The recent announcement of Taiwan's Compal Electronics Inc. receiving contract orders for producing 3G phones for Motorola Inc. seems like business as usual. A careful reading, however, reveals a significant break from the past.

The report says that Compal would be contributing to the mechanical design of the handsets as well as their manufacture. The fact that Compal will cooperate with Motorola on an original equipment manufacturer (OEM) basis, not as an original design manufacturer (ODM), marks an important shift from Taiwan's much-celebrated ODM business model.

After all, it was another Taiwan firm, BenQ Corp., that produced cellphones for Motorola just a few years ago. And now, when Taiwan players like BenQ are making the arduous transition from a commonplace ODM to a company focused on branded products, they find themselves in the tricky conflict of competing directly with their traditional OEM customers in the United States.

The PC and consumer electronics markets have been experiencing critical pricing pressure, which in turn has put a severe squeeze on the profit margins of ODMs. Moreover, as OEMs in mainland China continue to consolidate their brands and presence in the global market, this turns up the heat on Taiwan ODMs to break away from the margin-squeeze challenge and compete with OEMs in the mainland.

Although industry watchers see BenQ on the right track with its brand building, it's too early to call it a winning strategy. BenQ's parent company, Acer Inc., continues to battle in the PC space, although it has made substantial inroads for notebook brands in Europe.

Other ODM firms, such as motherboard maker Asustek Computer Inc., are also hoping to build global brands. Asustek is making a foray into smart phones and notebook PCs.

Does this new trend show cracks in the $54 billion ODM empire composed almost exclusively of electronic firms in Taiwan? Not really. Most Taiwan-based ODM companies are sticking to the traditional model that has served the island well over the last two decades.

What it shows is that dynamics of the traditional OEM/ODM model have started to shift as part of the design and manufacturing evolution curve, forcing some of the major players to mull over their options. BenQ's acquisition of the troubled handset division of Siemens also demonstrates the level of risk that Taiwan ODMs are willing to take to maintain their growth trajectory.

ODM activities are important to the semiconductor business, so silicon vendors will be closely watching these blurring lines between OEM and ODM outfits in Taiwan.

It might be too early to predict the outcome of these new endeavors from some of the island's top ODMs. After all, Taiwan-based top EMS firm Hon Hai Precision Industry Co. Ltd failed twice in the clone PC market.

But as they say, "change is inevitable." This shakeup in the ODM space might as well lead to some new growth venues, bringing a few more pieces of design action to Taiwan and around.

Email the Editor

Back to top