1、March 23, 2010 Asia Pacific: Technology Goldman Sachs Global Investment Research 1 March 23, 2010 Asia Pacific: Technology GS Taipei Cross-Strait Technology Summit 2010: Key takeaways More open cross-strait policy may lead to a win-win situation During our tech conference, the chairman of Taiwans St
2、raits Exchange Foundation, PK Chiang, stated his hope that ECFA will bed down in 1H2010. We believe the two parties are jointly moving bilateral relations forward, especially in the economic arena. Many firms highlighted the significance of the liberalization of business cooperation between China an
3、d Taiwan. TSMC noted the importance of lifting the ban on building 12” fabs in China in 1-2 years. AUO noted the benefits of setting up LCD fabs in China to bring them adjacent to end markets. We believe concerted efforts on both sides of the Taiwan Strait are creating a win-win situation. Ongoing s
4、pecialization is the way forward Cross-strait co-operation should emphasize specialization in the tech space. TSMC indicated China could focus on fabless development while Taiwan could focus on foundry. Acer said Chinas strength in software and internet services is a perfect match with Taiwans stron
5、g hardware manufacturing (e.g., foundry, panel, NB ODM). MediaTeK and AUO demonstrate best practice, in our view - they have successfully leveraged their China partners to expand market share not only in China but also globally. Strong upstream semi capex in 2010; China 3G build-out continuesTSMC be
6、lieves its 2010 capex of US$4.8 bn is reasonable as it will enable it to retain its dominance in 40nm and 28nm capacity. ASE expects its capex to reach US$600-$700mn in 2010, above its previous guidance of US$450-$500mn, in order to gain market share in copper wirebonding. ZTE stated that China 3G d
7、eployment has been much faster than that of 2G, but it is still in the early stage with relatively poor coverage. ZTE still expects its China revenues to increase 15-20% yoy in 2010. Low margin HW caps white-brands; content leads 4C convergence Acer/Tianyu do not expect white-box vendors to replicat
8、e 2G/2.5G handset success in the NB/3G smartphone market as NB is already a low-margin business and pricing is not the only factor driving smartphone demand. HTC also addressed the importance of user experience in the smartphone business. Separately, Acer expects convergence within 4C in the tech do
9、wnstream to be a long-term trend, while Innovation Works said content may be a more important factor than BOM cost in the future given internet driving software/services will become the decisive factor in outperformance. POINTS TO NOTE Goldman Sachs Cross-Strait Technology Summit was held on March 2
10、2 in Taipei. At the conference, we hosted nine major tech upstream and downstream firms: Acer, ASE, AUO, HTC, Innovation Works, MediaTek, Tianyu, TSMC, ZTE. ECFA: Economic Cooperation Framework Agreement contains details for implementation of greater cross-strait co-operation. We believe the ECFA wi
11、ll put Taiwan in a better competitive position than countries with financial MOUs with China. For more details, please see our November 17, 2009 report, Asia Economic Flash: Taiwan: Q and China on fabless IC design to leverage its vast pool of engineering talent and market potential. TSMC has March
12、23, 2010 Asia Pacific: Technology Goldman Sachs Global Investment Research 3 enjoyed significant revenue growth from its Chinese customers. Its China revenue is now higher than that from Japanese customers. China market growth: The consumption of electronics devices relies greatly on the middle clas
13、ses. Chinas middle class is about 200 mn. Morris Chang, the CEO/Chairman of TSMC, believes this figure will rise to 500-600 mn in the next 10 years. By then, the size of the China market size may surpass that of the US. Also, China will be able to supply abundant high-quality engineers and designers
14、 as its economy continues to grow. More open Taiwan cross-strait strategy: As many companies have been operating in China for years, TSMC contends that the more open cross-strait policy by the Taiwan government authorities did not actually provide concrete new avenues to pursue business but has remo
15、ved political uncertainty, enabling corporates to more clearly outline future cross strait strategies. Separately, TSMC expects the Taiwan government may allow the establishment of 12” fabs in China in 2011-2012. Business landscape: The final phase of Moores Law: Moores Law has entered its final pha
16、se. That said, the number of transistors which can be placed on an IC may not double every 18-24 months, but over a longer time frame in future. Morris Chang is confident that 20 nm nodes as well as 14-15nm nodes will be introduced, but that the time interval between adjacent nodes might lengthen, a
17、nd he believes that Moores Law might also work at the single digit nm level. Semiconductor content: Morris Chang indicated that semiconductor content in electronics might continue to decrease due to the introduction of new materials such as touch panel. However, these new materials have improved use
