07/01/96 ACER: A GLOBAL POWERHOUSE (int'l edition)

ACER: A GLOBAL POWERHOUSE (int'l edition)

Dixon Cheng steps out of his office in the cluttered executive suite at the Taipei headquarters of Acer Inc. and leads a visitor down a hall crammed with cubicles, where engineers sit hunched over their projects. ``It's right here,'' says Cheng, Acer's vice-president for information systems, as he squeezes around an awkwardly placed partition. An engineer seated on the floor hooks a simple white box to a television set and flicks it on. Three squares appear on the screen: ``Basic Net,'' ``Games,'' and ``Windows.'' Using a remote control, he selects ``Basic Net,'' and Acer's World Wide Web home page appears. Returning to the menu, he clicks on a different square, and Microsoft Corp.'s Windows 3.1 pops up.
The machine is called, simply, the Basic. Carrying a list price of $499, it is one of many ``information appliances'' that Acer will unveil during a four-day bash to celebrate Acer Group's 20th anniversary. There will be prototypes of a $500 video-game player, a $200 children's personal computer, and wide-screen TVs. In the back room, Acer is working on everything from digital videodisk (DVD) players to video telephones. Says Acer Chairman and founder Stan Shih: ``Our philosophy is to make it possible for everyone everywhere to enjoy these technologies by driving down costs and making PCs easy to use.''
HARD PUSH. By building Acer Group into a $5.8 billion global conglomerate, Shih, 51, has become Taiwan's answer to Intel Corp.'s Andrew S. Grove and Microsoft's William H. Gates III. Taiwan's dominant maker of PCs, peripherals, and chips, Acer has successfully pushed into markets from Malaysia to Mexico. Now, Shih is fixed on building Acer into one of the top five computer companies in the world by 2000--a $15 billion giant, right up there with Compaq Computer Corp. and Hewlett-Packard Co.
The plan? Move Acer to a new level--from being a global force in PCs, peripherals, and components to becoming a leader in a new market of intelligent consumer products. With the Internet PCs, smart TVs, and game machines now in the labs, Shih figures he can sustain annual growth rates of 25%--about 5 to 10 points more than the PC market alone will produce. By 2000, Shih is counting on having at least $3 billion a year in revenues from new consumer products. He expects further gains in markets from Moscow to Manila as well as growing acceptance for PCs and other Acer gear in the key U.S. market.
On most fronts, Acer has a running start. After years of frustration, it has hit on a successful formula for the U.S. market: concentrating on stylish, inexpensive home PCs. And benefiting from Shih's four-year-old vision that has spawned 10 subsidiaries around the world, Acer now dominates many hot-growth emerging markets, where it gets 35% of its sales.
COMING BATTLE. Acer also has one of the most efficient global manufacturing organizations in the industry and its own supply of key parts. A joint venture with Texas Instruments Inc. provides memory chips, and Acer factories build everything from PC motherboards and color monitors to keyboards and CD-ROM drives. The empire includes 39 just-in-time assembly plants scattered from San Jose, Calif., to Subic Bay in the Philippines. Last year, Acer pumped out 4 million PCs, 1.7 million CD drives, 3.5 million monitors, and 52 million memory chips.
That global manufacturing machine will come in handy in the coming battle for the 21st century consumer. Sony, Fujitsu, Compaq, IBM, and NEC are equally intent on selling all manner of electronic gadgets for the ``digital living room,'' where families will watch interactive TV, play video games, and surf the Internet. And, despite its recent success with American home-PC buyers, Acer is still outgunned by these giants in brand awareness and distribution in the West.
The biggest challenges for Shih, however, may be internal. First, he has to find a way to make money with New Age products. Straddling the worlds of computers and consumer electronics, they may represent the worst of both: products that require big investments in development but have the razor-thin margins of TVs and VCRs. Acer knows the risk: Its big consumer hit in the U.S., the Aspire line of PCs, produced a 62% jump in revenue, to $1.4 billion, for Acer America Corp. last year. But the company concedes that it has yet to make money on the machine.
Another management issue for Shih will be to keep his confederation of subsidiaries and joint ventures marching to the same beat. The company has succeeded in markets such as Mexico because Shih began giving his overseas units greater autonomy in 1990. Indeed, since 1991, Acer's sales have swelled sixfold. PC shipments doubled, to 4 million units, last year and are projected to hit 6 million in 1996--making it No.4 in the world. Shih estimates that 50% of Acer's growth since 1992 is due to his loose corporate structure.
OFFSHOOTS. Now, Shih, who owns 10% of Acer Inc., the holding company, has a radical decentralization plan: to spin off to the public 21 units in the next four years. Under the new structure, two of Acer's most profitable Taiwan manufacturing arms, $1 billion Acer Peripherals Inc. and $565 million TI/Acer, will become stand-alone companies. So will a number of foreign marketing arms, such as Acer's U.S., Latin American, and European divisions. Acer Inc., the Taiwan parent that makes desktop and notebook PCs, servers, and motherboards, will retain sizable stakes in the offshoots.
With this increasingly loose corporate structure, Shih may have trouble telling affiliates what to sell. Once Acer's subsidiaries start going public--Singapore-based Acer Computer International went public this spring, and the Mexican and U.S. companies hope to follow within 18 months--their managers will have to answer to local shareholders, rather than Taipei. ``After the units become more independent and local, it will be natural for investor pressure to push them to protect their own interests,'' says Shih. ``To meet their requirements, we will have to provide value added.'' In other words, he's betting that his engineers will come up with such irresistible designs that the affiliate companies will clamor for them.
