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How Quanta shifted gears when computer sales slowed

Quanta computer servers make up more than 90% of the servers used by Facebook, the U.S.-based social network.

TAIPEI/SILICON VALLEY -- For years, the big U.S. IT companies -- Hewlett-Packard, Dell and IBM among them -- have dominated the global computer server market.

     But even in this sector, Taiwan's contract manufacturers are increasingly challenging these information technology heavyweights. With greater technological prowess and lower prices, at least one Taiwanese company is gradually eating into the market share of its U.S. rivals.

     In Fremont, east of Silicon Valley and across San Francisco Bay in the U.S. state of California, Taiwan's Quanta Computer has been producing server hardware since 2009.

     As with many Taiwanese IT makers, Quanta has its key manufacturing base in China. But it takes four weeks to ship China-made servers to client data centers on the U.S. West Coast. From Fremont, it takes only a day by truck.

     The U.S. is the server industry's main battleground, and Fremont's proximity to its customers is a great advantage, a Quanta production chief said. In addition to its Fremont plant, Quanta last year began turning out servers at a factory in Nashville, in the southern U.S. state of Tennessee.

     Servers are becoming increasingly important pieces of hardware as the Internet age gives way to the big data age. As governments and corporations collect more bits and bytes, their data centers are getting bigger. Their demand for servers -- where all the data is stored -- is nearly insatiable. A single IT company can have hundreds of thousands of servers.

     For a long time, server buyers would turn to HP, Dell or IBM. But now more of them are placing orders with contract manufacturers, sometimes called original design manufacturers, like Quanta.

     According to IDC, a U.S. market research company, servers made by original design manufacturers last year accounted for 16.9% of all servers built. This puts original design manufacturers as a group behind HP and Dell in terms of server market share.

     Analysts say Quanta makes up 90% of this 16.9% share, meaning the company is effectively the No. 3 player in the global server market in terms of units shipped.

     Quanta's strength is its low pricing. Industry observers say the company's servers range from $500 to $600 per unit, nearly half what HP and other big-brand hardware costs.

     The company has gained expertise on materials selection and bulk parts procurement by producing laptops in China. It has also learned to make a pared-down server that holds data but offers few bells and whistles. These two traits have helped Quanta to cut production costs.

     Moreover, Quanta has gained the flexibility to alter designs and accommodate customer requests. If a client asks for easy image-saving or greater data search functions, Quanta can deliver.

     The company also provides clients with a range of peripheral devices and software. "We can offer comprehensive solutions," said Barry Lam, Quanta founder and chairman.

     In 2014, the company made about 30% of the world's laptops, becoming the world's largest original design manufacturer of these computers. Still, Quanta suffered financially, largely due to the contraction of the global PC industry, whose earnings peaked sometime in 2009 or 2010.

     But Quanta is succeeding with its servers, which have a large profit margin.

     In 2014, the company reported NT$926.3 billion ($29.7 billion) in group sales, a 5% increase on the year. It also logged an operating profit of 14 billion New Taiwan dollars, up 7% on the year. It was the first time in five years that Quanta chalked up sales and profit gains.

     Quanta is now focusing on getting its non-PC businesses to contribute more to overall sales. In 2012, the ratio was 30%; the goal is 50%.

     There are concerns. Dell and other U.S. server and PC makers have slashed the number of orders they are placing with Quanta for PCs. An analyst at a leading Taiwanese brokerage said this is a form of retaliation against the company for invading the U.S. companies' server turf.

     Moreover, other Taiwanese contract manufacturers, including Wistron, have started making servers.

     For now, Quanta will likely fend off challenges to its server business by wielding its overwhelming price competitiveness.

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