18、r experience and should help stimulate demand. Competition: Morris Chang indicated that many industry veterans have failed to recognize that a successful foundry requires a distinct “partnership and service oriented” corporate culture. Many IDM companies lack this kind of culture. Company specific:
19、Foundry capex plan: TSMCs capex guidance of $4.8 bn in 2010 is aimed at building on strong customer demand and comes after careful analysis. Morris Chang believes that TSMC will remain its dominance in “effective“ capacity for 28 nm and 40 nm nodes. He said he wished TSMCs capex plan could be even h
20、igher in 2010. TSMC solar and LED development: TSMC is still in the preliminary phase of solar and LED development. However, TSMC will not duplicate its semi foundry business model in these two fields, but will be looking to sell own-brand solar/LED products. He highlighted that TSMC would not compe
21、te with any existing customers in these areas. Mobilizing the future HTC GS view: While the panel discussion with HTCs Chairwoman, Ms. Cher Wang, and CEO, Mr. Peter Chou, did not yield new financial guidance, we believe the message from management is March 23, 2010 Asia Pacific: Technology Goldman S
22、achs Global Investment Research 4 constructive for HTC to capture the mobile data opportunity and reaping the rewards of its continued investment in its brand building activities globally. HTC reiterated its goal to become a top-three smartphone company by 2013, and believes it has the strategies in
23、 place (product roadmap, marketing resources, and operator engagement) to deliver this result. Business landscape: Optimistic in the smartphone market: HTC is positive on smartphone market growth and believes the market potential has not been fully discovered. Despite more vendors entering the indus
24、try, HTC has never underestimated its competitors, and thinks this market will be addressed by multiple successful OEMs. Increasing importance of software content and UX: HTC believes user experience is very important to give consumers a “holistic” smartphone experience and drive demand. Having its
25、proprietary operating system (OS) may have some advantages, but is not the most important factor in being competitive in the smartphone market. China opportunities: HTC said that mobile internet usage in China is growing rapidly and “localization” is its key strategy to penetrate this market. HTC wi
26、ll work hard to fulfill consumers needs by delivering tailor-made products. Long-term strategy: Enhance brand awareness: HTC believes a strong brand is the key to success, and the supporting factors to achieve this target include innovation, solid execution, customer fulfillment, and technology expe
27、rtise such as antenna and radio technologies. Time-to-market capability: HTC believes its superior product delivery and execution are the main areas of its competitiveness over other smartphone peers thanks to its flexibility and sensitivity to end markets. Remain competitive in in-house production:
28、 HTC believes its in-house manufacturing is very competitive in terms of cost structure and time-to-market. Even though HTC is flexible in its outsourcing strategy, it faces no pressure to outsource its production to EMS vendors in the foreseeable future. Company specific: Profits to be driven by vo
29、lume ramp up: HTC expects its opex ratio could range from 15-17% this year, slightly higher than the level seen in 2009 due to more brand building investments, but HTC will be benefiting from the scale expansion. HTC will not risk sacrificing its profitability merely to gain market share, but will s
30、eek a balance between the two to drive long-term shareholder value. HTC Smart, an initiative aimed at the mass consumer market: HTC believes the BMP (BREW Mobile Platform)-based HTC Smart is a stepping stone for the company to tap into the mass consumer market, featuring a smartphone-experience prod
31、uct with better affordability and greater simplicity that operators are demanding. HTC does not have high expectation in terms of volume (1-2mn units this year) given the early stage of this model, but has been working on the 2ndand 3rdgeneration of BMP handset to continue addressing the mass consum
32、er market. Apple lawsuit: HTC believes it has a very strong legal team and is well prepared for this type of litigation. March 23, 2010 Asia Pacific: Technology Goldman Sachs Global Investment Research 5 The China Arena Acer vs. Innovation Works GS view: Acer believes the China market is crucial for
33、 it to become the global No. 1 PC brand in two areas: (1) China is one of the highest growing PC/NB market in the world and Acer accounts for only 7% of the China NB market (vs. 20% of the global NB market share in 2009, according to IDC); (2) Acer can leverage its supply chain in China to capture t
