Is Consumer-Electronics Maker BenQ The Apple Of The Island?

It's Taiwan's top brand and sales are soaring in the U.S. -- yet its stock has sunk

It's no surprise that K.Y. Lee cites Steven P. Jobs as a key source of inspiration. Like Jobs, who heads both Apple Computer Inc. (AAPL ) and Pixar Animation Studio (PIXR ), Lee leads two successful companies: BenQ Corp. -- Taiwan's leading maker of thin-screen PC monitors, MP3 players, and mobile phones -- and AU Optronics Corp. (AUO ), the island's foremost producer of the liquid-crystal displays needed for many of BenQ's gadgets.

In Taiwan, electronics companies have typically thrived as anonymous contract manufacturers, but Lee especially admires the way Jobs has nurtured the Apple brand. "Technology changes so fast, and consumer habits are changing all the time," says Lee. "The only things a company has in the long term are the brand name and the management philosophy."

So far, following Jobs's lead has served Lee pretty well. BenQ -- the name is short for "bringing enjoyment and quality" to life -- has become the most successful Taiwanese consumer-electronics brand, with profits of $220 million on sales of $3.8 billion last year. In the U.S., meanwhile, sales of BenQ's branded products were up by 44% and are expected to double this year as Americans grow more familiar with the BenQ name. BenQ is now the No. 6 U.S. seller of LCD monitors. In Japan, BenQ is No. 1 in 17-inch LCD monitors. NTT DoCoMo Inc. (DCM ), Toyota Motor Corp. (TM ), and even the Japanese customs department in Osaka buy them.

Sounds great. There's just one hitch: BenQ's stock is down by 26% since May and is now trading near 52-week lows. Why the slide? Tech shares worldwide are in a funk, but BenQ is also being punished for its 14% stake in AUO, which last year provided BenQ with 56% of its earnings. Investors, worried that LCD makers have built too many factories too quickly, have driven AUO's stock down by 45% since April. The close tie between the two companies "is probably a winning strategy from an operating point of view," says K.C. Kao, an analyst with Deutsche Bank (DB ) in Taipei. "But investors think it increases earnings volatility."


There's another potential cloud on BenQ's horizon: Lee's dogged efforts to build up the BenQ brand name is costing him customers. BenQ's production of mobile phones could drop to 400,000 monthly by yearend from 1.2 million today, estimates Dominic Grant, an analyst with ING Financial Markets (ING ) in Taipei. That's largely because BenQ is losing orders from Motorola Inc. (MOT ), for which the Taiwanese company has been a top contract manufacturer. But BenQ now plans to sell phones in China, where Motorola has long led the market. "BenQ's goal is to sell its branded handsets," says Grant. "Of course there's a conflict."

It was just this sort of conflict that plagued BenQ's former parent, Acer Inc., for years. That led Acer in 2001 to spin off both its manufacturing division (now known as Wistron Corp.) and BenQ to concentrate on making brand-name computers. BenQ, though, doesn't think it needs to follow in Acer's footsteps and jettison its contract-manufacturing operations. Like industry giants Sharp, Samsung, and Sanyo, the company can successfully sell both branded and unbranded gear, says Adrian Chang, BenQ president for Asia-Pacific. "It really depends on how we position the brand name," Chang says. "We'll be fine."

China, meanwhile, is considered so important a market that Lee is willing to sacrifice a few million Motorola phones to open a space for his own brand. The mainland currently accounts for about a quarter of BenQ's revenues, while sales of brand-name gear there are on target to rise at least 50% this year, to $360 million.

Will K.Y. Lee's branding push pay off? Investors may be skittish, but Lee and his team are determined to prove that the BenQ name can be a hit.

By Bruce Einhorn in Taipei

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