PC motherboard industry: In grips of change

Back in 2002, the PC motherboard industry was just entering a period of major restructuring as manufacturers struggled to reduce costs to maintain their competitiveness in a challenging business environment following the PC slump in 2001. The solution they were all implementing that of the transfer of manufacturing to China Ð was only partially effective and they have all had to examine other solutions to ensure survival. Today, we see an industry that is diversifying away from a concentration on motherboards and in many cases even away from the manufacturing of motherboards.

Another trend over the past three years is that of 'the big getting bigger, ' in fact, much bigger! While the range of motherboard brands available on the market remains extensive, the reality is that many of them are no more than a brand, created by a marketing company that buys their product from a company that actually manufactures motherboards. By doing so, they remove the overhead of design and manufacturing and focus on selling. Manufacturing of motherboards has become much more concentrated in the top five companies as they have aggressively made use of the buying power afforded by economies of scale.


Industry at a glance
• The total 2003 motherboard market grew 10.8 percent in units to 132.3 million units and 8.6 percent in revenue to $9 billion. Growth is forecast to be at a 9.5 percent CAGR for units with 208.7 million units shipping in 2008 and an 8.3 percent revenue CAGR to $13.4 billion in the same period.

• Motherboard manufacturing is now concentrated among the five Tier-1 companies, which together accounted for 72 percent of all units shipped in 2003.

• Motherboard ASPs will decline at a moderate rate of 1.1 percent in the forecast period unless overly ambitious
expansion plans lead the Tier-1 manufacturers to use ASP as the main weapon for market share growth.

• Branded motherboard sales grew at a lower rate, 26.1 percent, than OEM/ODM sales, which grew at 31.1 percent for the top 15 motherboard manufacturers.

• Enthusiast and Mainstream motherboards gleaned 44.8 percent of motherboard revenue in 2003, while only
accounting for 33.7 percent of the units.

• ASPs for 2003 ranged from $119.30 for Enthusiast boards to $56.10 for Value segment boards.

• Semiconductor content accounted for 56 percent of the cost of a typical motherboard in 2003. Assembly and test accounted for a mere 6 percent.

• AMD architecture boards accounted for 22.8 percent of all boards shipped. However, in the OEM channel they only accounted for 8.2 percent while in the distributor and system integrator channel they accounted for 31.8 percent.

• Conversely, Intel architecture accounted for 77.2 percent of all shipments and 91.8 percent of OEM shipments and 68.2 percent of distributor and system integrator shipments.

• Motherboards with integrated graphics processors outshipped those without such processors for the first time in 2003, at 53.9 percent of all shipments.





Industry shifts
In 2003, the PC industry continued the growth that started in 2002, following the severe decline in 2001. This growth was echoed in the motherboard industry, which saw a unit growth of 10.8 percent over the previous year. More importantly, there was also a revenue growth of 8.6 percent, reflecting the slowdown in average selling price (ASP) decline, which had become prevalent in previous years. To a certain extent, this slowdown in ASP decline also is a reflection of the concentration of power in five major motherboard manufacturers as they also extend their reach within the client base and supply more than just bare motherboards.

Over the past four years the motherboard vendors have had to cope with the fact that motherboards have become a high technology commodity. With the majority of electrical design being done by the chipset vendors, who supply their motherboard reference designs to the motherboard manufacturers, it has become very difficult for manufacturers to differentiate their products. Today, most motherboards implement virtually the same feature set using the same chipsets from a small group of vendors. The motherboard manufacturers main contribution is the decontenting of chipset reference designs to provide the same features, but with a minimum of components while maintaining electrical integrity and functional stability.

The combination of design from the chipset vendors and 'productionizing ' by the motherboard vendors has totally changed the PC market to the extent that most PC vendors (including the Tier-1 majors) do not design motherboards. Instead they specify a list of features and functionality and buy the boards on an OEM or ODM basis from the principal manufacturers. However, as the motherboard has become a commodity with very thin margins, manufacturers have had to consider providing more to their clients to increase their margins. To this extent they have moved upstream, providing barebones PCs and even fully configured devices. They have moved into manufacturing graphics cards on the same model as motherboards and they have in many cases entered into building notebook PCs. As each of these areas has become competitive and 'margin light, ' they have endeavored to adopt the same OEM/ODM model in other volume areas with PDAs, mobile phones and increasingly CE products being in their sights.

