Acer: Past Dell, and Chasing HP

Taipei - It's a Saturday night in February, and 2,000-plus Acer employees have crammed into an exhibition center for the company's Lunar New Year party. As guests sit down to chestnut soup, steamed abalone, and double-boiled young chicken, a troupe of local comedians impersonates Acer executives.

Among the roasted is Gianfranco Lanci, the 55-year-old Italian who is the company's first non-Taiwanese CEO. His impersonator pastes a fake bald patch on the back of his head and mutters a few phrases in Italian, then switches to English. "In my opinion, Acer is already No. 1," the fake Lanci declares, taking a jab at Acer's aim to jump ahead of Hewlett-Packard (HPQ) into the top position in the PC industry.

Lanci and Acer Chairman J.T. Wang aren't quite there yet, but they're getting closer. Acer now sells 13.4% of the world's PCs, ahead of Dell's (DELL) 12.4% but far behind HP's 21%. On Feb. 9 the company reported its biggest quarterly profit in almost three years, with earnings up 25% to $109 million. Shipments increased 28%, well ahead of the industry average of 15%, as consumers flock to Acer's inexpensive offerings.

This year, Acer hopes to grab the top spot in laptops. That shouldn't be hard: It's already the leader in netbooks—the small, low-cost machines it launched in 2008—and it's neck and neck with HP for all portable computers. Once Acer becomes No. 1 in that segment, Chairman Wang boasts, it won't be long before it dethrones the Americans. "Within two to three years we will be able to take the total PC No. 1 spot," he says. "Whether it's 2012 or 2013, it doesn't make too much difference to us." HP declined to comment about the chairman's audacious predictions.

Wang, 55, understands that hubris could be Acer's undoing. So on his office wall hangs a framed copy of Taipei's Economic Daily News from September 2002, when Acer was at best a second-tier player. The page highlights Acer's plans for a new tablet PC—a product that quickly flopped. The lesson Wang drew: let others take the lead on the newest, niftiest gadgets and stay focused on the basics of churning out quality computers at low cost. "I cannot waste resources," he says. When it comes to launching the latest innovations, "We can be No. 2. It's O.K. with us." That's why Acer let a Taiwanese rival, Asustek, make the first move in netbooks. Once the machines proved a hit, Acer swooped in and became No. 1.

Being the leader doesn't mean much if you have to kill your margins to get there. That's why some investors fret that the effort to overtake HP will mean a price war that devastates earnings. Acer's operating margin in the fourth quarter was 2.95%, an improvement from 2.24% in the third quarter but far behind the 4.71% of HP's computer division. Worries about profitability have helped push Acer's Taipei-listed stock down 13% since a Jan. 15 high, vs. a drop of 10% for HP and Dell. "We don't think [sacrificing profits for market share] is the right strategy for our shareholders," says Stephen J. Felice, head of Dell's consumer and small business division. At the same time, he adds, "We are not ceding second place" to Acer.

As Lanci and Wang race to stay ahead of Dell and unseat HP, they have transformed what was formerly a bastion of Taiwanese management into the PC industry's most global company. While the top ranks at HP and Dell are dominated by Americans and Lenovo's (LNVGY) leadership is largely Chinese, Acer's team includes a French executive who oversees mobile phones, an Italian marketing chief, a German running China, an Austrian leading the U.S., and an American managing Brazil. "If you want to run a global company," Lanci says, "you need global talent."

That global team will need to make some changes to their business model if Acer is to reach its goal. The company is strongest in sales to consumers, using four brands to cater to various segments: eMachines for those who focus mainly on price, Gateway (in the U.S.) and Packard Bell (Europe) for the middle tier, and Acer for technophiles. The multibrand approach was developed after Acer bought Gateway in 2007 for $710 million, and it has helped the company gain shelf space in stores, says marketing chief Gianpiero Morbello. "It's difficult to get a retailer to place 50% of his space with one brand," says Morbello, who spent much of February entertaining customers at the Olympics, which Acer is sponsoring. "It's easier to split that same space with three brands."


Corporations, though, don't do their PC shopping at Best Buy (BBY) or Wal-Mart (WMT). Acer's focus on consumer sales hasn't been a problem in the past couple of years, as businesses have slashed tech spending. But the brighter economic outlook and the launch of Windows 7 will likely spur a rebound in business orders this year. Serving corporate buyers is more labor-intensive than selling to consumers, since companies require big teams to manage logistics and customer support. "They want...exactly the same model of PC worldwide, with the exact same support and service," says Tracy Tsai, an analyst in Taipei with market researcher Gartner (IT). That's something Acer has avoided, so many would-be buyers don't know Acer's products. As Acer's profile grows, Tsai says, "It might be a good chance to get some credit and earn the trust [of corporate buyers]."

Lanci aims to do just that. In November he began rolling out a new line of servers—bigger, more robust machines used by companies for data storage, number crunching, and network management. By yearend, Lanci expects servers to account for about 4% of Acer's revenue, offering margins that are roughly double what the company earns on PCs. Lanci predicts that the new servers, plus additional staff devoted to corporate sales, will quickly pay off. "We always have kept corporate low-profile, because we wanted to develop other parts [of our business] first," he says. This year, he promises, "Our effort will be big on commercial."

That doesn't mean Lanci is forgetting consumers. Acer is developing a Kindle-like e-Reader, laptops running Google's (GOOG) Chrome operating system, and devices to compete with Apple's (AAPL) iPad. In 2009 Acer launched its first smartphones. Lanci expects to sell more than 2 million of them this year, and by 2013 he aims to get 10% of revenues from smartphones. Soon Acer will open an Apple-like app store offering programs to run on these new gadgets. As all kinds of new devices hit the market, Lanci says, he's less concerned with dominating the PC business and more interested in being the leader in electronic gadgets of all kinds. "The industry is going to change a lot in the next five years," Lanci says. "To become No. 1, we need to continue to focus on mobile...the smartphone is just the beginning of the story."

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