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Explaining the Chaiwan model for the mobile device supply chain: Q&A with Digitimes Research director Joanne Chien

Michael McManus, DIGITIMES, Taipei

While Digitimes is known as a media outlet, the company also includes a business unit that solely focuses on market research. Run independently from the Digitimes news organization, Digitimes Research provides market intelligence and data analysis on a number of different IT and high-tech industries to its customers. Digitimes recently spoke with Digitimes Research senior analyst & director Joanne Chien to learn more about the seismic shift that is underway in the mobile device supply chain, the concept of Chaiwan (China+Taiwan), and the new English language data services that Digitimes Research is rolling out.

Q: The IT industry has been going through a major change over the past couple of years, with the rise of tablets and smartphones and the shrinking of the PC market. How has this shaken up the supply chain in Greater China?

A: At this point, I guess it is fairly well known that the tablet and smartphone market is rising at the expense of the PC market, especially the notebook market. Digitimes Research estimates that while demand for mobile devices (smartphones, tablets and notebooks) rose 30% in 2013, notebook shipments dropped 12%, the biggest on-year drop on record. And we expect the slide to continue in 2014. Digitimes Research forecasts that 165-170 million notebooks will be shipped worldwide this year, down from a peak of 204.5 million in 2011.

What is less well understood is how this change has shaken up the IT device supply chain. For example, if you look back at the PC industry, it has been the driving force behind Taiwan's dramatic growth over the past 30 years. That growth came about because PC brands started outsourcing their manufacturing, which in turn gave rise to the ODM model where large international brands partner with equally large manufacturers like Quanta, Compal or Wistron to produce devices. And now Taiwan dominates the global market for notebook PC manufacturing, with about an 85% market share.

But as I mentioned earlier, while the notebook market is still huge, it is shrinking. If you are looking for growth, you need to look at the smartphone and tablet sectors, where design and manufacturing have either become much more consolidated or become completely decentralized, which is a phenomena that we call the Chaiwan model.

Q: Can you provide a bit more color on that last statement?

A: In terms of consolidation, you have huge brands like Apple and Samsung, who continue to pursue a vertical integration strategy whereby they can control more of the design, component choice (including software) and manufacturing of their products in order to give them differentiation. These brands still rely heavily on the Greater China supply chain, such as with Apple using large EMS manufacturers like Foxconn or Pegatron. However, this is a much different business model than that seen in the notebook industry, where ODMs provide designs to the brands and choose their own components. ODMs do a lot of heavy lifting in terms of product development, while EMS firms simply provide manufacturing services. The brands have much more control over the overall design and component choice.

Q: What about this so-called Chaiwan model of decentralization?

A: We use the combination of China and Taiwan (Chaiwan) to describe how the supply chains in Taiwan and China are becoming increasingly more integrated and intertwined and this has given rise to a mobile device supply chain that is producing unheard of time-to-market scenarios while remaining flexible and responsive to market demand.

Q: How does it work?

A: As I mentioned, a brand like Apple or Samsung controls everything in the process of bringing their products to market. Under the Chaiwan model, each sector does what it does best. For example, it starts with the key component provider, which in the case of smartphones is the application processor (AP). Companies like MediaTek or Qualcomm provide a turnkey solution and reference design to the players in the market.

Those other players include independent design houses (IDH), which provide design services and recommendations for components (such as connectors, casing, etc) that are not included in the AP turnkey solution. You also have EMS players, who do the manufacturing. And ultimately you have the customer, which could be a large brand, a small white-box brand, or any vendor that wants to bring a smartphone to market. Moreover, under this model, the order volumes don't need to be very large, which means pretty much anyone who wants to can bring a smartphone to market in China, and it can be done quickly and cheaply.

Originally, this business model was developed by white-box players but it has been increasingly adopted by larger brands, such as Huawei, ZTE and Lenovo in China. A vendor such as Lenovo can direct development of one model through one IDH and EMS provider, while working with another pair of manufacturing partners for development of another model.

This has been a seismic shift for the market, but players are adapting. If you look at at AP provider MediaTek, the company no longer follows a strict roadmap. It simply reacts to what the market wants. In 2013, for example, MediaTek sometimes went a couple of months without releasing a new product and then would release two products in the same month. They weren't following a roadmap, they were chasing demand.

This is also a new model for EMS providers, since they have been used to dealing with huge orders and following longer-term manufacturing plans. They now have to become more nimble and are learning how to cooperate with the IDHs and smaller brands for small orders and quick delivery.

