Feb 1995

BUSINESS: Acer's rebound

High-Tech Rebound
Many had written off Taiwan's Acer Inc. But company Chairman Stan Shih's willingness to gamble and innovate has paid off

In mid-1992, all Acer Group Chairman Stan Shih could see was red ink: The Taiwanese company had for two years shoveled hundreds of millions into a risky joint venture, producing advanced memory computer chips, that had only recently begun to fill orders. Acer was pouring millions more into its money-losing U.S. operations, hemorrhaging partially because of a disastrous acquisition of microcomputer maker Altos Computer Systems. And it was trying to survive murderous price-slashing in the highly competitive personal-computer market.
All these factors combined to give Acer in 1992 its third annual loss in three years. It posted a $ 2.8 million loss after taxes on 1992 sales of $ 1.26 billion. The following year, the Taipei Stock Exchange downgraded Acer's stock because the company's earnings-to-revenue ratio was not sufficient to keep its standing on the blue-chip board.

But all that seems like a temporary glitch now. TI-Acer Inc., the joint venture formed with U.S.-based electronics maker Texas Instruments Inc. (TI) to produce dynamic random access memory (DRAM) chips, has turned out to be the company's salvation: TI-Acer generated 80 percent of Acer's $ 85.6 million profit in 1993 and an estimated one-third of the profit last year. Across the ocean, Acer America Corp. is beginning to generate a healthy return. And Acer has emerged from the PC price war with record-breaking performances in each quarter for the past year. Company sales overall were forecast to reach $ 3 billion in 1994 -- up 59 percent from the previous year. Its consolidated net profit was expected to hit $ 180 million for the year.

Shih's willingness to take risks, such as investing in the DRAM market, and to try innovative management strategies has helped turn Acer around and propel it into the top ranks of the global computer industry. The company that seemed stuck with the image of the quintessential clone-maker looks likely to become the 10th- largest PC manufacturer in the world.

"Stan is one of the few leaders in the industry with a vision," says Ronald Chwang, president of Acer America. "He believes in the role he wants Acer to play. He sees opportunities and trends ahead of others."

That has been the case since Shih earned a master's degree in 1971 from Taiwan's prestigious National Chiao Tung University. At his first job, with Unitron Industrial Corp., Shih helped design and develop the first desktop calculator produced in Taiwan. He then helped set up another local company, Qualitron Industrial Corp., where he led the team that designed the world's first pen watch.

Shih began to realize that the microprocessor and microcomputer industries had immense money-making potential -- something that banks hadn't grasped yet. So he teamed up with other techno-freaks, scraped together $ 25,000 and in June 1976 formed Multitech International Corp. primarily to do consulting on high-tech issues. Eleven years later the company, renamed Acer, produced its first personal computer. The Acer Group now has 8,200 employees working in more than 70 subsidiaries in 27 countries. It has expanded to produce a range of high-tech products, including fax machines and printers.

But some of Acer's expansion efforts brought hard times for the company. It decided to collaborate with TI in 1989 following an industry-wide DRAM shortage. TI agreed to provide the technology to manufacture DRAM chips, and Acer paid for the plant. It was a risky decision. The market for DRAM chips traditionally suffers huge swings of oversupply and undersupply, and some manufacturers have lost fortunes. Acer owns 58 percent of the joint venture, TI owns 26 percent and China Development Corp., a Taiwanese development bank, owns 16 percent.

Though the investment helped to nearly kill Acer, it has proven to be a wise one. Not only is the venture profitable, notes Jim Handy, a semiconductor-industry analyst, it guarantees Acer a steady supply of competitively priced DRAMs for its PC-manufacturing operations. With TI's chip-making expertise and Acer's access to Taiwanese capital and labor, says Handy, who works for Dataquest Inc., a San Jose, California-based research firm, "what you have, in effect, is a very good tool in the hands of a highly skilled worker -- a combination that can't lose."