Big players getting bigger
Focusing on their motherboard activities, immense power is concentrated in the top five manufacturers, which controlled 72 percent of the unit shipments in 2003 (Table 1). Asus retained its first place ranking and grew its unit shipments by 74.9 percent, creating a huge chasm between it and second-place Hon Hai Precision, which grew a significant 42.3 percent. ECS (Elitegroup Computer Systems) slipped from second place in 2002 to third in 2003, with its 2.9 percent unit growth, it effectively lost market share because the whole market grew by 10.8 percent. MSI and Gigabyte retained their fourth and fifth places and enjoyed growth of 19.5 percent and 16.6 percent, respectively.



As for the next 10 manufacturers, we see growth variations from 64.5 percent to minus 20.8 percent, reflecting the mixed fortunes of these Tier-2 and Tier-3 companies. Lastly, we see a continuation of the major trend toward concentration, with the Others segment dropping by 47.4 percent as the Tier-1 manufacturers provide boards on an OEM basis for increasingly more of the minor vendors.



This trend has moved the five Tier-1 manufacturers from making 44 percent of all motherboards in 2000 to 72 percent in 2003. In the same period, the 'Others' have moved from 42 percent to 10 percent. In the middle ground of the Tier-2 and Tier-3 companies we see a slight increase from 14 percent to almost 18 percent.

Generally, companies that are focusing entirely on the OEM/ODM portion of the market (Hon Hai, FIC, USI, Mitac, Wistron) perform better. In 2003 these companies collectively grew 31.1 percent which was more than the 26.1 percent growth of those focusing on either branded sales or a mix of branded and OEM/ODM (Table 3). These numbers relate to those companies identified in the Top 15.



Motherboard forecast
The motherboard industry enjoyed a good year in 2003 with 10.8 percent unit growth and 8.6 percent revenue growth. This followed a year of modest 3.5 percent unit growth and flat 0.7 percent revenue growth in 2002. This growth reflected the trends in the PC market and this will continue to be the case as we move through the forecast period to 2008 (Table 4). A moderating factor over this period is the changing product mix as mobile PCs take a greater share of the PC pie.



For 2004, forecasts indicate that unit growth will be 12.3 percent, with shipments reaching 148.5 million units while revenue growth will be more modest (10.7 percent), reaching in excess of $9.9 billion. This reflects the continuing slowdown in ASP erosion that occurred in 2003 and which is expected to continue over the forecast period. By 2008, unit shipments are expected to reach in excess of 208 million while revenue will be greater than $13 billion, reflecting respective CAGRs of 9.5 percent and 8.3 percent. Over the forecast period very little change is expected in motherboard ASPs.





Regional breakdown
A more detailed look at the figures for 2003 motherboard shipment reveals many interesting factors. From a regional shipment perspective, North America and Europe are the biggest markets (Table 5). However, the composition of the shipments to these geographies are somewhat different with North America being almost equally split between OEM and channel shipments while Europe is one-quarter OEM and three-quarters channel. Japan, although much smaller, is the reverse of Europe, with three-quarters OEM and one-quarter channel. Apart from China, the remaining geographies are all well biased toward channel shipments, showing the strength of the clone markets in these smaller fragmented markets. China has a higher proportion of OEM shipments due to the presence of a strong indigenous PC vendor base in the form of Lenevo, Founder and Tsinghua Tongfang.




Dollars and cents
Overall, motherboard ASPs in 2003 declined 2 percent compared to 2002, averaging $67.80, as compared to $69.20 in 2002. The range of ASPs was from $119.30 for Enthusiast boards to $56.10 for Value boards. Due to the volume pressures on OEM boards their ASP was similar to the Value boards at $56.60. As expected, the the Mainstream boards have an ASP roughly between that of the Enthusiast and Value segments at $86.10.



Mainstream boards have an ASP roughly between that of the Enthusiast and Value segments at $86.10 . The five major manufacturers have grasped almost three quarters of all units shipped and are now planning to increase their share even more. Analysis of the planned production of the top five shows that they have all boosted their manufacturing capacity. Using Asus as an example, they are quoting a unit shipment target for 2003 of 40 million units, a growth of 35.6 percent over their 2003 shipments. All the other Tier-1 vendors are talking similar growth target numbers. If we multiply their combined unit shipments by this number, a total of 130 million units is the result. With a forecast number of 148.5 million units this would represent 87.5 percent of all shipments in 2004. To achieve this number, the top five would need to manufacture for most of the Tier-2 and Tier-3 motherboard vendors plus a significant portion of the ODM vendors. It is believed that this market penetration is not achievable except at the cost of a severe ASP decline. The reality is that most if not all simply won't achieve their growth targets for this year, and the real result is that those that grow will mainly do so at the expense of other Tier-1 players.


