As PC Market Shrinks, ODMs Seek Greener Pastures: Server Farms

As the traditional PC market shrinks, original design manufacturers (ODMs) are trying to diversify from their stronghold of laptops into higher growth segments of the computing market -- namely servers.

Two trends are leading PC vendors to pull the design job away from ODMs and back to their internal teams. First, vendors are desperately seeking ways to at least maintain, if not grow, their share of a declining PC market. According to Gartner, PC production declined 2.5 percent in 2012. Both consumers and enterprises are adopting tablets and smartphones at the expense of PCs. Second, Apple -- which does all of its design in-house -- has demonstrated how an innovative design, rather than a standardized one, can be a major factor in capturing market share.

Acer’s Aspire S7 ultra-notebook is a good example. Introduced last fall at a $1,600 MSRP, it is the first laptop that Acer has designed in-house in more than a decade.

This is bad news for the ODMs, almost all of which are in Taiwan. They include Wistron Corp., Inventec Corp., Pegatron Corp., Quanta Computer Inc. and Compal Electronics Inc. According to recent statistics, about 94 percent of all laptops are designed and built by these companies. In fact, both Wistron and Compal’s revenues were down significantly in 2012, according to the Wall Street Journal.

The ODMs are cultivating a growing white-box server market, building equipment for the mega-datacenters run by social media, search, and e-commerce giants like Facebook and Google and Amazon.

According to DigiTimes, ODMs already design and build all of Google's servers and about 30 percent of Amazon’s, with those numbers expected to rise this year. It appears that a lot of this business is coming from Facebook’s Open Compute Project (OCP), which aims to use open hardware and open-source software to increase the efficiency of datacenters.

The move makes sense. While design has become more important for consumer products like tablets, smartphones, and laptops, the trend has gone the other way for servers. Who cares what a server looks like? Humans rarely touch it. The aim is to get the most efficient and effective computing power into as small a space, using as little power, and generating as little heat, as possible. In these datacenters, the brand of the server -- much less the attractiveness of the design -- is largely irrelevant.

Recent news reports out of Asia illustrate the interest in this market:

• In December, both Wistron and Quanta have reportedly received large orders for servers from Baidu, the Chinese search company, and Microsoft.
• In December, DigiTimes reported that Quanta has landed white-box orders for servers from Google, Amazon, Facebook, and Goldman Sachs.
• In January, DigiTimes reported that Wistron and Quanta would be bidding on "storage products" for Facebook. "Since the big web players also wish to directly outsource network switches and storage devices to ODMs, the sources expect network switches to be integrated into server racks in the next two years, helping ODMs to expand their businesses to a higher level," the Taiwan-based news site reported.

Apparently distributors see an opportunity here as well. Avnet is a member of the OCP. In a recent interview, the head of the OCP, Frank Frankovsky, described some distributor plans:

Synnex has launched a new division called Hyve around developing and supporting Open Compute hardware. Avnet is investing in Open Compute labs around the country where end users can come in and work on the Open Compute product, customize it to their liking, then procure it and have it be supported through Avnet.

Whether the server business will be enough to replace the PC market share that ODMs are losing remains to be seen. And how brand-name server vendors react will be interesting to watch. (Dell has already reportedly shifted server orders away from one ODM that is building directly for datacenter clients.) But as the PC market dies, ODMs' survival will depend on finding new, and growing, markets.