ODM Quanta focus on white boxes bypasses Dell, HP, Cisco traditional model for OEMs

By Staff

Cloud computing marketThis model removes one layer (brand vendor) from the equation, removing approximately 25-30% of costs of hardware. Internet companies (like Google or Facebook) and telecom operators (like AT&T, Vodafone) are seeking to optimize their procurement costs for IT hardware further with more configured solutions.


In the traditional IT business model, companies like HP, Dell used to sell servers, enterprise hardware and IT consulting services to enterprise customers. At the same time, the HP and Dell used to outsource manufacturing of the hardware to original design manufacturers (ODM) or electronics manufacturing services (EMS) providers in Taiwan, write a recent report from investment bank J.P. Morgan. (See Top 10 EMS / ODM)

In this process, Taiwanese ODMs (especially Quanta, Wistron and Inventec) have built up substantial knowhow in server design and data center performance.

In this business model, the brand vendors (OEM) used to make 25-30% gross margins while ODM and EMS vendors only made 6 to 7% gross margin due to the nature of engagement. (See article: Outsourcing cost reductions and benefits)

New OEM business model: Purchasing ‘white box hardware’ directly from ODMs
In the last few years, a new set of customers have emerged…primarily Internet companies (like Google or Facebook) and telecom operators (like AT&T, Vodafone), seeking to optimize their purchasing and procurement costs for IT hardware further and seeking more configured solutions.

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As the report states, this has led to the emergence of a new business model for ‘white box data center hardware’ in which the customers bypass vendors like Dell and HP and go directly to ODMs like Quanta or Wistron, to procure hardware. (see Figure 1)

At this point, it is happening mainly for ‘white box servers’, since servers are becoming more and more standardized in the x86 space the bank states in its report. However, there is an attempt to replicate this for storage and switches as well.


Figure 1

Cloud infrastructure – New business model evolving




According to the bank, the benefits of this kind of an approach are quite obvious and immense:

Cost savings: This model removes one layer (brand vendor) from the equation, removing approximately 25-30% of costs of hardware. As the hardware gets more commoditized, this is likely to accelerate.

Configurability: Most Internet companies (and to a certain extent, telecom operators) require highly customized server configuration in their data centers. For instance, J.P. Morgan believes one of the major online video broadcasting providers is using Intel ATOM CPUs for their servers supporting this service, since power efficiency is much more important and raw computing power requirement is low.

This level of customization is not likely to be provided by brand vendors, while vendors like Quanta are willing to provide it, given sufficient scale.

How big is the market?
According to Intel, its current server business is split into enterprise customers (80%) and data centers (20%). In 2014, Intel expects the data center and high performance computing market (which is the addressable market for this new business model) to account for 50% of the total market, implying a 30% CAGR for this segment, the report states.

In addition, data center build out activity is also accelerating globally (Intel’s Data Center revenues grew 32% in 1Q11) with the proliferation of mobile data and HD video.

For instance, EMC estimates that total data storage needs would increase 44 times from 2011 to 2020.

The global server market is around $40 billion, while the total Cloud / Data Center infrastructure market is around $120 billion (according to IDC).

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J.P. Morgan believes the total addressable market for this business model is around 30-35% of each market in the next 4 to 5 years (which equates to a $12-$15 billion market for white box servers and $35-$40 billion market for overall data center infrastructure globally).

The states in its report this will be driven by adoption of public cloud and buildup of mobile data infrastructure for consumer-centric applications and moving to hybrid cloud models (mix of private and public cloud) for enterprises.

Why now?
The ‘white box server’ market has been in existence for a while, but is becoming more relevant due to the target audience. Internet companies and operators are now more keen on adopting this mode of purchasing hardware as data center build outs are accelerating.

This is becoming more relevant since these set of customers now have more purchasing power (Google runs >1 million servers in its date centers), and the hardware itself has become commoditized enough to allow them to completely bypass the brand vendors.

Facebook’s ‘Open Compute project’ is also a step in this direction (Quanta is a key partner in this initiative).

In addition, the ODMs have also moved up the experience and learning curve – for instance, Quanta has augmented its hardware experience by also developing software platforms in conjunction with MIT and also invested in a multi-core CPU vendor called Tilera, states the report.

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In addition, these set of customers are much more IT savvy and do not require the level of IT consulting or services from companies like Dell and HP, compared to a typical enterprise customer.

Quanta v. competitors
In the report, J.P. Morgan believes Quanta has moved forward quicker than other peers in this area. The bank rates Inventec and Wistron as having good design capability in servers and able to implement this kind of business model as well, but feels Quanta has made a significant early entry into this space.

Another competitor the bank feels could emerge is Delta, which is setting up a comprehensive data center infrastructure team and is likely to tie up with other vendors for server capabilities.

Still, given the nature of the product (customized) and level of R&D resources required (Quanta has an 800 strong R&D team in servers), J.P. Morgan feels margins are likely to still remain fairly high in this space.

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