Players adapt because this is where the growth is. China-based vendors account for approximately one-third of global smartphone shipments and the region had four of the top-10 vendors worldwide in 2013. For 2014, Digitimes Research forecasts that China will have five vendors in the top 10.

Looking at the rest of the market (non top 10 or "Other" segment) is even more interesting. This portion of the market is dominated by Greater China vendors and white-box players. The Other segment accounted for 12% of global smartphone shipments in 2012, 21% of the global market in 2013 and Digitimes Research forecasts the share will rise to 25.6% in 2014.

This means that the global smartphone industry is opening up rather than consolidating and it is directly a result of the dynamic interplay seen in the Chaiwan model. Moreover, China vendors are now exporting about 30% of their smartphones (as of 2013) and that proportion is forecast to rise.

Q: Where are they shipping their products?

A: Mostly developing markets like India and Southeast Asia, where "Local King" brands (regional and local brands) are using their knowledge of local markets and ability to get good pricing from China on relatively small orders to compete successfully with top-10 smartphone brands. The interesting dynamic of this relationship is that many of these exported smartphones are supplied by IDHs, which function in a very similar way as ODMs do - providing design and manufacturing services for the international customers - though on a much smaller scale.

Q: Is the same thing happening in the tablet market?

A: In terms of tablets, if you remove Apple and Samsung from the equation, Greater China vendors account for pretty much the rest of all tablet shipments. And it's not just for local consumption. China players export about 70-80% of their tablets now, with more than 50% of exports going to developed markets. Greater China pretty much dominates the lower end of the market worldwide.

Q: It sounds as if you are tracking these markets quite closely.

A: This industry transition has been taking place for the past couple of years and Digitimes Research has been watching it closely for our customers. We have analysts on the ground monitoring the market dynamic in China and we have been working with a number of international suppliers to help them get a better understanding of how to compete in this market.

We realize that this is a different kind of market dynamic and that it can be confusing, especially for players new to the China market, and we are seeing more and more requests for information about the market. Therefore, we are launching a new off-the-shelf data tracking service in English to help more international players understand the scope and structure of various component and device markets in Greater China. We will start with four data tracking services: China smartphone application processors (AP) shipments; China smartphone shipments; China touch-panel shipments; and Global tablet shipments.

Q: What will the services entail?

A: Each quarter, Digitimes Research will provide preliminary shipment data from the previous quarter as well as a data forecast for the upcoming quarter. We will follow that up with an analysis report and mid-term data update.

In addition to the expertise we have in the local China market, I think one of our key advantages is our supply-side approach. We monitor shipments made to the vendor from the supply chain, rather than from the vendor to the end-user, which other research firms do. This means our shipment results from the previous quarter are actually leading indicators for a shipment forecast for vendors in the following quarter.

Q: What do you mean by that?

A: For example, when Apple is getting a product ready for the market, the product is in the supply chain pipeline 6-9 months before Apple even announces its launch. So we may provide shipment data for Apple 1-2 months before it even begins selling in the market, because that is when the supply chain delivers it to Apple.

Q: Many people consider Digitimes Research to be the same as Digitimes. Is this is correct?

A: The slogan at Digitimes is "Media, Marketing, Consulting" which means there are basically three different businesses run independently from each other. So while Digitimes may be best known as a media company, Digitimes Research is actually a business unto itself. We do our own market intelligence gathering and our analysts have a different operating mode than reporters at the Digitimes newspaper, who are more interested in real-time analysis. Digitimes Research is a market research firm, so our goal is to provide our customers with in-depth analysis and market forecasts.

Q: Who are those customers, and what kind of in-depth analysis do you provide?

A: All of the top ODMs and IT vendors in Taiwan are clients. Name any well-known Taiwan IT company and it is likely to be a Digitimes Research customer. We have been able to build up a customer base of more than 1,000 companies based on our ability to tie together data from the various industries that use Greater China as a supply chain hub. We offer 10 different research areas, including PC and Digital Home, Mobile Telecom, Computing, Mobile CE, Mobile Communications, Broadband and Wireless, Large-size FPD, Small-to-Medium (SM) size FPD and IC design, among others.

Q: Do you serve international customers as well?

A: We currently provide two data services, which we call Greater China ICT and Taiwan FPD. These services focus on shipment data from key Greater China industries. The ICT service focuses on data for notebooks, digital cameras and handsets, while the FPD service provides quarterly data for large-size LCD panels, small- to medium-size panels, LCD TVs, and monitors. These services are provided on an annual subscription basis. We are also excited to begin providing our new data tracking services for international customers as well.

Joanne Chien, senior analyst & director, Digitimes Research

Joanne Chien, senior analyst & director, Digitimes Research