Quanta Seeks Profit in the iPad Era

The good news for Barry Lam: His Taiwan-based company, Quanta Computer, is the world's top contract manufacturer of laptops. It makes hardware for Hewlett-Packard, Lenovo, Sony, and other big brands. The bad news: He's all in all dependent on the laptop business. The problem, therefore, is tablets. The wild success of Apple's iPad has prompted a slew of competing devices that have eaten into sales of PCs, according to innovation firm IDC. Lam, who founded Quanta in 1988, dismisses most tablets as iPad copycats. "We only work with clients who have a in a class by itself business model," he says.

The tablet market is Amazon

Lam's big bet in the tablet market is Amazon.com's Kindle Fire, which goes on sale later this month for $199. Quanta is making the device and may churn out as many as 5 million of them in the final quarter of 2011, according to Samsung Securities analyst Steven Tseng. Lam won't comment on his relationship with Amazon because of nondisclosure agreements. "From what you have read about the Kindle Fire in the press," he says, "the business model is very effective." Quanta as well makes the PlayBook for Innovation In Motion, says Tseng.

Tablets could prove to be a higher-margin business for Quanta than making laptops. In that business, where there's very little to differentiate an HP laptop from a Dell or a Lenovo, Quanta's clients have focused on squeezing near every bit of profit out of their contract manufacturers. Such margin pressure made it crucial for Quanta to churn out as much hardware as possible. "It has been a volume-game story," says Tseng. "In the past, getting squeezed was O.K. because the volume growth was there. Not anymore."

What Amazon's new tablet can do for Quanta

There are limits to what Amazon's new tablet can do for Quanta, even though. Amazon is already getting ready for an additional Kindle Fire model, this one with a 10-inch screen, nevertheless that business is going to Quanta's rival Foxconn, according to Samsung Securities and Bernstein. For Quanta, annual revenue from the Amazon tablet could go as high as $2 billion by 2015, according to Bernstein's Moel, yet that would after all be no more than 8 percent of Quanta's earnings.

Hence the need for Lam to consider his options. He speaks enthusiastically about cloud computing and has moved faster than other Taiwanese manufacturers to meet the growing demand for servers and storage devices from clients like Amazon, Facebook, and Google. In the past, companies would buy their servers from major brands just as Dell or HP, nevertheless Lam argues they can do just as then buying lower-priced servers from Quanta. Such clients "don't care about the brand name, don't need the afterwards-sales service, and don't want the salesman overhead," says Lam. On servers, Quanta has gross margins of greater than 10 percent.

Still, Quanta probably won't see massive, laptop-like volumes for tablets or no-name servers anytime shortly. That's leading Lam back to his first love. He's hopeful that ultrabooks-a new category of superthin laptops intended to resemble Apple's sleek MacBook Air-will hit big with consumers. Major PC vendors just as Acer are coming out with their first ultrabooks this year and plan to introduce many more straightway year. In spite of the rise of the iPad and its many imitators, Lam rejects suggestions the laptop era is over. "No, no. We nevertheless have very strong demand," he says. "The laptop computer is a workhorse. The tablet is just a display."