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Acer: Riding A Hot Streak


Though he's planning to retire as chairman of Acer Inc. at yearend, Stan Shih insists he'll squeeze in a trip to Europe before collecting his gold watch. Why? He wants to thank Acer staffers there for helping double the company's sales in the region to more than $2 billion. "I really have to show my appreciation to the European team," says the 60-year-old Shih. "Otherwise, I wouldn't be able to retire with honor."

There have been years in the last decade when Shih's retirement might have been less than honorable, as the Taiwanese tech pioneer frantically tried one strategy after another to stay ahead in the electronics industry. All too often, it appeared Shih had lost his way.

But today, Acer is on a tear. The Taiwanese PC maker last year racked up revenues of $4.6 billion, and early this year it pushed ahead of Japanese tech giants Toshiba Corp. (TOSBF) and NEC Corp. (NIPNY) to become the world's No. 5 PC maker. Sales in the first quarter jumped by almost 40%, the best growth rate of any of the top five manufacturers, according to researcher IDC, though from a far smaller base than leaders Dell Inc. (DELL) and Hewlett-Packard Co (HPQ). And after years of propping up earnings through sales of noncore assets, Acer now is enjoying profits from its PC business, with operating income of $64 million last year, up from just $5 million in 2002 and a loss of $99 million in 2001. Despite ongoing consolidation in the industry, "we are one of the few winners," Shih boasts. And Acer has become a global heavy without a major sales push in the U.S.

STRONG MEDICINE. Now, Acer is looking to extend its winning streak. The next challenge: overtaking Fujitsu Siemens Computers and IBM (IBM) to become the world's No. 3 PC maker. To do that, Acer plans to move beyond notebook PCs, which account for 58% of its revenues, and start selling more desktops, which today represent just 18%. Acer also aims to expand its reach beyond its key markets in Southeast Asia, Australia, and Europe by boosting sales in China and rekindling interest in the brand in North America. "We have to have breakthroughs in China and the U.S." to reach the No. 3 spot, says J.T. Wang, Acer's president and Shih's designated heir.

Acer's newfound confidence marks a dramatic turnaround for the company. In the late 1990s, Acer's brand-name PCs faced cutthroat competition while its contract manufacturing division (which built machines for the likes of Dell and IBM) fell behind Taiwanese rivals Quanta Computer Inc. and Hon Hai Precision Industry Co., which focused exclusively on outsourcing work. As a hybrid, Acer was hard-pressed to keep pace since would-be customers often worried that by outsourcing production to Acer they were helping a competitor. About the same time it was facing hard times in Asia and Europe, Acer was forced to beat a hasty retreat from the U.S., where its market share fell to just 2.2% in 1999, from 4.7% in 1996.

Acer needed strong medicine. So three years ago, Shih and Wang came up with a bold plan to remake the company. To eliminate the conflict- of-interest problem, they jettisoned the contract manufacturing business, spinning it off as a separate company, Wistron. Then, to keep their focus on PCs, they spun off both Acer's consumer-electronics division, now known as BenQ Corp., and AU Optronics, a joint venture with chipmaker United Microelectronics Corp. (UMC) that manufactures liquid-crystal display panels. In fact, the company has given up on manufacturing; Hon Hai now makes Acer's desktops and Quanta its notebooks. "Before, we couldn't get [Acer's] business," says Quanta Chairman Barry Lam.

The strategy has paid off best in Europe. Acer is the leading notebook seller in Italy, Germany, the Netherlands, and Austria, and is No. 2 overall in Italy and Spain. Acer's profile has been boosted by marketing ploys such as a bright red notebook co-branded with Ferrari, and it makes about a quarter of its European sales through consumer-oriented retailers such as Carre- four and Dixons.

But Acer's real strength in Europe derives from a strategy of working with middlemen such as Ingram Micro Inc. (IM) and Tech Data Corp. (TECD) to boost sales to corporations and specialized computer stores. While other companies push distributors aside and focus on direct sales, Acer maintains a close relationship with its dealers, says Fabrizio Cucchi, owner of Absolute, a Milan distributor that sells Acer and other brands. Acer executives "are interested in who sells their product and how," he says.

In Asia, Acer has seen strong growth in Thailand, where the government is in the midst of an ambitious campaign to boost computer literacy. Sales in Australia and in Acer's home market of Taiwan are strong, too. China has been more difficult because Acer has to compete against not only Beijing-based favorite Lenovo Group Ltd. (formerly Legend) but also up-and-coming Chinese brands such as Founder and aggressive foreigners like Dell. Acer's sales on the mainland are small, about 2% of the market. Wang says he wants to boost share so that Chinese sales represent 10% of the company's total within two years, up from 5% today. One advantage for Acer: its Taiwanese roots, says Robert Cheng, an analyst with brokerage CLSA Asia-Pacific Markets in Taipei. "It's more like a Greater China brand," he says.

STATESIDE STRATEGY. The U.S. may prove tougher to crack. A decade ago, Acer introduced the colorful Aspire PC -- one of the first desktops to depart from the traditional beige of computers -- to much acclaim and strong U.S. sales. But the company spent too much time chasing individual consumers rather than corporate customers, and its success was short-lived. By 1999, Acer was forced to drastically scale back its U.S. operation. Last year the company sold about $350 million worth of computers there. Acer has learned its lesson in America, Wang says. Retail in the U.S. "costs you a fortune" because of service, warranties, and returns from fussy consumers, he says. This time, Acer will instead focus on selling to corporate customers through distributors, the method that's bringing it success in Europe. That way, Wang expects to build U.S. sales up to $1 billion by 2007.

To be sure, Acer faces a lot of obstacles as it expands. Even if it meets Wang's U.S. target, it will still be a small player there. And China's economy could stumble, slowing growth for everyone. But Acer has seen its share of tough times before, and today it is slimmed down and ready for the fight. With the worldwide PC market perking up, chances are good that Stan Shih will ride into retirement in a blaze of glory. By Bruce Einhorn in Taipei, with Andy Reinhardt in Paris and Maureen Kline in Milan


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