The Supply Chain Effects of Smaller Desktops
significant shifts in the relative proportions of PC client form factors than the near-term forecasts
reveal. Focusing on desktops alone, in the near-term view, the minitower, a standard 32-35 litre box
with a full complement of ports and expansion slots and bays, remains the dominant type of
desktop, even as the small (7-14 litres) and ultra-small (less than 7 litres) forms make serious
incursions (Figure 1).
direction, people often see it all at once and rush to jump on the bandwagon. Thus, it's possible
that the 2015 scenario could happen much faster, as everyone suddenly sees that converting
over to smaller desktops is the right way to go. This possibility is particularly likely if the vendors
decide to move in that direction, each not wanting to be the last to make the switch.
This research note addresses the implications of a dramatic shift over to smaller desktop form
factors and the implications of such a shift on the supply chain.
Currently, about 80% of all notebooks are manufactured in China. This output includes all ODM
factories and any assets owned by foreign and domestic OEMs. Although Taiwanese ODMs
account for the bulk of all notebooks produced, the actual plants are in Shenzen and other
Chinese cites, and other ODMs and OEMs — Korean, Japanese, and American — make their
systems there as well. The original reason for moving to China was the constant search for low-
cost labor markets, but that motive is lost in the mists now, as the Chinese manufacturing
behemoth now generates its own momentum. Labor accounts for only 1-2% of a notebook's bill
of materials, but there are many economies to manufacturing in China, including tax and other
incentives (e.g., infrastructure subsidies) and the proximity of component manufacturing sites.
Because notebooks are less modular, lighter, and carry more value per weight and size than
desktops, it is economic to have notebooks made in China and shipped by air to their end market
destinations. In many cases, they can be dropped shipped directly to customer sites, bypassing
entirely the location of the OEM branded company that actually takes the order.
Desktops, on the other hand, are far more modular and are bigger and weigh more per value
than notebooks. These facts have led to a different type of supply chain. Often, only the
barebones box is made in Asia, and sometimes it is made elsewhere. If it is going to another
continent, it then ships by sea to regional assembly plants, where the higher-value parts (i.e.,
processors, memory, and hard drives) are installed, and from where final shipment occurs.
Small assemblers can also take advantage of this process, and thus the white box market is
quite large (47% worldwide) and healthy compared to the whitebook market (20%), which is
disadvantaged by the economics and structure of the notebook supply chain. Dell has perfected
the economics of desktop assembly, putting plants in relatively low-cost locations in every region
and assembling the final product as close to the end market as possible. This allows the
company lots of flexibility, permits rapid shipment of orders, and enables custom finishing with
relatively little bother.
However, as desktops become smaller with time, at some threshold it becomes interesting to
consider porting them to a notebook-style supply chain. So, how small is small enough? At the
moment, it is clear that a six litre box is still too large, but a one litre box is small enough. So, is it
three litres? Two? Two and a half? More study will have to be done on this issue.
But this much is clear. Companies like Lenovo, which already manufactures most of its products
in China, are already positioned to graft desktop operations onto the existing notebook supply
chain. Companies like Dell, which has deep commitments in regional assembly plants, need to
examine the disposition of their worldwide assets. The good news is that there still plenty of time
to assess the situation and make the necessary moves. The bad news is that a lot of operations
will be disrupted by such a development.
Meanwhile, various OEMs are examining the opposite proposition. To what degree can
notebooks travel by sea? The high-value parts can lose up to 1% of value per week, making any
inventory extremely painful to keep around. But a barebones notebook could potentially travel by
sea and be configured with a drive, processor, and memory close to the end market. The only
high-value part on such an assembly would be the panel (motherboards have value, but also
longer shelf life than the silicon components). For some high volume SKUs, it might make
sense to move some product by sea, which is much cheaper transport than air.
More study should be devoted to the economics of the two types of supply chain to determine at
just what size and weight desktops become small enough to manufacture centrally and ship by
air. In the not-so-distant future, the desktop unit itself will virtually disappear, becoming merely a
connection point for peripherals. Of the three main distinctions between desktops and
notebooks — price, performance, and comfort — only comfort (or ergonomics) will remain
meaningful, as the final tradeoff between the two form factors will be comfort vs. mobility.