Before he puts that theory to the test, however, Shih will have to see if these spin-off companies can stand alone. After Acer is broken up, the group can no longer use profits from units such as the chip venture and Acer Peripherals--which together accounted for 60% of the group's $204 million in earnings last year--to subsidize losses overseas. On Acer's core business--making PCs--aftertax margins average just 3%. ``Acer has to be concerned about the marketability of these companies,'' says Taipei analyst Ben B.Y. Lee of Nomura Securities Investment Advisory Co.
There won't be much to worry about if all the overseas subsidiaries can repeat what Acer America has done--while turning a profit, that is. Just a few years ago, ill-fated acquisitions and inventory bottlenecks were sinking Acer America. But with a new management team, headed by 10-year Acer veteran Ronald Chwang, the wholly owned U.S. subsidiary bet on a radically different TV-like design for its home PCs. The line was a runaway hit: Acer sold 300,000 Aspires in three months and emerged as one of the leaders in home PCs.
The Aspire's popularity inspired Shih's new consumer strategy, which is built around inexpensive information appliances such as the Basic. Shih is hoping that if consumers can save enough money, they won't mind a PC that lacks the latest bells and whistles and that can't do much more than cruise the Internet. Acer is bringing the Basic in at $500 by avoiding the cutting edge and eliminating some conventional parts. It's saving 60% over a hard disk by using Iomega Corp.'s 100-megabyte ``Zip'' drive, a sort of high-capacity floppy disk drive. Instead of an Intel Pentium, the Basic runs on cheaper clones from Advanced Micro Devices. The standard model uses a TV for a display--a $200 monitor is optional. To make it a machine for the masses, Acer added software that hides boot-up gibberish, gets you quickly in and out of the Web, and makes text on the TV tube legible.
The next target is children. This fall, Acer will bring out Eden, its $499 answer to Sony Corp.'s hugely popular PlayStation. Unlike the PlayStation, which uses proprietary Sony software, Eden is based on standard PC designs and will run Windows educational and entertainment CD-ROMs. It's also a word processor and plays audio- or videodisks. Acer expects to sell at least 200,000 Edens in the first year, mostly in Asia.
PLASMA DISPLAYS. Acer is also using the Far East as a base for its assault on other consumer-electronics markets. In July, Acer plans to trot out a 28-inch high-resolution TV in Taiwan for $1,100. A little later in the year, it will introduce a wide-screen TV that can double as a computer monitor. DVD players, high-speed CD-ROM drives, settop boxes for cable and satellite TV, and a multifunction machine that combines a fax, scanner, and color printer will be out sometime next year.
Next year, Acer Peripheral plans to introduce a five-foot-wide projection display based on TI's digital mirror device (DMD) technology. It will also begin work on a plant to make plasma displays for flat-screen monitors and TVs. And to round out its digital arsenal, Acer is investing millions in telecommunications, to develop wireless and integrated services digital network (ISDN) modems and video phones. For a crash course in telecom, it is joining Motorola Inc. in a bid for a license to operate a cellular system in Taipei.
SOFTNESS. While Shih pushes ahead with his master plan, he will have to pay attention to some short-term problems, too. One that could undermine the strategy is the sudden softness in the high-profile Acer America. Shipment growth cooled off from 75% in the fourth quarter of 1995 to 25% in the first quarter, and inventory piled up. Even cutting the Aspire's price from $2,200 last fall to around $1,500 hasn't helped. ``Price isn't driving customers right now,'' says Michael D. Culver, general manager of Acer America's consumer division.
To rev up the U.S. unit, Acer is planning to boost its name recognition by launching a new national ad campaign with Hal Riney & Partners Inc. It aims to expand distribution by the end of 1997 from mass-market chains such as Best Buy Co. and Incredible Universe, where it is the top-selling PC brand, to office supply and computer superstores. By then, Acer's U.S. managers say, they'll be ready to launch the Basic to keep the consumer business growing. Acer America is also renewing its push into the corporate market. The just-out Nuovo, a $3,500 to $4,000 notebook PC aimed at the corporate market, boasts a battery life of nearly nine hours.
SPORTS SUPPORT. As he waits for Acer America to get on track, Shih is counting on returns from his investment in developing markets. Excluding Japanese and Korean consumers, Acer is No.1 in Asia, a 5.3-million-unit PC market last year--despite rising competition from Compaq and IBM. Acer also is No.1 in Africa, No.1 in the Middle East, and No.2 in Latin America. Shih figures the less-developed countries will snap up the Basic and other budget appliances. He figures he can break even on these if he sells 1 million units by the end of 1997.
Meanwhile, the company continues its push into markets everywhere. In India, where Acer is No.3, it has a new manufacturing and sales deal with Wipro Ltd., the country's top distributor. In Malaysia, where Acer holds 20% of the market, it has 13 regional distribution and marketing branches. No.2 Compaq has a 9% share and just two offices.
Acer has even managed to outclass U.S. rivals in the former Soviet Union. Since arriving in late 1993, when it sold 2,000 computers to Gazprom, the huge natural-gas monopoly, annual sales have zoomed from $3.4 million to $42 million in 1995. Using a new plant in Lappeenranta, Finland, 20 km from the Russian border, Acer now delivers PCs in five days instead of five weeks. By plastering its name on the tramcars plying Moscow streets, at a golf tournament at the Moscow Country Club, and at matches of the Soviet Wings professional hockey team, Acer has built higher name recognition in Russia than Compaq or Toshiba.
What if all the new multimedia consumer gizmos don't catch on? As Shih sees it, he will win anyway. By methodically building a low-cost manufacturing base and accumulating skill in all digital technologies, Acer can still prosper the way it did before its PC success--as a behind-the-scenes supplier of components and systems sold by the big brand names. One way or another, Shih is determined to be a major player in the digital age.
By Pete Engardio in Taipei and Peter Burrows in San Jose, Calif., with bureau reports