center servers to major tech players including Facebook, Google, Amazon and Microsoft, says president-elect Trump's vow to push U.S. companies to make goods at home may increase sales for Quanta Computer as it already has two server assembly facilities in Nashville, Tennessee, and Fremont, California.

"We have an upper hand now ... Unlike companies which have to assess whether to move their facilities from Mexico or elsewhere to the U.S., we are already there and we are expanding our U.S. operations," Mike Yang, senior vice president of Quanta and president of Quanta Cloud Technology, told the Nikkei Asian Review in an exclusive interview on Nov. 24.

Quanta is the world's largest contract notebook manufacturer, while QCT is its fast-growing cloud computing unit that ships data center servers and related solutions worldwide.

"We will double our assembly facilities, output and headcount in the U.S. over the next three years," Yang said. Quanta's QCT currently has about 800 to 900 staff in the U.S., Europe and Taiwan and is continuing to hire more talent in these locations.

Yang added that if Trump does adopt a protectionist platform, as he promised on the campaign trail, the need for more domestic data centers will grow, as American tech companies might no longer be able to rely on data centers outside the U.S.

Yang's remarks came as Quanta has been aggressively driving its data center server business. This is to diversify its product portfolio, offset headwinds in the personal computer market and reduce dependence on Apple, its biggest customer, accounting for over 60% of its revenue.

Quanta is a key assembler for the Apple Watch and for Macbooks. In 2015, it booked revenue of one trillion New Taiwan dollars ($31.4 billion), up 8.7% year-over-year.

Cloud computing growth

The company is hoping that over 30% of its revenue will come from cloud computing this year, up from over 20% in 2015.

While the PC market has suffered from years of decline as smartphones have become ubiquitous, big tech and telecom companies are creating more data centers globally to foster emerging future technologies including artificial intelligence, machine learning, driverless cars and drones.

From 2015 to 2020, data centers are set to see a growth rate of at least 5% to 10% annually thanks to cloud computing and big data analysis, according to Leon Kao, an analyst at research company IDC.

Quanta's financials underline the growing potential of the data center sector.

According to an industry executive familiar with the matter, Quanta's data center business delivers gross margins as high as 10% to 20%, compared to some 5% of corporate margins generated by making notebooks and electronic devices.

"The data center and cloud computing market will continue to grow and we will keep investing," said Yang.

He added that building servers in the U.S. has a distinctive advantage over producing them in China, in terms of logistics and customer service.

"If we made all these machines in China, it would take a long time to ship them to the U.S.," the executive said.

"Further, if we assemble the final products in China, it would be extremely difficult us to service customers if there is something wrong with the servers or if our customers want some modifications," Yang said, even though Quanta still makes most of its computers in China.

Local assembly

IDC's Kao said that it is more feasible for companies to assemble servers than consumer electronics gadgets in the U.S. because the average selling price of servers are higher.

Further, having facilities in the U.S. can help server suppliers to better service their customers, as data center builders usually want to be involved in the design process to better suit their own needs, Kao said.

QCT allows customers great flexibility in buying what they want. Customers are free to choose the software they prefer and they can customize their own servers, storage, networking equipment and racks, rather than being limited to fixed solutions, Yang said.

The flexible and cheaper options have helped QCT sell directly to data center builders, snatch market share and challenge major U.S. rivals including HP, Dell and Cisco.

QCT is now the world's third largest server supplier by shipments after HP and Dell, according to Yang.

More and more Taiwanese competitors such as Hon Hai Precision Industry, Inventec and Wistron are also trying to turn a better profit through selling data center equipment directly to internet and e-commerce companies.

Servers directly sold by manufacturers such as Quanta and others have already accounted for around 20% of global shipments in 2016, and this trend is growing, according to Hsieh Pei-Fen, an analyst at Market Intelligence & Consulting Institute.

"This will continue to eat into shares held by traditional brand-name server providers such as HP and Dell," Hsieh said.

HP and Dell together accounted for some 36.4% (or 17.2% and 19.2% respectively) of global server shipments of 2.75 million units in the three months ended in June, according to research firm Gartner.

"However, as increasing numbers of players such as Hon Hai and Wistron are entering the battlefield, competition has become fierce," said Hsieh. "Looking forward, we are concerned whether profit margins can still be as juicy as in the past few years."

Nikkei Staff Writer Debby Wu contributed to this report.

Asia300

Quanta Computer, Inc.

Taiwan

Market(Ticker): TAI(2382)
Sector:
Industry:
Electronic Technology
Computer Processing Hardware
Market cap(USD): 8,813.33M
Shares: 3,862.62M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 65,802.77M
Shares: 17,328.73M

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