Hardware hot again in tech world

Peter Burrows and Ashlee Vance
12 Jul 2012

Since the mid-1990s Liam Casey, PCH International’s chief executive officer, has helped technology companies with the nastiest task in Silicon Valley: building hardware.

It’s long been considered scut work—dirty, complicated, low-margin stuff, beneath the dignity of software companies. Far better to write a few brilliant algorithms and then rack up profits by selling them over and over. PCH specialized in helping gadget-makers outsource as much as possible, finding cheap overseas manufacturers, streamlining supply chains, and negotiating airfreight contracts.

Casey has lately noticed a renewed appreciation for nuts and bolts. Silicon Valley is interested in hardware again, and Casey is riding the trend. Earlier this year PCH purchased a small San Francisco engineering consultancy called Lime Lab. He plans to hire 30 product development experts by year-end and to bring over some of the company’s electrical, mechanical, and industrial engineers from China to help clients design and build their products. “Hardware is the new software,” says Casey, who adds that the unit has booked contracts worth $10 million.

On June 18, Microsoft unveiled a pair of homegrown Surface tablets, a move that puts the company in direct competition with its traditional PC partners. Instead of crowing about the device’s apps, Microsoft executives gushed about its magnesium finish, kickstand, and a clever cover that doubles as a keyboard. Less than two weeks later Google announced it had worked with laptop maker Asustek Computer to build its own tablet, the Nexus 7. It’s suddenly hard to find a large technology outfit that traffics only in bits. Amazon has been making Kindles since 2007. Oracle purchased server maker Sun Microsystems in 2009 to wrap its databases in iron.

For decades, the accepted wisdom of the Valley was that the best way to get rich was to build software. By hooking the world on Windows and Office—and outsourcing the low-margin business of building, selling, and servicing computing hardware—Microsoft created an extraordinarily profitable business and became the world’s most valuable technology company. Oracle followed the same playbook in the world of data centers, as did Google in Web search. IBM prospered after selling its PC business to China’s Lenovo in 2004, enabling it to focus on corporate applications and consulting gigs. The model for hardware manufacturers became Dell, which innovated mainly by figuring out how to sell commodity gear more cheaply than the other guy.

“They all thought they could get someone else to do the hard work,” says Hartmut Esslinger, founder of Frog Design, which helped create the first Apple Macintosh computer. The idea that a 20-month-long design and production process could be handled by assigning a couple of engineers to find a Chinese factory “was just too easy and seductive,” he says. “Now they’re realizing that their hardware partners don’t have the vision to create anything holistic. And meanwhile, Apple is eating their breakfast, lunch, and dinner.”

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