34、he global market share else where. We think Acer can improve its market share in China after it finishes restructuring its channel strategy there. We like Acer for its potential in China as well as its good execution record Acer tends to meet its guidance. However, we rate the stock Neutral as we be
35、lieve most of the positives have already been factored into the share price. Cross-strait point of view: Cross strait co-operation: As Taiwan has the edge in foundry/panel/ODM and China has software/mobile internet/services strength, government authorities from both sides of the strait should seek m
36、ore opportunities for strategic alliances to pursue global market share. What to pay attention to when entering the China market: 1) understanding that China has different local market dynamics is crucial. The marketing strategy and end customers requirements differ between cities and between tiers
37、of cities and China overall is very different from developed markets; 2) building local teams should save on logistics between headquarters and local office and shape better China localization. China value: The possibility of witnessing a landscape-changing firm emerging in China (such as Google) is
38、 slim. Chinas competence lies in reproducing business models and then refining them which in turn should lead to brand new applications in time. China may also begin to innovate business models and will continue to make profits. Cloud computing in China: Dr. Li Kai-Fu (the CEO/Chairman of Innovation
39、 Works) is very bullish regarding development of cloud computing applications in China, especially the gaming industry. Cloud computing can help reduce the cost of software development, but more importantly, it ensures payment for software and provides a way to bypass the issue of piracy in China. S
40、ince users have to log on to enjoy the services, the mechanism will ultimately force end users to pay. However, the difficulties of cloud computing development in China include 1) it is hard to put together a senior engineering team in China (because much of the best talent tends to prefer larger fi
41、rms); 2) broadband infrastructure is not yet complete for example Northern and Southern China are not well connected to each other via broadband, and 3) Chinese internet service parties have not yet prepared to move from PC applications to Internet applications. Business landscape: 4C convergence (C
42、omputer, Communication, Consumer electronics and Content): Acer expects to see multiple mobile internet devices in existence with integration among service and content in the future. On top of that, the synchronization platform for each device should be a major trend. On the other hand, Dr. Li Kai-F
43、u expects the internet to be a great equalizer (as all devices develop the ability to access the internet, March 23, 2010 Asia Pacific: Technology Goldman Sachs Global Investment Research 6 rather than computers), which may lead hardware to become more of a commodity in future. As such, more softwar
44、e companies may emerge. Smartphone: The long-term gross margin for smartphones should be around 15-20% according to Acer. In addition, the open system adoption rate should increase. Acer may consider launching its multi brand strategy in smartphones after smartphones reach a certain level of shipmen
45、ts. China consumer behavior: Dr. Li Kai-Fu highlighted the Chinese consumption pattern. Only 25% of the phones are sold through operators, providing potential opportunities for third-party application developers. Also, 75% of the Chinese end users are under the age of 26 (vs. 42 in US). The developm
46、ent of mobile applications will therefore be centered on the younger generation, mostly featuring localized social-networking (ie. QQ) and games. On top of that, cloud computing could be the solution to the piracy problem in China. Company specific: Acers China growth: Acers current NB market share
47、in China is 7% (vs. 21% in global market in 2009 based on IDC). The China market is critical for Acer to become the global number-one PC brand. Acer expects to increase its market share in China via its multi brand strategy, but without OPEX increasing. Acers corporate business: Acers corporate busi
48、ness contributed 30% (20%-25% SMB and 5% large corporates) of total sales in 2009 compared with 40% in 2009. The change is due to the rapid growth of consumer business. Acer said SMB demand is quite strong in 2H09 and expects commercial PC demand to ramp up in 2H10. Smartphone: Acer expects its smar
49、tphone margin to stabilize in 15%-20% and the revenue contribution from smartphone to reach 10% in 3 years. Building cross-strait ties - Taiwans Straits Exchange Foundation GS view: In our view, Chairman PK Chiangs presentation reaffirms our view that the focus of cross-strait developments for 2010 will be discussion of the detail of ECFA. In our view, cross-strait policies are developing against the backdrop of steady momentum in Taiwans cyclical recovery (reference our Jan 15 report: Taiwan: Cross
