Today is not just a day which lives in infamy for WWII buffs. December 7 marks a historic date for Gigabyte Technology Inc., as it officially begins its executive trademark license of its brand to “Gigabyte United,” a joint venture with Asustek. The agreement was originally announced in August, with an initial capital of NT$8 billion (approx. US$244 million) and the terms being that Gigabyte will own a 51% stake in the company, with Asustek picking up the other 49%.
“The motherboard industry is a matured one, with slow growth and fierce competition. The Gigabyte/Asustek alliance will increase the competitiveness of both parties, and benefit the overall developments of the motherboard industry,” wrote Gigabyte in a statement. “In addition, by consolidating both companies’ resources, we will establish the world’s best motherboard and graphics card development platform to provide high-quality products and services.”
The Gigabyte United deal only applies to Gigabyte’s branded motherboard and graphics card business group, but none of its contract manufacturing business. There will be no changes to Gigabyte’s OEM/ODM business. As such, Gigabyte United’s core businesses are development and sales of motherboards and graphics cards. Decisions on manufacturing outsource will be made independently by the joint venture, which is headed mostly by original members of Gigabyte.
“Gigabyte has extensive experiences in the motherboard and graphics card industry, including channel expertise, excellent brand image and a sizable share of the market,” read the statement. “To leverage Gigabyte’s past efforts and success, and maintain good relationships with vendors and customers, the joint venture will utilize the original teams from Gigabyte’s branded motherboard and graphics card business and will run independently from Gigabyte and Asustek.”
Not widely publicized was one of Gigabyte’s prime reasons behind the alliance with Asustek: it was trying to avoid a takeover by Foxconn. China-based Foxconn specialized in mass producing components to OEM partners. It did not have a specific channel to sell to end customers, and because of this deficiency, it lusted after Gigabyte’s brand and good standing. Foxconn had made several indications over the last couple of years that it was interested in taking over Gigabyte as a quick and easy way to transform itself into a popular brand.
“So before Foxconn could take us over, Gigabyte decided to merge forces with Asustek Inc and consolidate its position. Plus, Asus was competing with Foxconn on the OEM level. Therefore, this joining of forces has made Gigabyte stronger as a company,” explained Tim Handley, Marketing Manager for Gigabyte, in an interview with DQ Channels. “Also, we can now make cheaper motherboards, without compromising on the quality.”
Handley also said that Gigabyte could be open to other merger and acquisition opportunities “when the market demands it” of the company. He further clarified that Gigabyte United functions “as a manufacturing arm of motherboards and graphics cards” and will share no technology or branding with Asus, and will continue to compete with its alliance partner as it always did in the past.
Gigabyte United will operate separate from its parent and it will have to pay licensing fees for the use of the Gigabyte brand on the generous terms that it will pay 50 percent of its operating profit to Gigabyte for the first three years, after decreasing to 33 percent the following two years. From Gigabyte’s perspective, this deal has little in the way of downsides.
“This is an entirely win-win situation for us. For starters, we will now be able to concentrate more on R&D,” continued Handley. “Also we will be the first company to come out with motherboard on the latest technologies announced by Intel or AMD. This is because we have strengthened our position with OEMs. Also, these very OEMs will come to either Asus or us, which still works in Gigabyte's favor.”
Gigabyte currently has technological agreements with CPU makers AMD and Intel, which carry over to Gigabyte United. By keeping its business and technology separate from Asustek, Gigabyte retains all its existing relationships with its present OEM partners while picking up new ones through its new found strength in its alliance.
“Another benefit is that margins in the motherboard business are very thin. By taking Asus into our fold, we can operate on better margins while bringing down our production costs,” said Handley. “This in turn will make us a stronger player in the market.”