Meanwhile, Shih needed to stem Acer's losses in the U.S., the most demanding PC market in the world. He initially depended on exceptional outsiders to run the U.S. division, hiring as president Leonard Liu, a Chinese-American who was formerly general manager of IBM's software development laboratories in California's Silicon Valley. It was Liu who arranged the 1990 acquisition of Altos, hoping that its marketing and other resources would give Acer a firm foundation in the U.S. Instead the acquisition drained more than $ 100 million from Acer.

Liu resigned in April 1992, and Shih replaced him with Chwang, who had moved to Acer in 1986 after working for U.S. computer-chip maker Intel Corp. At the same time, Shih developed a new management strategy. He adapted McDonald's Corp.'s philosophy of providing goods that are fresh, cheap and quick and giving buyers exactly what they order. Says Shih: "I asked myself, 'If you could standardize food, why not computers?' "

This meant Acer had to stop shipping certain components, such as motherboards , by sea from Taipei because they took months to reach the U.S. market. Given the continuous technological developments in the PC industry, the time lag hurt the company's competitiveness. Instead, Acer decided to ship time-sensitive components to the U.S. by air and assemble the final product there. It has an assembly plant in Silicon Valley and another in Mexico City, where it capitalizes on the cheap labor. All that helped make Acer profitable in the key North American market, which accounts for some 30 percent of the company's sales.

In line with the fast-food giant's approach, Shih is decentralizing -- or as he calls it, "disintegrating" Acer's operations and "franchising" its subsidiaries. The company now follows the "client-server" model of computing, in which a powerful central computer links and supports a host of independent smaller computers and peripheral devices. At the same time, each independent business within Acer, such as Acer Computer International in Singapore, continues to serve the rest of the group. The company's Taipei and Penang factories make high-value-added components, such as motherboards, and other key parts. For markets outside Taiwan, overseas operations assemble the final product, using some locally produced parts.

By giving affiliated companies greater independence, Acer is able to respond more quickly to changes in individual markets and to competitors' innovations. If Shih hadn't decentralized Acer's operations, says one analyst, the company couldn't have met the price-cutting challenge of industry leaders like Compaq Computer Corp. and IBM Corp.

As a result of Acer's reorganization and its marketing and research and development (R&D) programs, says Eric Woo, a Dataquest analyst in Taipei, "Acer will continue to capture market share from less competitive industry vendors."

The company's R&D work has drawn praise from several quarters. Acer's engineering, design and R&D abilities "move it in the front of the industry today," says Ted Hannum, a sales manager with Microsoft Corp., which chose Acer as one of its many partners to develop computers that would use the company's Windows NT (New Technology) software.

Even though the Acer Personal Activity Center (AcerPAC), a PC with multimedia capabilities, sold poorly after its launch in 1992, it nonetheless won the "Innovation of the Year" award at CeBIT, a leading European computer fair. Woo notes that setbacks like AcerPAC and the 64-bit RISC PC, whose acceptance was hurt by the lack of appropriate software, have not daunted Acer's engineers. "They are willing to challenge any new technology that may lead the company to the front," Woo says.

Shih can take a lot of credit for that attitude. In fact, he'd rather spend time with engineers in mismatched socks tinkering with chips and circuits than hobnob with Taipei taipans. His serious manner, thick glasses and dark suits make him look as indistinguishable from other engineers as one PC clone from another. But his ability to navigate a growing high-tech company through the roller-coaster PC market has made him a standout.

"Technically he is very much in touch with the industry, even though he delegates a lot," says Acer America's Chwang. "By nature he does not go into details; he does not micro-manage the company. But he is capable of understanding the details."

Says Shih: "We don't believe in control in the normal sense. We feel there is another way to succeed. We rely on people and build our business around them." He says he has decided to listen more carefully to others' opinions, even if he is convinced they are wrong. "I consider each view (before making a decision) because most of the time I'm not the one who has to implement it," he says.

