A long-term fixture in Taiwan’s motherboard industry, Shuttle phased out its motherboard business at the end of 2004, and now focuses its business around its XPC small-form-factor (SFF) PCs. DigiTimes.com recently spoke with product marketing vice president Jonathan Yi about competing in the motherboard market as a second-tier player and the challenges Shuttle now faces in growing its XPC business. Q: Although executives from Shuttle have mentioned that the company quit the motherboard business, the company has never made any official statements. Can you tell us why Shuttle left the motherboard business? A: Shuttle had been in the motherboard industry for over 20 years. However, over the past three to four years, this business was not providing us with any profits. As a second-tier vendor, we were at a disadvantage, considering that first-tier vendors usually have 40-50 motherboard models on the market and another 20-30 models under development, while second-tier motherboard vendors have to try to compete with only 10-15 models. Actually, if you look at the Taiwan Stock Exchange (TSE), you will see that most second-tier motherboard companies have not been making any profits over the past few years. So, rather than splitting our resources by continuing to invest in a losing proposition, we decided it would be a much better return on investment if we focused all of our R&D on XPC development. Q: Do you think other second-tier motherboard companies will have to face similar decisions in the future, meaning do you see consolidation in the market? A: If you look at Taiwan’s motherboard industry, about 100 million boards are shipped each year, and the first-tier vendors – Asustek, ECS, Gigabyte and MSI – account for about 80% of the market. So, that leaves very little room for the 10-15 second- and third-tier companies that still produce motherboards. In addition, the clone PC market is shrinking, as more and more consumers are buying PCs from the top 10 brands, and this trend is affecting the overall growth of the motherboard industry (according to MIC, Taiwan’s motherboard shipments only increased 3.6% on-year in 2004 and the volume is expected to increase only 2.3% in 2005). In response to this trend, companies such as Asustek and Foxconn are cutting their costs and aggressively looking to expand their market share, which is making things even harder for second-tier makers. In my personal opinion, three or four motherboard companies will account for most of the market in the future. There will be a place for some second-tier makers, but they will have to adjust to the structure of the market in order to survive. For a company like Shuttle, we cannot survive on 150,000 motherboards per month. Maybe that is a business for a company with less than 100 employees. The future will be that of a second-tier comprised of much smaller companies that specialize in niche or emerging markets. The companies need to find a niche where the larger players are not paying attention. For us, we originally found our niche market with our XPCs in Japan. We have now grown our XPC business to the point where we can compete with first-tier motherboard vendors on brand-name and technology, so we do not need to rely on the motherboard business any more. Q: Are SFF PCs still a niche market? A: Well, in one sense SFF PCs are not a niche product, in the sense that all first-tier motherboard companies have marketed this type of product. However, companies like Hewlett-Packard (HP) and Dell have not really targeted the market, and the total shipment volume of is still only a small percentage of total PC shipments, so it is most definitely a niche market. Q: Is it an advantage for Shuttle that the SFF PC market is still niche, in that you don’t have to compete with larger players such as HP and Dell? A: Not really. If companies such as HP and Dell entered the market, they might bring Shuttle down, but we do not think that way. As I mentioned, we have built up our brand in the market and we have confidence in our products. Apple is just as famous as those other large brands, and the introduction of the Mac mini has not impacted our shipments one way or the other. However, those big brands do have a strong influence in the PC market and if they entered the SFF market, the overall shipment volume would most certainly grow, which is what we want. We want to expand the market, as that is the way to grow profits. Shipment growth is the nature of the PC business. The key to a company’s success, though, is the manner in which it increases its shipments. Q: If larger brands enter the SFF market, would you pursue OEM relationships with them, being that you have in the past had OEM relationships with some vendors marketing SFF PCs, or do you want to push your own brand? A: We are not really interested in pursuing any OEM business and it is not only because we want to market our own-brand. It is not that simple. Our experience is that the OEM mentality is different from the one we want. The goal in the OEM business is to aggressively cut your costs, which ultimately hurts your innovation and quality. We do not want to be constrained by this kind of cost-down mentality. We currently produce 12-15 models per year and we have a lot of other experimental models that never make it to market. That is where we are spending our R&D money, on technical innovation and product design. Q: Shuttle is quite well known in the gaming and enthusiast markets. Will you continue targeting this market, or will you also try to produce some more mainstream products? A: In general, the price difference between our XPCs and standard PCs in the mainstream market is a challenge for us to overcome. For example, Dell can sell an entry-level system for US$499 whereas we would sell