For Acer, Breaking Up Is Smart To Do

Few businessmen have worked harder to make Taiwan's products respectable than Stan Shih. Chairman of Acer Inc., Shih has built the Taiwanese company from a small PC cloner into a giant in 18 years. Along the way, Shih received considerable help from Taiwan's state-run banks. So when a Taiwanese agency put up a billboard at Washington's Dulles Airport to kick off a Taiwan image-building campaign, it seemed natural to feature Acer's new notebook computer.

For Shih, though, patriotism has its limits. At the urging of his U.S. executives, who want to downplay Acer's Taiwan origins, he decided to have nothing more to do with the campaign. Why? With the island's reputation for low-end products, he says, "even bankrupt companies in Silicon Valley have better images than Taiwan companies."

Shedding his company's Taiwan identity is just part of the sweeping changes Shih is planning as he prepares Acer for global computer warfare. He wants to "deconstruct" the company, selling off majority stakes in 21 different business units in Asia and North America ranging from semiconductor and peripherals manufacturing to PC assembly and sales (chart). By building a global string of companies capable of raising their own funds, Shih hopes to generate the cash and connections needed to quadruple Acer's sales, to $8 billion, in six years.

But Shih is convinced he can't reach that milestone as a maker of thin-margin PCs. Instead, he wants Acer to be one of the world's highest-volume producers of key components and design services, both to Acer assembly plants overseas and to such big-name companies as Apple Computer, Canon, and Fujitsu.

Trouble is, the group's overseas subsidiaries have a different agenda: pushing sales of Acer's own brands. So where does Shih invest--marketing or development of high-tech components? The solution, he says, is to turn his integrated empire into a "federation" of stand-alone units. Key component divisions will remain in Taiwan, but overseas affiliates that assemble and sell PCs will be listed on local stock exchanges and run by local managers. This year, he will spin off the peripherals and PC-distribution units in Taiwan. He plans to float shares of marketing arms in the U.S., Mexico, and Singapore in 1995. Acer will keep stakes of anywhere from 19% to 40%, which in most cases would allow it to retain control.

Giving Acer units financial independence from Taipei, Shih believes, is essential if they are to have adequate capital. He hopes to raise as much as $200 million by publicly listing Acer America Corp., whose sales of PCs and servers soared 75% in 1993, to $433 million, and are expected to surge an additional 40% this year.

BOTTLENECKS. But Acer America isn't likely to soar as a public company until it can deliver profits, too. It lost an estimated $48 million in the past two years because of inventory bottlenecks and the $94 million acquisition in 1990 of Altos Computer Systems Inc., a pioneering maker of microcomputers that now sells servers. In 1994, Acer America will be lucky to break even. Indeed, the Acer empire's profitability is not impressive. All told, the group reported $77 million in profits last year on sales of $1.9 billion. That was a 58% improvement over 1992, but still only a 3.5% aftertax margin. And 80% of the earnings came from a memory-chip joint venture with Texas Instruments Inc.

Nevertheless, Acer is surviving the PC shakeout. According to International Data Corp., Acer was No.10 in U.S. computer sales, shipping 83,000 PCs in this year's first quarter. Acer's growth in the U.S. is led by its $1,500 Acros PC, with sales of nearly 20,000 a month, compared with fewer than 4,000 in early 1992. Other growth areas: servers and notebook PCs, where sales are expected to triple, to 10,000 per month, by yearend.

For other Acer divisions, money raised in local capital markets will help increase the group's role as a one-stop sourcing shop. Acer Peripherals Inc., the world's seventh-largest producer of color monitors, will double capacity, to 3 million units annually, with new plants in China and Taiwan. Meanwhile, the joint venture with Texas Instruments is building a $460 million plant to produce new 16-megabyte memory chips.

TIGHT-FISTED. To vault into the top tier of computer makers, however, Acer needs to overcome its two biggest weaknesses--marketing and distribution. Although Acer's machines are often praised for their quality and price, few top U.S. corporations are customers. Moreover, less than 5% of American PC consumers have heard of the name. One big reason is Acer's $14 million advertising budget--a fraction of the $250 million that Compaq Computer Corp. spends. Says Bruce Stephen, IDC's director of PC hardware: "They are going to have to turn the volume up or they will continue to be drowned out."

Despite griping by American managers, Acer has been reluctant to invest in advertising. But plans to sell 60% of Acer America's stock to the public could help. "We would invest most of the proceeds in marketing and service," says Acer America President Ronald Chwang.

While Acer slugs it out in the U.S., however, its contract-manufacturing business at home is thriving. Acer's Taiwan factories have landed large orders to make desktop and notebook PCs for Apple, Fujitsu, and NEC. Such work is expected to account for more than 40% of overall sales, compared with 32% in 1993.

But whether Acer's size will guarantee success for its brands in the U.S. remains in doubt. Sales are spread across a number of market segments, and Acer isn't among the leaders in any of them. Still, Shih is betting that Acer America can make money in a variety of computer markets. One big edge is that Acer can use its own factories--not subcontractors--for a reliable supply of inexpensive, Taiwan-made components. That's one Taiwanese connection Acer isn't about to abandon.

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