Shih's management style differs from that of most Chinese chief executives in other ways. He doesn't mind if his top executives have a high public profile. Chwang, who engineered Acer America's turnaround, often appears on TV technology programs in the U.S. and is regularly quoted in the media. William Lu, who runs Singapore-based Acer Computer International, has been profiled in the local press.

But Shih also is deeply rooted in tradition. He derives inspiration from the ancient Chinese board game of Go, or Wei Chi. To win at Go, a player has to consider the long-term effects of every move and follow certain strategies, such as huo yen (establishing self-sustaining strongholds, which Shih hopes to accomplish through decentralization) and wei kong (encircling open territory).

And in many respects, Acer is a typical Taiwanese high-tech company. It has benefited from Taiwan's aggressive technology-development programs, such as cheap government loans. And Acer has a factory in Hsinchu Science-based Industrial Park, a mini-Silicon Valley created by the government in the early 1980s. Companies there enjoy certain tax advantages and government funding for innovative R&D programs.

Yet Shih tries to disassociate Acer from its home base in the public's mind. "Taiwan's reputation is for low-end products," he says, explaining why he didn't want Acer's computer notebook to be used as part of a Taiwan public-relations campaign in the U.S. "Even bankrupt companies in Silicon Valley have a better image than companies from Taiwan."

Eckhard Pfeiffer, chief executive officer of U.S.-based Compaq, the No. 1 PC company, alluded to this when he questioned the emerging Asian challenge recently at a news conference in Singapore: "It will take some time before doubts about the quality of some Asian products are fully removed," Pfeiffer said. The normally polite Shih momentarily lost his cool when a journalist raised this point afterward. "Many American companies pay a low price for our quality, our labor and our talent," he said, fuming. "They take advantage of us and that's not fair. Why should we charge low prices and take so much shit?"

Some Asian products do have problems, Shih admits. "Our (Asia's) quality is not consistent," he says. "And we have not known how to communicate our brand names effectively to the market. At Acer,we are aggressive in trying to change this image."

Taiwan suffers from a poor reputation even within Asia. In 1989, when Acer teamed up with PT Metrodata Sistika in Indonesia to sell PCs, sales were sluggish because consumers there didn't believe that a Taiwanese company could provide sophisticated technology. But today, says Bobby Arifin, Metrodata's general manager, "the name that carried a question mark is now parked on most professional desks." Acer, according to the company, leads the market there with a 16 percent share.

Shih contends that the best Asian competitors have lower cost structures and are better prepared than big U.S. players to deal with rapid change. "Our chance is now," he says. "We must create and innovate quality, promote brand names aggressively and communicate our story."

That won't be easy, though. Shih concedes that Acer's own top managers remain too technically oriented and need to learn more about the market. "This is the weak point of Taiwanese companies," he says. "They are not able to exploit their technical capability to the level where it reaches their market potential."

Acer hopes that won't be the case as it pushes sales in developing countries around the world. The fastest-growing computer markets in the next two years, according to U.S.-based market researchers International Data Corp. (IDC), will be in developing countries like India (30 percent annual growth), Thailand (28 percent), Mexico (24 percent), China (20 percent) and Malaysia (17 percent), followed by Chile, Argentina, Venezuela, Brazil and Taiwan.

Acer spun off in 1993 its most profitable division, Singapore-based Acer Computer International, to oversee Asia, Latin America, Africa and the Pacific Islands, a massive territory it refers to by the acronym ALAP. Not surprisingly, the ALAP region is Acer's fastest-growing source of revenue. Acer claims to lead the market in much of Southeast Asia -- the Philippines, Thailand, Malaysia and Indonesia -- and parts of Latin America, including Panama, Uruguay and Mexico. "Careful planning as well as the low importance given by the U.S. vendors to the Latin American market have contributed to Acer's success," says Anurag Agrawal, senior researcher at IDC. "Acer has also been one of the first entrants in Africa and has now started reaping the benefits."

