A Proud Papa Called Acer

Its spin-offs are thriving, and a tighter focus is helping the parent

In the late 1990s, Acer Laboratories Inc. President Chin Wu was feeling a little like a rebellious teenager. After more than a decade as a subsidiary of Taiwan's sprawling Acer Inc., the chip-design company began craving more distance from its corporate parent. At the time, Acer Chairman Stan Shih wanted the group's logo to appear on just about everything the group made, from personal computers and monitors to semiconductors. But Wu resisted. Many of his biggest customers, including IBM and Hewlett-Packard, competed with Acer PCs. "They didn't like to see a competitor's logo on their key components," recalls Wu.

These days, Wu does not have to worry about those perceived conflicts of interest. In 1999, Shih spun off Acer Labs as a separate company. This May, it changed its name to ALi Corp. Since winning independence, ALi has expanded into chips for such products as DVD players and wireless telecom equipment. This year, analysts expect its sales will surge by 27%, to $205 million.

ALi is just one of several offspring of the old Acer family that are doing better on their own. Wistron Corp., the group's former contract manufacturing arm, has won a contract to make handheld PCs for Dell Computer Corp. (DELL ) and is close to clinching another to make Xbox game consoles for Microsoft Corp. (MSFT ), industry sources say. (Dell, Microsoft, and Wistron won't confirm the reports.) Wistron plans an initial stock offering next year, when Acer plans to cut its stake to under 40%. The stock of another Acer spin-off, BenQ Corp., is up 32% this year, at a time when Taiwan electronics stocks are down 26%. BenQ is a leading producer of thin computer monitors and is the largest contract manufacturer of mobile phones for Motorola Inc. Telecom equipment maker Ambit Microsystems Corp. is a growing supplier of modems and has begun making equipment for wireless networks.

Shih's willingness to let go already is producing some dividends. The combined sales of the companies in the Acer Group are up 15%, to $9.7 billion, since 1999. The breakup has brought some benefits to the flagship company, Acer Inc., as well. The company, which is still run by Shih and owns shares in many of its offshoots, has raised some $1 billion from asset sales. But Acer Inc.'s consolidated sales of $3.3 billion were 37% lower from two years ago. It eked out a $30 million profit.

Still, Shih maintains, that Acer is poised to improve. One reason is that Acer Inc. now can focus on its core business of selling its own PCs, rather than struggling to master every sector of the electronics industry. "The new environment requires a new structure," Shih explains. "A brand-name company doing everything is out of fashion." Shih plans to keep selling assets, including a $200 million stake in Wistron and some $350 million worth of shares in Taiwan Semiconductor Manufacturing Co. (TSM ) Shih also wants to expand Acer's logistics and Internet services and sharply boost spending on product development.

This is hardly the first time Shih has done a radical makeover. After making a name for himself as an early cloner of IBM PCs in the 1980s, Shih set out to build a diversified conglomerate that was Taiwan's answer to Japan's Hitachi Ltd. (HIT ) and South Korea's Samsung Group, with global investments spanning memory chips, PCs, monitors, consumer electronics, and telecom gear. Acer became a major PC brand in Asia, Latin America, and Eastern Europe, and even enjoyed a brief success in the U.S.

But by the start of the new millennium, Acer had lost its way. Upstarts such as Quanta Computer Inc. and Hon Hai Precision Industry Co. emerged as Taiwan's hot contract manufacturers for U.S. companies that felt uneasy teaming up with Acer, a potential rival. Meanwhile, Acer's brand floundered in the U.S., and investors tired of Shih's lack of focus, not to mention his constant reengineering.

The latest strategy was hatched on a Sunday morning in September, 2000, when Acer CEO Simon Lin and Chief Financial Officer Philip Peng met at Shih's Taipei home for an urgent meeting. They concluded that the conflict between Acer's brand-name business and its contract-manufacturing operations had to end. "When we were a $300 million business, nobody cared," recalls Lin. "When we were a $6 billion company, they cared a lot." The best solution, they decided, was to break up the group into independent affiliates that no longer would use the Acer logo. Acer Inc. would keep minority stakes and several board seats in the spin-offs, but would exert little influence. "It's a pretty loose relationship," says Lee Kuang-lu, president of broadband equipment manufacturer Ambit Microsystems. "Stan leaves you alone."

The new arrangement suits Ambit fine. In the mid-1990s, the company sold half its output to Acer. Now, it sells 95% of its broadband networking gear to such customers as Apple Computer (AAPL ), Dell, IBM (IBM ), Cisco Systems (CSCO ), and Alcatel (ALA ). Although the global tech crunch is crimping sales growth, Ambit did raise $100 million in a bond offering in March to finance expansion into new products.

Not that Acer's offshoots have broken their family ties completely. BenQ Chairman K.Y. Lee also chairs AU Optronics Co., another Acer spin-off that makes thin-film transistor liquid-crystal-display (TFT-LCD) panels. BenQ uses the panels in its monitors and digital cameras. In May, AU raised $580 million when its shares started trading on the New York Stock Exchange. BenQ owns a stake in AU, and the companies collaborate on development.

Shih says spinning off contract-manufacturing also has helped Acer lower costs and boost efficiency. That's because it now is free to use outside component vendors and factories. And Acer remains a brand-name force outside the U.S. It has held steady as Asia's No. 6 PC brand, with a 4% share. Acer boosted its share of Western Europe's notebook PC market from 9.7% to 11.5% over the past year by expanding its sales and service network. In Italy, Acer's sales of desktops and notebooks surged by a third, giving it an 18% share, behind only Hewlett-Packard Co.

Still, it's too early to declare definitive victory for Shih's makeover. Nabbing Dell's handheld PC contract may be a coup for Wistron, but skeptics say Dell drove such a hard bargain that few other Taiwanese manufacturers thought the deal was worthwhile. Wistron "is desperately cutting prices" to win new customers, says Asia technology analyst Tejinder Sandhu of HSBC Securities (Asia) Ltd. Sandhu also says many investors suspect Acer "will change the strategy again when the winds change."

Perhaps. But however Acer evolves, Shih vows he won't return to vertical integration. "I don't have the resources to support that kind of growth," says Shih. After years trying to create Taiwan's equivalent of Asia's giant electronics groups, Shih has learned his lesson. The question now is whether he has learned it in time.

By Bruce Einhorn in Taipei

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