Merrill Lynch OLPC XO Investment Strategy: Caution

   
   
   
   
   
olpc screen in sunlight
While we proletariat debate the OLPC XO production model, the mighty moneyed bourgeoisie have their own opinions on Children's Machine XO Taiwanese computer manufacturer impact.

Bloomberg Asia reports a vibrant run-up in OLPC component maker's stock prices since One Laptop Per Child was announced:

Shares of ENE and Shin Zu Shing have almost doubled since then and are among the top 100 gainers of the 1,160 stocks traded on Taiwan's two main exchanges. Simplo has climbed 79 percent and Sunrex Technology Corp., a keyboard maker for the computers, has added 33 percent in the period.

"The program will bring lucrative opportunities for Taiwanese laptop computer component makers and its large scale means high growth potential for these suppliers," said Angela Hsiang, an analyst at KGI Securities Co. in Taipei.

Merrill Lynch even went so far as to issue an OLPC investment strategy. And what's their opinion on "$100 laptop" investment?
from a long-term perspective, market expectations for OLPC seem too high, in our view. Some local research institutions like TRI predict that the sub-US$200 [notebook] market will pick up to 68mn units in 2010 from 7mn in 2007, implying a 113% CAGR. We expect the market to start realizing the difficulty to ramp up the OLPC project and cut shipment forecasts in 2H07.
Now why would research analysts have such a dim view of One Laptop Per Child's future? Could it be the radically different business model and supply-chain that dramatically lowers costs, and therefore revenues and profits? Their break down of the OLPC bill of materials sure shows the razor-thin margins involved:
olpc bill of materials cost

In the report, the analysts bring up the usual concerns, field testing, content, and OLPC alternatives. Then they hint at what might be the program's largest un-explored quandary: Children's Machine XO maintenance .
Even assuming there is enough educational resource and children in emerging markets tolerate poor specs, after-sales service is another challenge. As mentioned earlier, the OLPC project eliminates the roles of OEM brands and distributors, so it will be difficult to find someone to provide after-sales service.

PC is not as user-friendly as traditional consumer products, and it is easy to have software and/or hardware problems. We do not think customers will be able to send back their OLPC to Quanta when they have a problem. Thus, in the near term, emerging markets will find it a challenge to build relevant infrastructure to solve the situation.

Now that's an understatement. Without local assembly, Open Source hardware, or a spare parts distribution plan, local maintenance will be a serious problem, no matter how many children Nicholas Negroponte thinks will be come spontaneous computer maintenance technicians.

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4 Comments

Does anybody know if Quanta will sell these laptops outside of the OLPC project? I'd like to buy some and retail them in the United States to college students and the lower income market.

I've spoken with a lot of people in various ministries of education in developing countries over the past few months. Maintenance and support already form one of the strongest obstacles to educational computing in a lot of instances. Smaller, poorer countries, and especially those using refurbs, have tended to rely on existing govt IT departments. Those departments are already maxxed out in terms of their jobs, so schools don't fare too well.

Countries that can buy (or lease!) hardware from OEMs or other vendors are typically savvy enough, after some lousy experiences, to factor warranty, service, and support into their procurement decisions -- which supports the Merrill analysis.

My recollection of the OLPC situation is a little loose. But in some instances (Rwanda, Brazil), they're dealing directly with country presidents, who may be making decisions, or influencing them, way in advance of usual MOE procurement processes. If the cachet-factor wears off and Prof. Negroponte's access to heads of state is re-routed, it's a different ballgame. But who knows? Perhaps it'll be a situation that gives rise to domestic OLPC service and support.

Without a bloated, unreliable and virus prone OS and plenty of useless features, the OLPC would be no more fragile or difficult to service than a Gameboy or a cell phone.
In third world countries, they have plenty of gameboys or cell phones!

The only thing I'm uncomfortable with the OLPC is it's(first) distributed by a central government. But hey, it's being made in China-Taiwan with a profit, so chances they'll succed as they've succeded with PC parts or LCD screens.

I want to purchase OLPC Children's Machine XO. So can you contact with me. I will wait your reply.

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