No One Said Building A Brand Was Easy

To boost its profile, Taipei's BenQ snagged Siemens' cell-phone unit -- just as sales stalled

The jerseys of Britain's Manchester United are emblazoned with the logo of cell-phone giant Vodafone Group PLC (VOD ). Chelsea's sport the Samsung name. Since 2002, Real Madrid's have read Siemens (SI ). Now, after the German industrial powerhouse sold off its cell-phone business, they'll soon say BenQ as well.

Ben Who? In early November, Real Madrid signed a sponsorship deal with the Taipei-based producer of handsets, liquid-crystal display TVs, PC monitors, and other gadgets. So next year David Beckham, Ronaldo, Zinedine Zidane, and the rest of the team will wear jerseys with a name that many Madrileños may have a tough time pronouncing (for the record, it's two syllables, "Ben" and "Q").

Nabbing the Real Madrid sponsorship, for an undisclosed sum, is the latest move in BenQ's attempt to pull off a brash corporate transformation. For years, Taiwan's electronics manufacturers made pretty good money as outsourcing specialists for Western or Japanese companies with big-name brands. But with margins shrinking as customers continually demand price cuts, the Taiwanese -- especially the island's computer makers -- are struggling to eke out a profit even as their sales soar. "We don't want to fall into the same trap as the PC business," says K.Y. Lee, BenQ's chairman. With a strong brand of its own, he says, BenQ will be able to command higher margins and better control its destiny. "We must be able to promote our brand name," he says.


Lee has a head start on many of Taiwan's other big electronics houses. Since computer maker Acer Inc. spun off its consumer electronics division and christened it BenQ in 2001, Lee has been trying to shift the company's focus away from working for others and more toward producing cutting-edge goods under its own brand name. He has directed BenQ designers to create cool products and boost the BenQ image, with TVs and computer peripherals bearing the company's name now common at U.S. retailers. Then in October, BenQ completed the acquisition of Siemens Mobile, the cellular-phone division of the German conglomerate. The deal instantly turned BenQ into a major brand-name player. Lee plans to use a hybrid name, BenQ-Siemens, for up to five years before phasing out Siemens altogether.

The purchase was the latest in a series of deals in which ambitious companies from Greater China have acquired down-on-their-luck Western brands. Beijing-based PC maker Lenovo in May bought the PC division of IBM (IBM ). TCL Communications, one of China's largest producers of cell phones, last year formed a joint venture that gave it control of Alcatel's (ALA ) handset unit. And sister company TCL Multimedia Technology Holdings took over the TV division of Thomson Corp. (TOC ), the French outfit that controls the RCA brand in the U.S. While it's still early, many of these deals have run into difficulties. In May, for instance, Alcatel withdrew from the TCL venture, and for the first nine months of 2005, TCL Communications lost $166 million on sales of $513 million.

Investors aren't so sure BenQ can do much better. When the Taiwanese company took control of Siemens Mobile, it was so troubled that the Germans actually paid BenQ to take it off their hands. So despite the $350 million BenQ got in the deal, its stock price is down 15% this year, compared with a 13% rise for the Taiwanese electronics index. Macquarie Bank predicts that BenQ earnings will slump 99% in 2005, to just $7 million on sales of $4.5 billion.

The big problem is that the merged business doesn't look a whole lot more attractive than Siemens Mobile did on its own. Together, BenQ-Siemens phones had just 4.6% of the global market in the third quarter, according to researcher Gartner. That's down from a 7.6% share for Siemens alone a year ago and puts the combined company at No. 6 worldwide. Next year, BenQ-Siemens will likely sell about 40 million phones, 20% fewer than Siemens did in 2004. Worse, they have the lowest average selling price -- $83 -- of the top six because consumers have been more impressed with jazzier models from Nokia (NOK ), Motorola (MOT ), Samsung, Sony Ericsson, and LG Electronics. Siemens was slow in getting phones from the research lab to the market, and it botched distribution, so it lagged rivals in shipping handsets to retailers. "In this need to be very fast, as product cycles are very short," says Inge Heydorn, an analyst at Deutsche Bank (DB ) in London.

Even in China, BenQ has its share of woes. The mainland is the world's biggest cell-phone market, with Chinese expected to buy 78 million handsets this year, up from 70 million in 2004, according to market watcher Analysys International. But anyone wanting to sell there needs a license to do so, and BenQ didn't get one until last May. While Siemens was one of the first to enter the market and has a large factory in Shanghai, the company in 2004 dropped from China's top 10 sellers. BenQ acquired a brand that is "outdated and not trendy," says Edward Yu, president of Analysys International.

BenQ executives insist they can add new luster to the brand and work out the other kinks that hobbled Siemens. Lee wants to target entry-level users in emerging markets such as India. At the same time, he wants the new BenQ to produce high-end phones with features that can compete with the industry leaders. Over the summer, BenQ started selling smart phones, and the company expects to introduce between 30 and 40 new models next year, with a focus on multimedia handsets. And Lee says he can cut costs by moving manufacturing to BenQ facilities in China from outsourcers in Eastern Europe. All told, he expects $590 million in annual savings.


One thing Lee says he won't do is clean house. Lee claims a key reason for the troubles at Siemens Mobile was excessive turnover in the executive suite. "In the last two and a half years, they had six management changes," he says. "That was why they fell down so rapidly." So Lee has kept Clemens J. Joos on as chief executive and left the division's headquarters in Munich. Moreover, BenQ plans to expand the 2,000-strong German research and development staff. Lee steps gingerly around the question of layoffs among the 2,000-plus workers at the plant BenQ inherited from Siemens in Kamp-Lintfort, Germany. He says that "so far" BenQ doesn't plan to shut any factories, but DZ Bank estimates that BenQ now has overcapacity of between 15 million and 20 million handsets.

Lee is counting on the Real Madrid deal and other promotions to build sales. "With this sponsorship we can definitely increase our [brand] awareness," he says. But does he have the right team? Despite its superstars, Real Madrid is only in fourth place in the Spanish premier league. For a sixth-place player such as BenQ, though, fourth place must look mighty attractive.

By Bruce Einhorn, with Bettina Wassener in Frankfurt and Andy Reinhardt in Paris

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