(Corrects the spelling of Asustek in the headline)
Tiny computers have been good to Asustek. The Taiwanese company in 2007 introduced the first netbook, those low-priced mini-laptops that have been the PC industry's fastest-growing product for the past two years. Netbooks now represent nearly 40 percent of the Asus brand's sales and have been the primary factor in helping Asustek tie Lenovo as the world's No. 5 portable PC company, according to researcher International Data Corp.
Now it looks like the netbook growth engine is losing steam. Netbooks' share of the global PC market will probably be flat this year at 12 percent, IDC estimates. Instead, consumers are flocking to tablets such as Apple's (AAPL) iPad, which offer many of the advantages of netbooks. For Asustek, that means making a big push into tablets while trying to convince corporations and consumers that there are still advantages to netbooks.
On May 31, Asustek unveiled its first weapons in the battle against the iPad: the Eee Pad and the Eee Tablet. Like Apple's device, the Eee Pad—available next winter—will have a touchscreen, an embedded keyboard, and videoconferencing capability. Unlike the iPad, the Asus machine will sport an Intel (INTC) processor and use the Windows 7 operating system. The Eee Tablet, to hit the market in early 2011, is an electronic book reader with a touchscreen and built-in camera that allows users to write notes on photos. The new gadgets could be "key drivers for Asustek's sales and earnings growth in the coming years," KGI Securities analyst Angela Hsiang wrote in a June 1 report.
Asustek will have plenty of competition, even aside from the iPad. Dell (DELL) has introduced a mini-tablet called the Streak, and almost every other PC maker has a tablet in the works, though some have delayed launches in the wake of the iPad. While the new Asus machines will hit stores before most of the competition, investors clearly have doubts about Asustek's strategy. Its Taipei-listed shares dropped 18 percent this year through May 17, when stock sales were suspended pending the upcoming spinoff of the company's manufacturing arm. One investor worry is that Asustek can't offer as many apps as Apple can. "They have a very good product but the environment is not ready; there's still not enough content," says Robert Cheng, an analyst in Taipei with Credit Suisse (CS). Another problem is that the Eee Pad will have about six hours of battery life, four hours less than the iPad.
Asustek CEO Jerry Shen believes he still can tap a vast corporate market for netbooks. The company is tinkering with design, moving away from the current clamshell look to sleeker one-piece models—a kind of tablet shape but with a physical keyboard. Asustek "will have a lot of different types of netbooks that can still provide a better user experience" than tablets, says Shen.
To hedge against a big decline in netbook popularity, Asustek is heading upscale. In May the company launched notebooks with Bang & Olufsen sound systems and introduced a line of laptops with bamboo on the lid, using 20 percent less plastic than other machines. "We still have a lot of innovation going on," Chairman Jonney Shih says, showing off the private lab adjacent to his office where he retreats to clear his mind by tinkering with Asus gadgets.
One of Asustek's most offbeat innovations is its product-testing strategy. A Buddhist vegetarian, Shih is a supporter of the Tzu Chi Foundation, one of Taiwan's biggest Buddhist charities. He enlisted Venerable Dharma Master Cheng Yen, the foundation's 73-year-old founder, to help test e-readers. Cheng Yen "is the best quality assurance," Shih says. "She is so patient." As Asustek tries to match the iPad, he'll need patience from customers, too.
The bottom line: Asustek is working on new tablets as sales of its mainstay machines, tiny netbooks, begin to flatten.