For Acer, A Bad Year Turns Brutal

Chairman Shih's comeback plan leaves the markets cold

Last month, Acer Inc. Chairman Stan Shih did what he has done before: restructured his ailing company. The Dec. 26 announcement came after an especially rough year, in which Taiwan's top PC maker lost a $640 million deal to build computers for IBM and predicted that its earnings would rise only 4%, to $242 million. Over the past 12 months Acer's stock has plunged 80% and is trading at about 50 cents. "The market has delivered a very clear message," says Shih, who is 58 and plans to retire in 2003 for health reasons. "In the next two years I have to focus."

The restructuring is Acer's second in as many years. The PC maker will split into two units: one focusing on brand-name products (sales: $2.7 billion), the other on Acer's contract-manufacturing business (sales: $480 million). The goal is to quell complaints that Acer's own products compete with those it builds under contract for the likes of IBM and Dell Computer Corp. This is not a new issue, but given Acer's tanking stock, Shih says he has no choice but to break the company in two.

Will it work? Analysts are skeptical, in part, because the restructuring appears to be largely cosmetic. Both new units report directly to Shih and are wholly owned by Acer Inc. Hence, the reorganization does not address the conflict-of-interest concerns of customers. Nor will it, until Shih spins off the contract business as a separate company--which won't happen for several years.

Besides, Shih's previous restructuring was hardly a resounding success. Two years ago, he split Acer into five units that put computer manufacturing, distribution, peripherals manufacturing, software development, and digital services in the hands of individual chiefs. Shih's idea was to smash the traditional centralized Chinese business model.

ADRIFT. Trouble was, Shih didn't properly implement what amounted to a revolution in Acer's corporate culture. Instead, he went into semiretirement, focusing on pet projects, including Aspire Park, an information technology research foundation in suburban Taipei.

With Shih's attention diverted, Acer drifted. Despite years spent trying to break into the U.S., the company has sold fewer and fewer of its name-brand PCs there. Determined to break free of the anonymity of contract manufacturing, Acer executives stayed with the money-losing, brand-name operation--and continued to alienate their contract clients. "Why would a U.S.-based company give them business?" asks an executive of an American PC maker. "It would just be feeding the enemy." Other low-cost Taiwan manufacturers, such as Quanta Computer Inc. and Compal Electronics Inc., were just as technologically savvy--and they weren't trying to compete with their customers.

To the consternation of critics, the executives who presided over the failed model of the past two years also remain in place. "Shih sounded like he would fire top management," says Tony Tseng, an analyst with Merrill Lynch & Co. in Taipei. "But everybody is still there." For his part, Shih insists a management overhaul is unnecessary.

Restructuring is unlikely to be the panacea Shih is hoping for. Acer needs to diversify away from its reliance on PCs into servers, storage systems, and network communications gear. But it will be hard to catch up with such established players as Solectron Corp. and Flextronics International. And while J.T. Wang, the new CEO of Acer's brand-name operations, says he plans to focus more on China than the U.S., the going there will be tough, too, especially against home-grown players such as Legend Computer. If Acer's stock continues to plumb the depths, Shih may be forced to take sterner measures.

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