SUPPLY CHAIN MANAGEMENT
CASE SUBMISSION REPORT
Transforming ASUSTeK: Breaking from the Past
PROF. JISHNU HAZRA
INDIAN INSTITUTE OF MANAGEMENT, BANGALORE
Submitted by: Group 6
1311147 Akhil Mittal
1311200 Shashank Shekhar
1311197 Supriya Shailesh Kumar Sehgal
1311195 Sameer Gupta
1311196 Saurabh Kumar
ASUSTeK is a Taiwanese multinational computer hardware and electronics company. It started in 1989 as a motherboard manufacturer and ventured into diverse streams in the coming years. Its motherboard business model was based on white box manufacturers and by early 2000s, ASUSTeK became the number one manufacturer of motherboards in the world. ...view middle of the document...
ASUSTeK started off both as an Own Brand Manufacturer (OBM) and Original Design Manufacturer (ODM) in the motherboard segment, with 70% business coming from OBM sales. In case of notebooks, it is trying to move up the value chain from ODM to an OBM.
Q1) What was ASUSTeK’s motivation to move up the value chain? How serious a threat is ASUSTeK to HP or Dell?
The motivations for ASUSTeK to move up the value chain could be the following:
Opportunity to capture higher value:
1. Economies of Scale and Scope:
The notebook segment, in early 2000s, was a nascent industry. It involved a lot of R&D and other overhead expenses that had to be distributed over higher unit volumes for a profitable business line. From 2002-2006, the notebook shipment grew at an average rate of about 35% per year. It was imperative for ASUSTeK to capture an increasingly large share of this growing pie of notebooks segment. A larger market share accrued two distinct advantages:
a. As discussed above, lower cost per unit as fixed costs are distributed over more number of units, making the business profitable.
b. Enables the firm to exert greater buyer power over component suppliers. Some of the largest leader brands like HP, Dell etc. employed online bidding system to discover the lowest procurement prices of components, and then further negotiated these prices to lower levels, reducing the suppliers’ margins to diminishingly low numbers. This kind of dominating power in the supply chain came from large volume sales.
As an ODM, ASUSTeK could only sell as many notebooks as were ordered by the leader brands, and that too at “micro margins”. This clearly laid the argument for moving up the value chain to an OBM position.
2. Increasing Commoditization of ODMs’ processes:
The global brands were reluctant to engage in long-term contractual arrangements with ODMs, including ASUSTeK. This makes the future ODM demand uncertain. The branded companies did aggressive price negotiations to drive down procurement costs. They even procured key components for their ODMs and removed the ODMs completely from negotiating directly with the component suppliers. This squeezed the ODM margins and removed any opportunity to hide profits, making the ODM business unattractive and creating a case for moving up to an OBM.
Presence of Favourable Markets in Europe
1. Brand Insensitivity of End Customer:
ASUSTeK had a limited brand visibility in the Western markets, and would have required a considerable marketing expenditure to promote itself as a branded manufacturer. However, to its advantage, the consumer market in Europe, particularly the eastern parts, has low sensitivity to brands. They demanded functional performance more than the brand recognition. In fact, most of the other global brands were often in a disadvantageous position when local customization and fine tuning were required. With Europe being almost 40% of the total notebook market in 2004, and almost 60%...