a similar system for US$699, due to the smaller size, quieter noise level and special design of our product. Mainstream customers have not yet been willing to accept that bump in price. However, on the higher-end of the market, the difference is less pronounced and users are willing to pay a little extra for the added features. As a result, we have tended to focus on developing products for the enthusiast and professional segments. However, although this segment accounts for the bulk of our shipments, over the past six months our sales have been flat at 40,000-50,000 units per month. Before that, our shipments were growing. We believe that perhaps the barebones market has reached the saturation point. Over the past four years, we have shipped about 1.5 million XPCs, and I believe some 70% of these products are still on duty, meaning that we have not hit the start of the replacement cycle yet. Of course, some enthusiasts do change their systems quite often, but that is only a small proportion of the market. For more mainstream users, they may expect to use the product longer, maybe every four years. We have not figured out the exact replacement cycle yet. But since our products are priced higher than mainstream PCs, we believe that users will be able to get more mileage out of them, which means a longer replacement cycle. Q: How about the market for systems? A: In general, the systems market is for users who cannot assemble the systems for themselves. When it comes to things technical…forget about it. They just want to surf the Internet. They are also looking to pay mainstream prices for their products. For example, Dell can sell an entry-level system for US$499 whereas we would sell a similar system for US$699, due to the smaller size, quieter noise level and special design of our product. Mainstream customers have not yet been willing to accept that bump in price. However, on the higher-end of the market the difference is less pronounced and users are willing to pay a little extra for the added features. So, for the past year we have focused on introducing products for the enthusiast and professional segments, and most of our systems sales have been from those segments. However, as I said earlier, perhaps the shipment level has peaked. If we were able to design a mainstream product that maintained the quality, performance and sound level of our current XPCs, while also narrowing the price gap with competing mainstream PCs, then we would see a big spurt in our XPC sales. However, growing the mainstream market has the risk of alienating your customers on the high-end. There is still debate within our company on the importance of the lower end of the market. Some in our company think we should remain only in the high-end, while others believe we should introduce more mainstream products. There is no conclusion yet, meaning that any developments here are still in the discussion phase. However, if we want to stay in the market over the long-term, we will have to seriously consider mainstream products. Q: Although your gross margins were above 10% in the first quarter of this year and the company made a profit, you had losses of NT$76 million in the fourth quarter of last year. Can you say anything about Shuttle’s financial status? A: Well as we discussed earlier, Shuttle exited the motherboard business at the end of last year, so there were a number of things that had to be written off. However, the big reason was the appreciation of the Taiwan dollar. In fact, the depreciation of the US dollar continued to affect our business into the first quarter of this year, which means our profits should have been even better for the last quarter. Another contributing factor to last year’s disappointing four quarter was the fact that our gross profits were lower. We did not have any strong product launches, which tend to give a boost to margins. However, the situation improved greatly in the first quarter of this year, with the launch of our nForce4-based XPC. Our second quarter results should be even better than the first, as the exchange rate is steadier and the new product effect is there. Q: Can you tell us what is the outlook for the rest of the year? A: Well, since we did not have any profits in the fourth quarter of last year, we are quite aware of the need to remain profitable. That is the short-term goal for the rest of the year. We will not be trying to expand our market share using pricing strategies this year. However, we will still introduce a total of 10-12 new products for this year. We may also look to expand our business in developing markets, such as in the BRIC (Brazil, Russia, India and China) markets. In these markets we can have a great deal of improvement. Q: Will you add more new products at Computex? At Computex, we are introducing our dual-core solution based on Intel’s 945 chipset, as well as being the first SFF PC company to introduce a SLI (Scalable Link Interface)-supporting SFF PC. In addition, we are developing our concept of the digital home, and we will be showing our streamlined Pentium M-based M1000, which we introduced at CeBIT earlier this year. This product will be released sometime this summer at the same time as our widescreen 20-inch LCD is launched. Q: Are you optimistic about the market for the digital home? A: The digital home is still a long way off. In terms of hardware, software and the user interface, we think it still has a long way to go. However, compared to the PC market, it has much more of an upside. At this point, companies need to get involved by introducing products. Unless you get involved in the early stage, you will end up being a follower, which may mean sacrificing your quality or profits. Shuttle product marketing vice president Jonathan Yi Source: Company

