Global Economics

Acer Joins the TV Set


Are you ready for an Acer in your living room? Executives at the Taiwanese computer company are betting the answer is yes. In late April, Acer CEO J.T. Wang and president Gianfranco Lanci announced plans to make a big push to sell consumers on Acer brand LCD TVs. While Acer's TV sales today are minimal, by 2008 the company expects revenues from LCD TVs to surpass $1 billion.

Not everyone is convinced that Acer has what it takes to make the LCD gambit pay off. "I wouldn't use that to revive my earnings," says Daniel Chang, an analyst with Macquarie Bank in Taipei. He notes that other PC companies have had difficulty making a go of it in the TV business.

"Dell in the U.S., with a bigger market and with a very strong brand, doesn't have very strong contribution from LCD TVs," he says. "They are still struggling." Acer is likely to have difficulty too, he adds. "I don't think that LCD TVs will immediately become earnings contributors for Acer."

So why bother? Reuben Tan, a research manager at International Data's Asia-Pacific office in Singapore, notes that Acer and the other PC companies are responding to increasing pressure in the cutthroat computer business. "As with Dell (DELL), Acer recognizes that if you want to increase revenue streams, you have to start thinking outside the box," says Tan.

FLASH AND FLAIR. At first glance, Acer's PC business seems quite healthy. Acer projects that it will generate $311 million in profits on $12.42 billion in revenues in 2006. The company boasts that it is No. 4 in global PC market share, thanks in part to its dominant position in markets in Europe, where it's tops in notebooks.

To appeal more to customers there, Acer has made an effort to add a bit of European flair to its design. In 2003, it launched a snazzy fire-engine red notebook PC that it co-branded with Italian sportscar maker Scuderia Ferrari, following up last year with Ferrari desktop PC monitors. Confident Acer execs even predict that their desktop PC sales will gain strength and that the company will soon surpass China's Lenovo, which became No. 3 after acquiring IBM's PC division last year, but has been losing market share since then.

Moving into TVs also represents a major about-face for Acer, which a few years ago seemed to have given up ambitions for the living room. Early this decade, J.T. Wang and then-chairman Stan Shih were struggling to revive the Taiwanese computermaker. In the late 1990s, the company had fallen on hard times. Its attempt to break into the U.S. market had flopped.

NETWORK OF CONNECTIONS. While other Taiwanese companies were growing by focusing on one product -- notebook PCs, for instance -- Acer was an anomaly. Its subsidiary, Acer Peripherals, made TVs, monitors, keyboards, and other products. In 2001, Wang and Shih (who retired last year) decided to spin off Acer Peripherals and focus on PCs. Today, the spinoff company is BenQ, Taiwan's leading TV brand. But now Acer is getting back into the TV business -- and BenQ increasingly is marketing PCs such as its JoyBook notebook computer.

Not surprisingly, the talk in Taiwan is that there's no love lost between Wang and BenQ CEO K.Y. Lee, who also worked under Shih at Acer before the spinoff. Last month, BenQ announced that Acer -- which still owns 5% of BenQ -- was withdrawing its representative from the BenQ board in order to reduce conflicts of interest.

That stake in BenQ is likely to shrink as Acer sells off noncore assets, helping to boost the company's earnings. For instance, on Apr. 27, Acer sold 100 million shares of Wistron Corp., the contract manufacturer that used to be an Acer subsidiary and was spun off during the same reorganization that led to BenQ's independence. Acer booked a gain of $64 million from the sale. It still owns 15% of Wistron and 5.3% of BenQ.

PRICE WAR? It also has a tiny but very valuable stake in chipmaker Taiwan Semiconductor Manufacturing. TSMC is the world's leading foundry and Acer's 0.1% share is worth $54 million. All told, according to a Lehman Brothers' calculations, Acer has $814 million worth of investments in such non-core assets.

Selling those stakes gradually helps Acer bolster earnings. It needs to do that because the company faces two very significant competitive challenges, namely Dell and Hewlett-Packard (HPQ). The two American giants are putting lots of pressure on the Taiwanese by aggressively lowering their prices. For instance, HP has been gaining market share in Europe, and Macquarie's Chang expects HP to take Acer's place in the No. 1 position there soon.

And Dell has been cutting prices so much that Acer's price advantage is disappearing. Indeed, Chang says that it's gone completely. At the start of the year, Dell customers would have had to pay a 13% premium, but with the Texas company not only cutting prices but offering rebates, now a Dell notebook PC actually costs about 25% less than a comparable one from Acer.

DESKTOP GROWTH. No wonder investors are worried. Acer's stock price is down 23% so far this year, at a time when the Taiwanese market is hot, up 13% and trading at levels last seen during the dot-com bubble. "It's a good thing to see [Acer] diversify," says Chang. "But the company is struggling to try to use the new revenue source to compensate for potential losses of notebooks."

Still, other analysts are more upbeat. "We think Acer will continue to grow," Alex Yang, an analyst at Lehman Brothers in Taipei, wrote in an Apr. 28 report. Yang expressed confidence based in part on Acer's expected growth in desktop computers: Acer is targeting shipments to double to 10 million PCs next year. Other analysts are also confident that Acer will be able to withstand the threat from the U.S. "The company is much better prepared to defend the rising competition than it was a quarter before," Ellen Tseng, an analyst with Morgan Stanley in Taipei, wrote in a report published on Apr. 29.

Under Wang, Acer has made a top priority of diversifying the company's geographical base, relying less on markets in Western Europe, and instead developing the U.S. and China, two areas where Acer had not made much of an impact. Acer is clearly making progress. Sales in the U.S. represented 18% of Acer's total sales in the first quarter. That's up from just 11% a year ago.

TV BRANDING. Acer has made headway in China, too, albeit with less impressive results. First quarter sales in the mainland were 6% of the company's total, compared to 4% last year. And the company expects the growth to continue, with China sales quadrupling this year and U.S. sales doubling. Acer could use a boost in China, since making money there is not as difficult as in the cutthroat U.S. market. Operating margins in China are 2%, compared to 0.5% to 1% in the U.S.

However, with so many companies getting into the LCD TV business, margins there might not be much better. And Acer is going to need to do a lot of promotion to get consumers to think of it as a TV name. "A lot more branding is needed," says IDC's Tan. "You have to really pump in the funding, otherwise you will just be overlooked." That's a challenge that Acer executives have to overcome before they can make Acer a name found in living rooms worldwide.


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