HCB Chapter 191 Compaq's Manufacturing Orders
Chapter 191 Compaq's Manufacturing Orders
At nine o'clock in the morning, Ben Rosen walked into the conference room of Star Technology.
He looked older than a year ago, with deep wrinkles around his eyes. There was a noticeable ink stain on the back of his hand as he put down his briefcase.
"Ling." He reached out his hand.
"Hi, Ben." Ling Yun shook hands. "Would you like a coffee?"
"Black coffee, no sugar, please."
The assistant brought over coffee. Rosen took a big gulp, and the bottom of the cup made a soft clinking sound as he put it down on the table.
"You've heard about the DEC thing, haven't you?" he asked.
"I heard. It's been three months since the acquisition. How's the integration going?"
"It's been three months since we finished." Rosen loosened his tie. "I spent eighty-six billion dollars, bought three thousand engineers, and a bunch of technical patents that I don't even understand. Now, every day in meetings, the people from DEC say, 'This architecture can't be changed,' and our people say, 'This cost must be reduced.' We can't do anything."
He opened his briefcase, took out two reports, and pushed them in front of Ling Yun.
One document is Compaq's manufacturing cost analysis, and the other is DEC's product line list.
"Look at this." Rosen pointed to a figure on Compaq's report. "The assembly cost per desktop computer is 18 percent higher than Dell's. Why? Because we're still using the traditional distribution model, with an inventory turnover of 47 days, while Dell only needs 19 days."
He then pointed to DEC's list.
"Look at this one. The Alpha server does have good performance, but it costs $150,000 per unit, and only a few hundred units can be sold in a year. With the R&D costs spread out, each unit loses $20,000."
Ling Yun looked through the reports without saying a word.
"I need contract manufacturing," Rosen said. "For mid-to-low-end desktop PCs, starting at 100,000 units. Can your Xinghuo Electronics factory make them?"
"Yes," Ling Yun said, "but what about Compaq's own factories?"
"I have to deal with union issues, production line transformation, and the problem of those DEC engineers looking down on the PC business." Rosen rubbed his temples. "I don't have time. Dell's market share increased by another three percentage points last quarter."
"OEM pricing?"
Rosen wrote a number in his notebook and pushed it over.
Ling Yun glanced at it.
"At this price, our profit margin is only five percent."
"Five percent is quite a lot. The quantity is large."
Dell gives its contract manufacturers an 8% profit margin.
"That's Dell." Rosen took another sip of coffee. "And their manufacturing plants are in Taiwan, so their labor costs are lower than yours."
"But transportation costs are high and the time cycle is long," Lingyun said. "Our factory is in Shandong, and the parts are sent from Shenzhen. Once assembled, they are shipped directly to the United States via Qingdao Port, which is seven days faster than shipping from Taiwan."
"That's why I came to you," Rosen said. "But this is the price I can offer. The board gave me cost targets, and I have to meet them."
The meeting room was silent for about ten seconds. A car drove by outside the window.
"I can accept the price," Ling Yun said, "but on one condition."
"explain."
"Compaq wants to purchase our keyboards and mice. At least 30% of them will be compatible."
Rosen leaned back in his chair.
What are the prices of your keyboards and mice?
"Keyboards are $89, mice are $69. Here you go, keyboards are $79, mice are $59."
"What about the market price?"
"Logitech keyboards cost 120 yuan, mice cost 100 yuan. Microsoft's are even more expensive."
"quality?"
"Optical mouse, 800 DPI, currently the highest precision on the market. Keyboard mechanical switches, lifespan of 50 million keystrokes."
Rosen took out his calculator and pressed a few buttons.
"One hundred thousand computers, thirty percent of that is thirty thousand sets. The total price of the keyboards and mice..." He pressed a few more keys, "...four million one hundred and forty thousand US dollars. Plus the manufacturing fees..."
"I've reduced the profit margin for OEM manufacturing to seven percent," Ling Yun said. "For keyboards and mice, I can still offer a three-point discount. Ultimately, the profit margin for keyboards will be 76 percent, and for mice, it will be 56 percent."
"Why do we have to purchase the parts ourselves?"
"Because of your distribution channels," Lingyun said. "Compaq's computers have entered businesses, schools, and government agencies. Those users who have tried our keyboards and mice and found them good will buy them separately next time. This is market education."
Rosen stared at the numbers on the calculator for a long time.
"Dell also uses your components?"
"Yes. Starting last month, 25 percent of Dell's orders included our keyboards and mice."
"What price did they offer?"
"Trade secrets".
Rosen smiled, but the smile was brief.
"Cunning," he said, "but I like it."
He pulled a draft contract from his briefcase, flipped to the price terms page, and changed a few numbers with his pen. After making the changes, he pushed the contract towards him.
"The OEM price will be as you said, with a 7% profit margin. For component procurement, the first batch will be 30,000 sets: 76 for keyboards and 56 for mice. The second batch will be decided based on market feedback."
Ling Yun took the contract and read it carefully.
"Delivery time?"
"The first batch of 20,000 units will arrive before the end of December. The second batch of 30,000 units will arrive by the end of January next year. The remaining 50,000 units will be delivered in quarterly installments."
"Can."
"There's one more requirement," Rosen said. "The 'Spark' logo cannot appear on the packaging. It can only say 'Compaq Custom Keyboard and Mouse'."
"Yes, but our logo must be on the product itself, even if it's very small."
"How small?"
"The bottom of the keycaps and the bottom of the mouse are not visible to the user during normal use, but can be seen when disassembled."
Why?
"For patent protection. If someone copies it, we need to be able to prove that it is our product."
Rosen thought for a moment.
"OK."
The two signed the contract. After signing, Rosen let out a long sigh and threw the pen on the table.
"Sometimes I wonder," he said, "what was the point of me spending 8.6 billion to buy DEC?"
"For the sake of technology."
"What's the use of technology? If you can't sell it, it's just waste paper." Rosen stood up and tidied up the files. "Dell has no technology at all, all it knows is how to sell computers, and now it's about to win."
"Not necessarily." Ling Yun also stood up. "DEC's Alpha chip, if optimized well, can perform high-performance computing, which Dell doesn't have."
Do you know how much optimization costs?
"I know, but it's worth it."
Rosen glanced at him, said nothing, and picked up his briefcase.
He stopped when he reached the door.
"By the way," he said, "people from Microsoft are asking about you. Ballmer's assistant contacted us last week, asking if Compaq and StarCraft have any deep collaboration."
"What did you say?"
"I said, not for now," Rosen said, pushing open the door. "But I doubt it can be kept secret for long."
After he left, Ling Yun stood in the conference room for a while.
Then he picked up the phone.
"Li Mo, we've secured the Compaq order. 100,000 units to be manufactured, plus 30,000 keyboards and mice."
There was a two-second silence on the other end of the phone.
What are the profit margins for OEM manufacturing?
"Seven percent."
"Too low."
"But the profit margin on keyboards and mice is 35 percent," Ling Yun said. "And this is Compaq. Their distribution channels can help us get our components into places we couldn't reach before."
"...Understood. When do we need a production plan?"
"I'll ship it to you this afternoon. The first batch of 20,000 units will be delivered before the end of December."
"There's still time. The new factory will be operational next week, increasing production capacity by 40%."
"it is good."
After hanging up the phone, Ling Yun walked back to her office.
On the table sat a gold badge brought back from Doha, gleaming slightly in the sunlight.
He picked up the badge, looked at it, and put it in the drawer.