Legend Holdings Ltd. is taking China's bullish electronics industry by the horns in an effort to translate its leading PC market share into new growth areas. With China's booming wireless handset sector as its next target, Legend is stitching together a network of suppliers and EMS providers to give it quick access to what has become the world's largest market for cell phones.
Though growth in China's wireless and PC markets slowed last year, the industries are back on track, according to Qiao Song, senior vice president of Legend's IT Business Group. Song sat with EBN editor-at-large Jack Robertson recently at Legend's headquarters in Beijing to discuss the future of China's electronics industry and Legend's role in cultivating new markets.
EBN: Legend is expanding into the mobile phone market. Will you turn to contract manufacturing of cell phones, as many cell phone makers have done?
Song: Of course, because we don't have the expertise to make cell phones. It is a new area for us. Legend fully utilizes three factories in China, but we look for help when we move into new markets. We have formed several joint ventures to help us penetrate this market.
Last year we joined with Xia Hua, a Chinese telecom equipment maker, to develop and market a new line of cell phones. Recently we formed a joint venture with Texas Instruments to help us upgrade the phones with new digital data content.
EBN: Legend also manufactures PDAs. Do you plan to produce PDA wireless versions?
Song: This is part of our long-range strategy. All PDAs in the future will have to have wireless capability. We plan to merge the PDA with our cell phone in a new integrated product. The same executive, vice president Zhi-Jun Liu, is general manager of both product groups, so it will be natural to combine them in the future.
EBN: Does Legend outsource any assembly of its PC motherboards?
Song: Historically we have long had a subsidiary that made our motherboards. Lately we have increased our outsourcing, which now accounts for about half of our board manufacturing. We may increase this to 60% to 70% in the future.
In servers, we make all of the boards for low-cost, entry-level servers. In high-end servers, we acquire the motherboards from Intel Corp.
EBN: Does Legend have any long-term supply contracts to ensure future supply of components, as many PC companies are now doing?
Song: We have a long-term supply contract with Micron Technology for a full range of DRAMs. It isn't exclusive, as our business policy is to use multiple sources. We're moving to DDR memory very quickly, as that is what our customers want.
EBN: Will you have PCs in the near future that will use DDR333 memory, which is now starting to come onto the market?
Song: I think the modules and motherboards using DDR333 must still be validated. We'll wait until the validation is completed before we bring out any new PCs with DDR333 memory.
EBN: Does Legend use Direct Rambus DRAM in any products?
Song: We used to have some RDRAM when it was the only memory Intel Pentium 4 supported. However, now that Intel has gone to DDR, we're going with DDR.
EBN: Servers are also a big area for Legend. What is your roadmap there?
Song: Legend has 16% of the Chinese server market. We support Intel server processors strongly. On the same day last year that Intel introduced its [64-bit] Itanium processor, we sold a server system with Itanium. That's because, as a longtime major customer of Intel, we get processors before they're announced, and we have our products ready for the market the day Intel introduces its chips.
EBN: On the new Intel Xeon Prestonia processor just introduced, what chipset does Legend use?
Song: We're using the Intel Plumas chipset. We generally don't use third-party chipsets such as ServerWorks'. We may use a few third-party chipsets for low-end, entry-level servers.
EBN: Does Legend plan to use any of Advanced Micro Devices' processors?
Song: We will if our customers ask for AMD. However, so far we haven't seen much demand that would make us add any PCs with AMD processors.
EBN: PC market growth in China slowed slightly in 2001. Do you see it picking up this year?
Song: Yes. Legend expects 20% revenue growth in PCs this year over 2001. That compares with 10% growth last year over the previous year. The consumer market, Chinese business market, government, and education markets are all strong. China's entry into the World Trade Organization will also promote faster IT growth at all levels of society.
EBN: Does Legend have plans to expand outside China?
Song: Even though there's still a lot of room for growth in China, we want to become an international player. Currently we are No. 12 in PC world market share and we would like to improve our standing.
We decided to start in Europe because we think that's an easier market to penetrate. We have already been selling motherboards in Europe, so it's a natural extension to start selling PCs there as well. It would be much tougher trying to enter the U.S. market. We don't sell motherboards in the U.S. for the same reason.
EBN: What about expansion into other Asian countries?
Song: We sell some products in Hong Kong but have no plans to sell elsewhere in Asia. One of the reasons is that the Asian PC market is so price-competitive that you can sell a large volume of units and still not achieve much revenue.
EBN: Will China's membership in the WTO have much impact on Legend?
Song: We never enjoyed any protection in the PC market. We have always had to compete head-to-head with PC companies from all over the world.
Actually, membership in the WTO will benefit us. Elimination of [semiconductor] tariffs will mean our cost for chips will decrease. We'll pass this saving on by lowering the price of our PCs, which means more people and businesses can afford to buy PCs. Unlike the West, small Chinese businesses have to think carefully whether they can afford to buy multiple computers.