The landscape of downstream electronic manufacturers is changing. 2023 was the starting point, and it will become more apparent afterward, with AI as a key driving force of this transition.
Companies like Quanta and Wistron were known as notebook ODMs in the past, but their proportion of notebooks has significantly decreased. Foxconn is also no longer solely an Apple or iPhone assembly plant.
Adapting to trends is crucial. The faster the transformation, the better the profitability, as 2023 showcased.
The financial reports for publicly listed companies in 2023 showed mixed results. Quanta achieved its highest gross profit margin in 21 years and highest Earnings Per Share (EPS) since going public.
Foxconn saw growth in gross profit, operating profit, and net profit margins. Wistron achieved record highs in gross and operating margins, with profits reaching near-record highs.
However, Pegatron experienced a decline in gross and operating profit margins compared to the previous years. Interestingly, the companies mentioned above all experienced revenue decline in 2022, with many reductions exceeding double digits.
Quanta's 2023 revenue was NT$1.856 trillion (approx. US$58.7 billion), down 15.2% year-on-year. Foxconn's 2023 revenue was NT$6.16 trillion, down 7% year-on-year. Wistron's 2023 revenue was NT$867.057 billion, down 11.94% year-on-year. Pegatron's 2023 revenue was NT$1.25 trillion, down 4.7% year-on-year.
Increased profitability despite a revenue decline indicates that while facing dismal economic situations and tense geopolitics, these companies inevitably suffer from customer order decreases. However, they could stay ahead of the curve and profit by finding the right direction. For those stuck behind the curve, they have no choice but to keep up or risk their future growth prospects.
Notebooks and smartphones are now considered behind the curve, while the latest wave revolves around AI. Right now it's AI servers, with AI PCs possibly being the next wave, though it won't start to gain momentum until the second half of the year.
Shifting trends for notebook ODMs
Quanta, Wistron, Compal, and Inventec are all traditional notebook ODMs, yet in recent years, they've all been doing the same thing: actively expanding into non-notebook businesses. Whoever moves faster in this transition will reap higher profits.
Quanta achieved a record-high gross profit margin in 2023 because the proportion of its notebook-related revenue dropped to 40-45%. Non-notebook products like servers and automotive electronics have higher gross profit margins.
With the rapid increase in AI server shipments in 2024, the proportion of notebook revenue will decrease even further. Although the increased proportion of AI server shipments will result in lower gross profit margins, overall profits will still grow.
Wistron follows a similar storyline. Although PCs still accounted for 80% of its revenue in 2023, non-PCs contributed more to profits despite only accounting for 20% of revenue.
Non-PCs were responsible for 65% of profits while PCs only accounted for 35%. The company estimates that in 2024, PC revenue will account for 75% while non-PC revenue will account for 25%, with the non-PC profit share increasing to 75%.
In other words, at their core, Quanta and Wistron are no longer notebook ODMs. Sources noted that Quanta's server profit share surpassed notebooks several years ago, and with automotive electronics joining the mix, it's clear that non-notebook products are the company's profitability focus.
The same goes for Wistron. Wistron chairman Simon Lin stated that in 2024, amidst the rough global economic and political environment, increasing revenue won't be easy and the focus will be on profitability.
Compal president Martin Wong has repeatedly emphasized that non-PC businesses are the company's priority. His goal is to increase the revenue share of Compal's non-PC businesses from 31% in 2023 to 40% within the next 3 years.
A similar situation for smartphone ODMs
When notebook ODMs are no longer primarily focused on notebooks, ODMs that previously focused on smartphones are shifting their focus away from smartphones.
Ever since Young Liu took over as chairman of Foxconn, maximizing profits has been the company's most important development direction, consistently striving to increase profit margins. Liu's goal is to raise gross profit margins to double digits by 2025. Despite the challenges in increasing profit margins, Foxconn's gross profit margin grew to 6.3% in 2023, indicating that Liu is serious about his commitment.
Observing the revenue percentage of Foxconn's four major product lines, consumer smart electronics, headlined by smartphones, accounted for 54%. Cloud networking products contributed 22%; PC end-user products accounted for 18%, while components and other products accounted for the remaining 6%.
While consumer smart electronics products and computer end-user devices are the main revenue contributors for Foxconn, they have lower profit margins. Liu's strategy involves increasing the proportion of AI server modules and substrates. He also mentioned that Foxconn controls several key modules for AI data centers, including liquid cooling and heat dissipation. The hope is that increasing the shipment proportion of AI-related components can boost profitability.
In contrast to other major players already capitalizing on AI opportunities, Pegatron had a later start, which led to its weaker financial report. The actual contribution of AI remains to be seen, and the development of automotive electronics will also take time to bear fruit. With new businesses yet to produce results, Pegatron's operations are therefore affected by the downturn in the consumer electronics industry.
In 2023, Pegatron saw a decline in revenue and a decrease in gross profit margin to 3.7%, down by 0.6% year-on-year, with operating profit margin also declining to 1.2%. Pegatron mentioned that the market outlook for PC/notebook demand has limited visibility, and significant growth signals may not be clear until after May.
Article translated by Jack Wu
