Taiwan's Acer eyes Chinese rival

Taiwan's Acer eyes Chinese rival

	Published : Fri, 30 Mar 2007 19:00 By : Agencies Print this Story

HSICHIH, Taiwan (AP) - Taiwan's Acer Inc. wants to be known as the Ferrari of personal computers.

Seeking to climb past Chinese rival Lenovo to become the world's No. 3 PC maker, Acer has tied up with the iconic Italian automaker to convey to consumers that its computers have a special sleekness to them -- a distinction, it hopes, that separates its machines from the plain boxes of other manufacturers.

The colorful marketing campaign, complete with claims of 'easy to spot dashboard controls' and 'a vision of perfection,' is a key part of Acer's retail push in the United States, which it withdrew from in the 1990s after a disastrous first foray, and in China, Lenovo's home turf.

Expanding sales in those two markets is key to Acer CEO J.T. Wang's strategy to overtake Lenovo by the second half of the year. The Chinese computer maker burst into international prominence when it acquired IBM Corp.'s PC business in 2005.

The gap is narrowing. Acer's global market share has crept up to 6.8 percent in the fourth quarter while Lenovo's share has shrunk to 7.1 percent, according to the market research company Gartner. In third quarter of 2005, Acer had 4.7 percent and Lenovo had 7.3 percent.

While the showdown between the two companies comes amid lingering political tension between communist China and democratic, self-ruled Taiwan, Wang says the rivalry is all about business.

'We are trying to grow without regard to politics,' he said in an interview at Acer's glass-fronted headquarters building in the Taipei suburb of Hsichih, echoing a view held widely among commercial leaders in Taiwan.

Despite threats from Beijing to attack if Taiwan formalizes its de facto independence, business ties between the two sides have grown closer. Taiwanese companies have invested more than $100 billion in the mainland since the early 1990s, and many companies -- including Acer -- outsource manufacturing there.

The Acer chief's optimism about overtaking Lenovo is based at least in part on the company's rapid revenue growth over the past several years -- about 30 percent to 40 percent annually before an industrywide downturn cut it to 16 percent in 2006 -- and Lenovo's problems with declining market share in North America, Europe and Japan.

Wang says a lot of Acer's success derives from its effective use of the 'channel' marketing model, which pairs it with local distributors to help its products gain traction.

In the process, its profit margin is reduced to an average of 2 percent worldwide and as low as 0.5 percent in the U.S. because of the healthy commissions it pays to these partners.

Still, Wang has no intention of ditching the model now.

'When we develop good channels our sales grow,' he said. 'Through the channels we address our main markets -- small- and medium-size businesses, educational institutions and home use. We are good at this model and it serves us well.'

Of the big four PC manufacturers, all but Dell use the channel approach to some extent. Dell dispenses altogether with distributors, instead focusing on direct sales over the Internet.

At least for now, Acer's strategy seems to be working. According to Gartner, Acer's computer sales in the U.S. increased 87.6 percent year over year during the first three quarters of 2006, while in China, they rose 40.8 percent.

Analyst Tony Tseng of Merrill Lynch believes that marketing moves like the Ferrari tie-up have played a role in Acer's rapid progress.

'It's certainly one of the drivers,' he said. 'It helps Acer explain itself and differentiate itself from the rest of the pack.'

Analyst Ellen Tseng of Morgan Stanley in Taipei said another key to Acer's success -- and a litmus test for its ability to move ahead of Lenovo in coming months -- is gaining sales in the critical U.S. market.

Wang, an electrical engineering graduate of Taipei's prestigious National Taiwan University, said that unlike some PC makers, Acer has no plans to try to go after market share by offering cut-rate products that compromise on function and computing power -- even in developing countries where spending power is relatively limited.

'Our research shows that people with smaller incomes don't want inferior products,' he said.

The Taiwanese company re-entered the U.S. retail market two years ago, confident that it had learned lessons from its first attempt about eight years ago.

That effort lost money, partly because Acer failed to factor in liberal American retail policies, which allow customers to return big ticket items like computers to stores within a set time period after purchase. Retailers in Asia and Europe generally have stricter return policies.

Wang predicts that Acer will be generating $3.5 billion in annual revenue by 2008 from its American operations, about twice the current level.

Some industry analysts believe that Acer's increasing competitiveness motivated Hewlett-Packard's patent-infringement lawsuit filed against the company this week in a Texas federal court. HP claims that Acer is illegally using five patented HP technologies in a variety of desktops, laptops and displays, and is seeking an injunction barring the sale of those products in the U.S.

Analyst Roger Kay, president of Endpoint Technologies Associates, said HP was spurred into action by Acer's dominance in the European laptop market and aggressive growth targets for the U.S.

'I see (the lawsuit) as a harassment tactic -- the business tactic is essentially distraction,' Kay said. 'They haven't done it up through now because Acer hasn't been that competitive.'

Meanwhile, Lenovo is losing money in its U.S. business -- despite its IBM connection, which includes the right to display IBM's iconic 'Thinkpad' brand.

Merrill Lynch analyst Tseng says there are persistent doubts about Lenovo's prospects, mainly because it is losing ground to Dell Inc. and Hewlett-Packard Co.

'Lenovo is very strong in its Chinese base,' Tseng said. 'But they have already lost money for two consecutive quarters in ... the U.S. I don't think this is temporary.'

At Lenovo's U.S. facility in Raleigh, North Carolina, company spokesman Ray Gorman would not comment directly on Acer's efforts.

Besides the U.S., Acer's other big business push is China itself, despite Lenovo's entrenched status there. In 2006 the country accounted for 5 percent of Acer's total PC revenues of $9.86 billion.

'We find that China is more and more like a free and open market,' Wang said. 'Not totally free, but improving. That is good for Acer.'