But developing those high-growth markets won't be easy. Acer is wary about moving into China, since a rapprochement across the Taiwan Strait must precede any significant foray. And competition elsewhere is tough. As a result of the price-cutting wars, Compaq now leads in Singapore and New Zealand and is close behind Acer in Malaysia and Thailand. Compaq also is set to become the leading PC company in Hong Kong.

But Acer's position in the region is strong enough for David Hoffman, director of accounting firm Coopers & Lybrand's Taipei office, to predict: "If it makes the right moves, Acer could be the dominant brand in the Asia-Pacific/China market 10 years from now. By that time, this market alone will be sufficient to support a multibillion-dollar Acer."

Acer continues to expand in other ways. TI-Acer's wafer-fabrication plant, which now makes 4-megabit DRAMs, soon will be making 16-megabit and eventually 64-megabit chips. The joint venture plans to pump another $ 400 million into the facility, doubling the initial investment and allowing it to churn out each month 9,000 200-millimeter wafers, which are then cut into DRAM chips.

In the DRAM market, says Handy, "things are on an unparalleled roll, and it looks like the business will stay really strong throughout 1995." But the undersupply of DRAM chips might end next year, he says, "narrowing profits to the absolute minimum and taxing the forbearance of all DRAM manufacturers, including the TI-Acer relationship."

Acer also is considering some strategic changes as a result of the recent PC-price wars, when its consolidated gross profit margin fell from 25 percent of sales in 1991 to less than 22 percent in 1992. After years of aggressively promoting its own brand, Shih now concludes that Acer may have overdone that strategy.

"Nobody is going to pay an extra thousand bucks to see a familiar logo on his desktop," as Compaq's Pfeiffer puts it. Today's PC buyers know they can get off-the-shelf products with the processor, memory and software to suit their needs.

So Acer is pursuing more deals to sell its computers through other makers' channels. In 1992 some 74 percent of Acer's production was under its own brand. In 1993 it dropped to 68 percent, "but even that's way too high," Shih says. "We'd like the ratio to be even." The company plans to reach that goal next year.

Acer's biggest advantages lie in the concentration of its suppliers, its manufacturing infrastructure and its engineering resources. It costs Acer much less to bring a product extension like a fax machine to market than it would Compaq or IBM. "Acer's development and manufacturing-cycle times are among the fastest in the industry," explains Coopers & Lybrand's Hoffman. This enables the company to squeeze costs, from design and mass production all the way to delivery to customers.

Acer's plans to "franchise" its subsidiaries are an attempt to further lower costs, reduce inventory and offer flexible equipment configurations. It intends to form joint ventures with local investors and take an ownership stake of 19 percent to 40 percent -- small enough not to stretch the parent company's resources, yet large enough to maintain control. Twenty-one subsidiaries in various markets are slated to go public by the year 2000. Acer hopes to list its Computec de Mexico on the Mexican stock market, Acer America Corp. on the New York Stock Exchange and Acer Computer International on the Singapore stock market within the next two years.

The franchise effort hit a roadblock last September when the Taiwan Stock Exchange rejected the listing applications of two subsidiaries. Exchange officials said Acer Sertek Inc. and Acer Peripherals Inc. didn't have a history of adequate financial independence from their parent company to qualify for separate listings.

But such a temporary setback won't upset Shih's plans. Again and again, Acer has proven its "long-term competitive mentality," says Dataquest's Woo. The boy who once amazed neighbors and teachers with his mathematical feats when he was growing up in the fishing village of Lukang is sure to continue to surprise competitors with his feats as Acer's president.

Looking ahead, Shih says: "To survive in the 1990s a company will need not just a good product or a brand name, but it will have to be willing to stay, to be able to change the lines of production quickly." Acer looks ready to do just that.

Acer Turnaround

Year: Sales/Net Profit (both in millions)

1989: $ 688.9/$ 5.8

1990: 949.5/-0.7

1991: 886.0/-26.0

1992: 1,260.0/-2.8

1993: 1,883.0/85.6

1994: 3,000.0*/180.0*
* Estimated