By Dow Jones Business News, March 14, 2013, 07:24:00 AM EDT
By Eva Dou
TAIPEI--For years there was a clear divide: Taiwanese contract manufacturers made all the world's well-known tablets
like Apple Inc.'s ( AAPL ) iPad, while Chinese firms made imitations for little-known brands. But with Hewlett-Packard
Co.'s ( HPQ ) newest device, the line is blurring.
H-P, the world's largest personal computer maker by shipments, chose Chinese firm BYD Electronic (International) Co.
(0285.HK) to manufacture its new Android tablet called the Slate 7, said people familiar with the project. It's an
unusual departure from the industry practice of relying almost solely on Taiwanese contract manufacturers, and an
example of how Chinese companies are starting to become more serious competitors.
Shenzhen-based BYD Co. (1211.HK) is better-known for making electric cars and batteries, but over the past few years
it's been quietly building up electronics production expertise in its subsidiary BYD Electronic. Berkshire Hathaway
bought a near-10% stake in BYD Co. in 2008, in Warren Buffett's highest-profile investment in China so far.
Virtually every previous big-brand tablet that wasn't produced in-house has been contracted out to a Taiwanese
company, such as Hon Hai Precision Industry Co. (2317.TW), Quanta Computer Inc. (2382.TW), Compal Electronics Inc.
(2324.TW), or Pegatron Corp. (4938.TW). These companies were seen as having both the technology and the scale to carry
out these projects at attractive prices.
But when H-P decided to make a low-cost tablet to vie with Google Inc.'s ( GOOG ) Nexus 7 and Amazon's ( AMZN ) Kindle
Fire HD, it passed over its usual Taiwanese hardware partners and outsourced to BYD, said people familiar with the
project who declined to be named because they were not authorized to discuss the arrangement.
"BYD is getting quite serious about tablets," said UBS analyst Arthur Hsieh. "They are starting to get quite well-
recognized clients. However, it's unlikely to be a major competitor to Taiwanese contract manufacturers, as BYD lacks
the experience and scale."
The Slate 7, H-P's first Android tablet, was launched last month and undercuts by $30 the price of the Nexus 7 and
Kindle Fire HD, which were made by Taiwanese contract manufacturers. The lower $169 price comes with some tradeoffs in
specs such as screen resolution, but H-P has been playing up the tablet's sound quality with embedded Beats Audio.
BYD declined to confirm whether H-P is a tablet customer. "BYD is actively expanding its tablet computer business, but
cannot provide any specifics at the moment," it said in a statement.
"Suppliers for the Slate 7 offered the best quality and cost solution for the product," H-P said in a statement.
H-P also turned to a Chinese supplier for the Slate 7's processor - Fuzhou Rockchip Electronics Co. - instead of big-
name U.S. chipmakers like Qualcomm Inc. (QCOMM) and Nvidia Corp. ( NVDA ).
Fears of the rise of Chinese rivals have circulated in Taiwan's tech industry ever since Taiwanese firms moved
factories en masse to China during the early 2000s in pursuit of lower costs. Taiwanese executives have tried to prevent
the leak of trade secrets by keeping their Chinese factory-floor workers from being promoted into high-level positions.
But there has still been conflict. Foxconn International Holdings Ltd., a subsidiary of Taiwan's Hon Hai, sued BYD in
2007, accusing the Chinese firm of hiring away employees and stealing trade secrets in a case that is still ongoing.
Sanford C. Bernstein analyst Alberto Moel said that while Chinese firms like BYD are still far from becoming a major
threat to Taiwanese contract manufacturing giants, they are rapidly advancing their technological capabilities.
"The Chinese players haven't had a lot of traction in the past, but they are moving up the knowledge curve," he said.
"They will be a bigger force, especially outside of traditional PCs."
Acer Inc. (2353.TW) President Jim Wong said Monday there is growing interest in alternative component suppliers, as
the fierce price competition for tablets sends manufacturers in search of lower-cost solutions. Acer also opted not to
use a big-name processor for its low-priced Iconia B1 tablet, choosing instead a more economical chip from Taiwanese
firm MediaTek Inc. (2454.TW).
The growing popularity of low-cost tablets prompted research firm IDC to raise its 2013 forecast for global tablet
shipments to 190.9 million units from a previous forecast of 172.4 million units. That translates to a 56% growth this
year compared with 2012.
Write to Eva Dou at email@example.com
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