Although small-form-factor (SFF) PC vendors do not in general offer customers the option of purchasing motherboard for upgrading their systems, Shuttle is displaying a number of XPC accessories at Computex 2005 to enhance and expand its current XPCs on the market, including a slim 300-watt power for its G-chassis, according to Ken Huang, chief architect of the XPC platform. The slim 300-watt power supply is designed for the company’s G-chassis, which currently supports 200- and 250-watt power supplies and is used in a number of the company’s mainstream and business XPC models, according to a Geoffrey Egger, a Shuttle marketing representative watching over the Computex show. In addition to targeting users that wish to max out their systems, Shuttle is looking to offer its distributors in the channel more flexibility with their SKUs, Egger explained. In that regard, Shuttle is also showcasing other XPC accessories including extended storage enclosures for supporting external 3.5-inch or 5.25-inch IDE drives, its CR40 16X DVD drive, a clip-on wireless LAN module for its P- and I-chassis and expansion kits for adding parallel and USB ports to XPCs. Shuttle slim 300-watt power supply Photo: Michael McManus, DigiTimes Shuttle XPC external storage enclosures Photo: Michael McManus, DigiTimes

Motherboard maker and Pentium M desktop specialist AOpen introduced a Pentium M-based mini PC, codenamed Pandora, at Computex 2005, with the Wintel-based small-form-factor (SFF) PC matching the Apple Mac mini in size, performance and price, according to sources at the company. The AOpen mini PC system, which measures 15cm by 15cm and is only 5 cm high, is powered by the Intel Pentium M processor running at 1.3GHz or 1.6GHz and is supported by the mobile 915GM chipset with integrated GMA 900 graphics. With a target price of US$499-699 for entry-level models, the system will be the most competitive Pentium M desktop solution on the market, the sources pointed out. The sources added that the current challenge of hitting the US$499 target price is more of a software issue than a hardware issue. The system will include a 2.5-inch hard drive and slide-in optical drive, which will vary among a combo drive, DVD-ROM and DVD burner, depending on the SKU, the sources explained. A wireless mini-PCI 802.11 a/b/g wireless communication module will also be included, as well as Bluetooth support on higher-end models. The system will also have two USB ports and one IEEE 1394 port, thought the sources stated that the company has not yet finalized the specifications. AOpen will target the digital home with the system, and has included DVI, S-Video, and YPbPr outputs for connecting to HDTVs, plasma displays, large screen displays, and high definition audio products, stated Tony Yang, marketing director of AOpen. The system is also designed for low-noise environments, and so has only two fans and is powered by an external 85-watt power supply. AOpen claims the product was developed in cooperation with Intel, and will hit the market by the end of the third quarter. In addition to marketing the system under its own brand, AOpen is also considering OEM opportunities. AOpen Mini PC Photo: Michael McManus

Twinhead International is exhibit its new series of “Durabook” notebooks at its Neihu headquarters during this year’s Computex Taipei. The Durabooks are designed to withstand the hazards that may harm notebooks during daily usage. They are available in both Intel and AMD flavors. Durabooks vary in form, function and features, but share the common traits of being drop- and shock-resistance and spill proof. Durabooks all have a magnesium alloy case that is 20 times stronger than usual ABS plastic. The LCD monitor is contained in an anti-shock mounting design, while the optical drives have a patented locking mechanism. There are two models available for each platform: the 15D and 14D Intel-Centrino models and the 14K and Lite 12KS AMD-based models. The Durabook 15D supports Intel’s Pentium M CPU and is based around the 915GM chipset. It supports SATA with a 150MB/s data transfer rate and 10/100/1000 Mbps Ethernet. The Durabook 14D is a 14-inch model that also uses the 915GM chipset and supports DDR2 533 SDRAM. The Durabook 14k is a 64-bit model that supports AMD’s Athlon 64 or Sempron, while the Lite 12KS uses the Turion 64 or Sempron. Both notebooks offer AGP4x/8x high-performance graphics. In addition to the Durabooks, Twinhead is also displaying its 17P, 17K and 12K traditional models. The 17P has a 1440x900 resolution 17.1-inch LCD monitor, making it best suited to multimedia applications. This notebook supports Intel’s 3GHz Pentium 4 530 CPU. Buyers can choose between an Nvidia or ATI graphics solution. The 17K is another multimedia-oriented notebook, which offers the AMD Athlon 64/Sempron CPU. It is equipped with an Nvidia Geforce Go6600 (codenamed NV43M) on a PCIe interface with dual-channel DDR SRAM. For those who are looking for a slim, light and wireless-ready notebook, Twinhead offers the 12K. This model supports AMD’s Turion 64 or Sempron CPU and offers AGP 4x/8x graphics. The 12K weighs just 2kg and is aimed at providing a high-mobility solution. For an up-close look at the Durabooks and Twinhead's other products, a trip to the company's Neihu headquarters is required (see advertisement on back page). Alternatively, you could visit www.twinhead.com/index.aspx. Twinhead Durabook 15D. Photo: Company Twinhead Durabook 14D. Photo: Company Twinhead's Lite 12KS supports 64-bit applications on a 32-bit platform. Photo: Company Twinhead’s wide-screen 17P notebook. Photo: Company Twinhead's slim and light 12K only weighs 2kg. Photo: Company

