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ComputerWire: IT Industry Intelligence

Fears that the merger of Compaq Computer Corp with Hewlett-Packard Co would spark a bloody rationalization of the company's Far Eastern supply chain appear to be unfounded, according to reports in the local media.

However, HP's decision to retain most of its and Compaq's existing relationships electronic service manufacturers in Taiwan, Singapore and Korea may simply be part of the Palo Alto, California-based company's plan to embroil them in a bidding war for future contracts.

According to a Dow Jones newswire report, HP's stated goal of realizing $2.5bn of post-merger cost savings could rely greatly on pruning back its EMS bill. So, even if Asian EMS companies manage to hang on to HP's business, it will almost certainly be at the cost of slimmed down margins.

"The profit margins from [new] HP orders should be thinner than before, and thinner than others," Tony Tseng, downstream electronics analyst at Merrill Lynch in Taipei told Dow Jones on Friday.

If correct, Tseng's analysis of the situation spells hard times ahead for Asian EMS companies, and particularly for those in Taiwan. Last year Compaq and HP together spent $14.5bn with Taiwanese companies, accounting for more than 10% of Taiwan's $123bn of exports.

HP executives have said that its existing suppliers will all have an equal chance of retaining HP's favor, but they have not been shy of stating that the selection process will be "rigorous".

© ComputerWire

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