Motherboard categories
Motherboards are tracked in four general categories, three that reflect shipments into the distributor and system integrator channels and one for the overall OEM channel. The 2003 split between these four categories shows that the OEM category is the biggest, with 38 percent of shipments (Figure 1). The Mainstream segment is the second largest with 29.4 percent, while the Value segment is third with 28.3 percent and the Enthusiast is the smallest with 4.3 percent of all shipments.



On examination, the relative revenues associated with these four categories show that while the Enthusiast is the smallest in units and overall value, the value per board is much higher and 4.3 percent of units account for 7.5 percent of revenue, for a revenue-to-units ratio of 1.74 (Figure 2). Similarly, the Mainstream segment raises 37.3 percent of revenues with 29.4 percent of units, for a ratio of 1.27. Measured on the same basis the Value segment shows a ratio of 0.83 while the OEM segment is marginally better at 0.84. These ratios are reflected in lower margins, so the quandary for the major players is balancing the mix of the business between production line filling/low margin OEM/Value business and higher margin/lower volume Mainstream and Enthusiast products. Each company has its own business model with different ratios as they try to achieve a degree of profitability.





Integrated graphics on the rise
Within the chipsets used on motherboards, the next biggest architectural difference after CPU choice is that of graphics choice. Will the motherboard feature a chipset that has an integrated graphics processor (IGP) or one that features no on-board graphics processor and necessitates the use of an add-in board (AIB) for graphics support? While the mix has fluctuated over the past few years the IGP boards are definitely in the ascendancy, and in 2003 shipments of IGP-based boards exceeded AIB-based products for the first time where 53.9 percent of all motherboardsshipped with an IGP chipset (Figure 3).



More interesting is the mix of IGB and discrete AIB in the individual board segments (Figure 4 and 5). In the Enthusiast category, it is clear that there are no IGP boards shipped. The mantra here is one of performance and thus there is no room for an integrated graphics solution. In the Mainstream arena, there is more latitude, and while the user may need high processor performance, extreme graphics are not a major contributor to the end-result, hence we see 43.4 percent of boards shipping with IGP. When the Value and OEM segments are evaluated, we see that shipments of IGPs exceed the AIB with 54.6 percent of units in the Value segment and 67.7 percent of the OEM. The latter number is perplexing, at least until you start going through the Web site of the major PC vendors.

When this is done, it is seen that many stockkeeping units (SKUs) are based on IGP boards that allow the flexibility of several SKUs on one platform. The most cost-effective (i.e. least expensive) SKU will ship with the IGP active and no AIB in the AGP slot and the lowest performance CPU, etc. The next most expensive will have a moderate performance AIB in the AGP slot, a moderate performance CPU, etc., and so on – allowing one base platform to give several levels performance at various price points. This practice then begs the question as to how many PCs are shipped with both an IGP present on the board and an AIB graphics adaptor fitted in the AGP slot.. A recent study of AIB graphics adaptors revealed that 78.4 million stockkeeping units (SKUs) are based on IGP boards that allow the flexibility of several SKUs on one platform. The most cost-effective (i.e. least expensive) SKU will ship with the IGP active and no AIB in the AGP slot and the lowest performance CPU, etc.

The next most expensive will graphics processor units (GPUs) were shipped in 2003. Assuming that every motherboard that has no IGP on board was partnered with a GPU, then 60.9 million of the Graphics boards are accounted for, and this leaves a total 17.5 million boards available fordouble occupancy, i.e., 13.2 percent of all motherboards shipped, or alternatively 22.3 percent of all AIB Graphics cards. This number is lower than when it was last looked at, but it is not surprising. While the performance of an IGP is found wanting, when compared to an AIB-based graphics solution, the reality is that for the tasks that most consumers and, more importantly, corporate users actually use their PCs, they are more than adequate.



Another factor that will further drive the acceptance of IGPs as we move forward, is the entry of the major GPU vendors, NVIDIA and ATi into the PC chipset market with their own IGPs. This move validates the use of IGPs even more, as they are now supplied by leading graphics vendors.

Conclusion
The motherboard market is buoyant and moving ahead with reasonable growth prospects. The commoditization of the product has led to structural changes that have concentrated the manufacturing power in the hands of a small group of companies. Yet, even for these companies to continue growing they must migrate up to the PC value chain and/or look to other high-volume product areas where they can imitate the same business model that has developed for the PC.


The migration of manufacturing to China has resulted in very little left to cut for further cost savings, and thus manufacturers need to determine how they can gain market share without impacting the already-thin margins. However, with the ambitious growth plans of the top-five vendors cutting into their ASPs and further eroding margins, this may be the only way that those plans may be met this year.

The writers are analysts with Compute Platforms, iSuppli Corporation.