Handset maker Wistron NeWeb (WNC) and Senao International, a handset distributor and a wireless phone manufacturer, introduced wireless IP phones supporting WiFi at Computex 2005. WNC is displaying a clamshell-design wireless IP phone that supports the IEEE802.11b standard at the show. The phone has no codename and will be shipped as an ODM product, according to the company. Senao International has introduced a series of IP phones, which use chips from Atmel Semiconductor, at the exhibition. Although IP phones usually only support the 802.11b standard, Senao’s lineup of IP phones offer 802.11a/b/g support, as well as supporting up to five-line conference calls. In related news, Asustek Computer, BenQ, Gigabyte Technology and Micro-Star International (MSI) plan to develop Wi-Fi IP phones in the second half of 2005, according to market sources. WNC WiFi IP phone Photo: Daniel Shen, DigiTimes

More notebooks using CPUs from Advanced Micro Devices (AMD) are being highlighted at Computex 2005 (May 31-June 4) than last year. Micro-Star International is featuring its Turion 64-series notebooks while Asustek Computer is also presenting notebooks using AMD CPUs. In addition, Acer is highlighting its third-generation Ferrari notebook featuring AMD CPUs. Acer finds the right formula for its AMD notebooks Photo: Allen Lin, DigiTimes

Arima Computer has launched the SW500 server board and SW5001U barebone system, which adopt dual-core AMD Opteron 800 Series CPUs in a 4-way configuration, for the demanding four-way 64-bit architecture server market. The board and barebone system are moving into mass production this quarter, according to the company. The SW500 is equipped with Broadcom's HT-2000 and HT-1000 server I/O chipsets with a HyperTransport throughput of 2000MT/s. The board also supports up to 64GB of DDR400 registered memory with ECC support. In addition to dual 10 Gb/s InfiniBand ports on a PCIe interface, the SW500 has four integrated SATA2 ports with RAID 0, 1, and 1+0 support and provides optional Ultra 320 SCSI as well. The integrated 2Gb Ethernet ports provides teaming with load balancing and fail over capability. It also provides an independent Gb Ethernet controller for a server management daughter card. The SW500 board is also available in a 1U barebone, the SW5001U, which offers a SCSI backplane with two hot swappable drive bays. It can also accommodate one riser card on one full size PCIe 8x or PCI-X 133MHz interface. For more information, visit Arima in Hall 2 at booth F184 or go to the company website: http://www.arima.com.tw. Arima's SW500 4-way Opteron motherboard Photo: Company.

Both Taiwan-based Kolin and BenQ will demonstrate a number of LCD TVs at Computex 2005 (May 31-Jun 4). This year will be the first time Kolin has appeared at the exhibition, and the company will be displaying its 20-, 26-, 30-, 32-, 37-, and 42-inch LCD TVs. In addition to 23- and 32-inch LCD TVs models, BenQ will be showcasing 37-inch and 46-inch models, which the company will begin volume producing in June and the fourth quarter, respectively, according to the company. In related news, Teco Electric & Machinery also aims to draw attention to its products at Computex by introducing LCD TV models designed by three famous Taiwanese artists.

Sampo and Tatung will be the only two Taiwan-based vendors to showcase 42-inch and 50-inch PDP (plasma display panel) TVs at Computex 2005 (May 31- June 4). For Sampo’s PDP TV lineup, the company uses panels from Japan-based Matsushita featuring a contrast ratio of 3,000:1. Tatung is using panels from both Samsung Electronics and Pioneer, with the panels featuring a contrast ratio of 3,000:1 and 1,500:1, respectively. In related news, last year Taiwan-based PDP panels makers focused on WVGA resolution (852×480 pixels) panel production, with less than 5% of the panels supporting WXGA resolution (1,280×768 pixels). On the other hand, WXGA panels accounted for 30% of the panels produced by Japanese PDP makers and 12% of the panels produced by South Korean vendors, according to market sources.

TwinMOS will display a series of computer and consumer application products at Computex 2005 (May 31-June4), including Bluetooth speakers, Bluetooth microphones, flash cards, flash disks, MP3 players and DDR2 memory modules. The company will also debut its mini MMCmobile, MMCplus and MiniSD memory cards for smartphones. Other memory devices include the 133x Ultra-X SD Card for camera phones and DVs, and a SD Combo Card. For memory modules, TwinMOS will present SO-DIMM and Micro SO-DIMM modules for notebooks and DIMMs for servers, all under the company’s TwiSTER series designed for overclockers and gaming enthusiasts. The company’s booth (A1027) will be located in Hall 1 of the Taipei World Trade Center.