Despite its growth and size, why is Inventec not very profitable? 1.

Rivalry among existing organisations Concentration and Balance of Competitors The ODM industry was highly fragmented with a large amount of competitors with a high concentration of market share in certain brands (e.g. asustek, compal, inventec, quanta, wistron etc.). Degree of differentiation /industry growth rate As there are so many companies provide almost identical or similar products, there is competitive pricing as companies try to lower prices in order to gain market share in a growing market. Client companies tended to limit ODM use to highly commoditized products with widely available designs and so ODM products tended to have a low degree of product differentiation. The design of a new product may obsolete in a very short period of time, the reliance on frequent technology innovation determined the high industrys inherent risk. Switching costs There were very little costs involved in switching between different companies (it might take them three weeks or three months maximum to switch, but they could do it, and they would survive) Switching to different companies was also easy as the majority of PCs use Intel microprocessors or Microsoft Windows operating systems. Scale/learning economies As the abundance of companies that had moved to china increased, the average selling price began to decrease as China was no longer a low cost area as everyone had the same cost structure. 2. Threat of new entrants Legal Barriers Since the easing of Taiwan government restrictions of high tech investment in China, all the major ODMs had opened plants in mainland and new firms could easily step into this field, thus increasing supply of quality goods. Virtually all the components needed to produce a personal computer were available for purchase; there were few barriers to entering the industry. Michael Dell started Dell Computer Company in the early 1980s by assembling PCs in his University of Texas dorm room. 3. Threat of substitute products The threat of EMS were a constant alternative for companies to go to with 61% of contract manufacturing revenue being made up of EMS (2004) in comparison to ODMs 39%. EMS often did not retain IP rights and generated customized, confidential designs. 4. Bargaining Power of Buyers The bargaining power was high as Inventec has a limited list of customers. This prevented Inventec from switching customers and limited the negotiation possibilities as it could not afford to lose its major clients. They had no choice but to accept its principal clients aggressive pricing strategies which often left Inventec with low margins as otherwise the

clients would be able to take their business to competitors within a short period of time and a low loss. What are the drivers of the average profitability of the ODM industry? The ODM industrys average profitability is low. Net margins of leading Taiwan ODM companies range from 1% to 6%. The low profitability is mainly driven by the huge customer bargain power and the fierce competition. ODMs clients also have high levels of competition and thus need to lower costs in order to compete. They would divide their business among the five leading Taiwanese ODMs and even some second-tier ODMs, thereby reducing their reliance on a single partnership and increasing their negotiating strength. The threat of EMS also drove prices and thus profitability down as they usually dont maintain Intellectual Property and are not likely to be able to compete with OEM clients. This made them an attractive substitute to ODMs as the design of their product was customized and confidential. As China was no longer a low cost area, ODMs had to find new ways to lower costs as the average selling price decreased.

What are key factors that a company like Inventec needs to manage above-average profits in this industry? One way that Inventec could remain profitable is to shift their production and sophisticated production software from their hardware production to software development and IT consulting and IT system integration services. Inventec considers its software capability to be a major differentiator from the other Taiwan ODMs. This would allow them to rely on innovation capabilities which can provide high added value rather than cheap operating environment which added low margins. Inventec had invested in 1,500 software engineers, ten universities in Tianjin that provided a steady stream of well-qualified R&D engineers and a group of Inventec engineers in Beijing specialised in developing language and geographic guide software and interactive educational websites. Observers believed that the company had the expertise, resources and local talent to go after a much larger software-centred market than electronic dictionaries. But as part of a low-margin product line, the added value of software was lost to Inventec as its most sophisticated software was embedded in its hardware products.

Why is the Indian software industry, on average, so much more profitable than the Chinese ODM industry? It doesnt rely on cheap operating environments in order to save on costs. The largest industry segment was custom application development and maintenance, in which the Indian IT firms created software solutions for business process needs unmet by packaged software. This meant that they provided differentiated products that were specialised and high-end. This made it hard to substitute or compete against. India had world-class technological education and an abundance of highly-skilled engineers, lots of whom came back from USA.

The Indian software industry has a very high growth rate of 30% annually. Therefore, firms are not competing through price wars and instead, they obtain market shares via their own R&D and services. This gives them the opportunity to differentiate their products and serve different client industries. Widespread English skills among Indias educated workforce.

What strategic advice will you give Inventec to improve its profitability? To move its expertise, resources and local talent to a more software-centred market, other than electronic dictionaries. Inventec could differentiate itself by offering sophisticated software design together with the hardware manufacturing. Software development adds more value to OEMs and by taking this competitive advantage, Inventec could obtain a higher price premium and stronger bargaining power.