Strategy & Competition February 25, 2010, 5:00PM EST

Acer: Past Dell, and Chasing HP

The Taiwanese PC maker is now the global No. 2. A new focus on corporate sales could take it to the top

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Wang and Lanci: With smartphones and e-Readers, consumers won't be forgotten Paul Hu/Assignment Asia

By Bruce Einhorn and Tim Culpan

Taipei - It's a Saturday night in February, and 2,000-plus Acer employees have crammed into an exhibition center for the company's Lunar New Year party. As guests sit down to chestnut soup, steamed abalone, and double-boiled young chicken, a troupe of local comedians impersonates Acer executives.

Among the roasted is Gianfranco Lanci, the 55-year-old Italian who is the company's first non-Taiwanese CEO. His impersonator pastes a fake bald patch on the back of his head and mutters a few phrases in Italian, then switches to English. "In my opinion, Acer is already No. 1," the fake Lanci declares, taking a jab at Acer's aim to jump ahead of Hewlett-Packard (HPQ) into the top position in the PC industry.

Lanci and Acer Chairman J.T. Wang aren't quite there yet, but they're getting closer. Acer now sells 13.4% of the world's PCs, ahead of Dell's (DELL) 12.4% but far behind HP's 21%. On Feb. 9 the company reported its biggest quarterly profit in almost three years, with earnings up 25% to $109 million. Shipments increased 28%, well ahead of the industry average of 15%, as consumers flock to Acer's inexpensive offerings.

This year, Acer hopes to grab the top spot in laptops. That shouldn't be hard: It's already the leader in netbooks—the small, low-cost machines it launched in 2008—and it's neck and neck with HP for all portable computers. Once Acer becomes No. 1 in that segment, Chairman Wang boasts, it won't be long before it dethrones the Americans. "Within two to three years we will be able to take the total PC No. 1 spot," he says. "Whether it's 2012 or 2013, it doesn't make too much difference to us." HP declined to comment about the chairman's audacious predictions.

Wang, 55, understands that hubris could be Acer's undoing. So on his office wall hangs a framed copy of Taipei's Economic Daily News from September 2002, when Acer was at best a second-tier player. The page highlights Acer's plans for a new tablet PC—a product that quickly flopped. The lesson Wang drew: let others take the lead on the newest, niftiest gadgets and stay focused on the basics of churning out quality computers at low cost. "I cannot waste resources," he says. When it comes to launching the latest innovations, "We can be No. 2. It's O.K. with us." That's why Acer let a Taiwanese rival, Asustek, make the first move in netbooks. Once the machines proved a hit, Acer swooped in and became No. 1.

Being the leader doesn't mean much if you have to kill your margins to get there. That's why some investors fret that the effort to overtake HP will mean a price war that devastates earnings. Acer's operating margin in the fourth quarter was 2.95%, an improvement from 2.24% in the third quarter but far behind the 4.71% of HP's computer division. Worries about profitability have helped push Acer's Taipei-listed stock down 13% since a Jan. 15 high, vs. a drop of 10% for HP and Dell. "We don't think [sacrificing profits for market share] is the right strategy for our shareholders," says Stephen J. Felice, head of Dell's consumer and small business division. At the same time, he adds, "We are not ceding second place" to Acer.

As Lanci and Wang race to stay ahead of Dell and unseat HP, they have transformed what was formerly a bastion of Taiwanese management into the PC industry's most global company. While the top ranks at HP and Dell are dominated by Americans and Lenovo's (LNVGY) leadership is largely Chinese, Acer's team includes a French executive who oversees mobile phones, an Italian marketing chief, a German running China, an Austrian leading the U.S., and an American managing Brazil. "If you want to run a global company," Lanci says, "you need global talent."

That global team will need to make some changes to their business model if Acer is to reach its goal.

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