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By | Drew Cullen 6th October 2008 14:12

Acer: We’re comin’ at ya, Dell

The PC company that rose without trace

And so to Budapest last month for Acer’s annual global press conference. What did I learn?

That Acer in recent years rose without trace to become easily the world’s third biggest PC vendor. That in the first half of this year, the company supplanted Dell to become the world’s second biggest laptop supplier. And that the Acer Aspire One is a pretty cool netbook. I may even buy a couple – with my own money – for the children.

The last time I looked closely at Acer – ooh sometime in the mid-or-late-90s - the Taiwanese firm was one of the world’s biggest OEMs. In other words, it made computers for bigger companies to slap on their own badges and to present as their own. It also sold under its own brand and was fairly successful at this. But it was much better known in the US than in Europe.

How things have changed. Acer abandoned the OEM business years ago – indeed in 2000 it got out of making PCs altogether, hiving off the manufacturing into a separate company called Wistron. Wistron, incidentally is said by Reuters to be keen to buy some PC factories from Dell. It is what is known in the trade as and ODM, or original design manufacturer, and Taiwan is famous for such companies.

Why did Acer, a PC manufacturing powerhouse, want to stop making things?

Survival of the biggest

In recent years, sales of PCs have consolidated, big-time. The US and Japan are the only mature economies in which there are many significant ‘local’ PC makers – but they tend to have names like HP and Dell and NEC and Fujitsu.

In the US and in Europe, the national champions of yore have mostly fallen by the wayside. In due course the emerging economies will follow suit – maybe another Chinese PC maker will break out, to join Lenovo.

Acer saw that average selling prices were under price and margin pressure, that without differentiation, things could only get worse, and that raw performance was becoming an inadequate differentiator. The PC market was already becoming the survival of the biggest.

Acer’s prognosis was commonplace. The remarkable bit is that Acer decided to do something radical, over and above outsourcing the tin-bashing.

In brief, the company decided to build a brand business, to major on notebooks, and target small and medium business and consumers in particular. Also, it looked to the developing world – especially the BRIC (Brazil, Russia, India and China) economies as another growth engine.

In the process, Acer has become something of a Global Brand, for which Taiwan is not famous. Remember, the company once was called Multitech, which shows how much it had to learn.

[The name Acer – which as you all already know is Latin for a tall strong tree, although there is nothing tall or strong about the one in my garden– is the brainchild of an American branding consultancy.]

Channel flannel

Acer has adopted a channel-only policy – it does not sell direct to end-users. This was a key factor in the rise of Compaq in the eighties and early nineties. But nowadays, in a maturing market, channel-only PC companies are as rare as hen’s teeth. In the developed world PC vendors make market, not resellers, and they are just as happy to sell direct, if the custom and the profit warrants it.

So Acer’s channel-only policy may be a throwback, but the policy is reaping dividends.

The company was early into notebooks and this is also paying off in a big way, especially in Europe, which accounts for about half of the company’s expected $20bn revs in 2008. That’s right, twenty billion dollars generated by 5,500 staff, flogging 30 million units through computer dealers and retailers. In the first half of the year, the company grew four times faster than the global market, thanks to acquisitions as much as organic growth.

Europe has become the commercial and marketing powerhouse for the company, with Acer Inc. CEO president Gianfranco Lanci driving the business from his Milan base. The Italian connection is very visible in the company’s big move into sports sponsorship - Inter Milan, Ferrari, MotoGP are current beneficiaries of Acer cash. The company is also to become a major Olympics sponsor, in time for the Vancouver Winter Olympics in 2010.

Acer is now gunning for $30 bil annual revenues by 2011 and to overtake Dell, the number two PC player, but I don't quite know when. The company acknowledges turmoil in the wider economy, but it is certain that trends are running its way.

“Achieving our business goal is not an issue," Acer chairman JT Wang said in a video address to the press corps in Budapest. People need PCs and they need the internet, so the argument goes. New classes of devices and form factors, such as cheap netbooks and “one-hand computers’ will fuel Acer, with people in rich countries using them as their second or third PC, while people in the developing world using them as their primary PC.

It also thinks that it can’t do this with one brand alone. To hit different types of customer, at different price points, it needs several PC brands. This, almost as much as scale economies, is why the company bought Gateway, in the US, and Packard Bell, in Europe, last year. With Gateway, it got eMachines, thrown in for good measure.

Acer is the sole top five PC vendors to operate entirely different brands – no Pavilion or Presario sub-brands for this firm.

Here is what the Acer Strategy Boutique has to say for itself:

By its very nature a brand builds exclusive and reciprocal relationships with a specific segment of the market yet cannot expect to create a dialogue across the entire market. The ability to communicate with diverse social-demographic groups can only be achieved through multiple brands, managed within an integrated multi-brand framework.

Quite.

Brand grenades

The company is pitching Acer as the small-premium / tech savvy brand for business and home users, across the world. eMachines is for the bottom feeders – you know, the type of people who shop at Aldi. The company has built two separate teams to target business and consumer channels with the Acer and eMachines brands.

On the purely retail-consumer, moms and pops and grandmoms and grandpops side, things are a little more complicated – Acer is retaining the Packard Bell name in Europe, and using Gateway everywhere else in the world. In due course, maybe a year or so, Packard Bell and Gateway product lines will be merged, more or less.

Packard Bell and Gateway will continue to run as independent divisions [eMachines on the other hand is now just a brand name, a play thing of the Acer sales teams]. But presumably, their management teams will merge at some point. So why two retail brands? Simple, Packard Bell has enormous name recognition in Europe, while Gateway can claim the same in America.

Chinoiserie

Last year, Acer chairman JT Wang mooted buying a Chinese PC maker to boost market share in the country. But in Budapest Acer’s Lanci noted that acquisitions were unlikely to make a big difference any more to the company, so large has it grown. He acknowledged that the company was weak in the business sector in China, but noted corresponding strengths in the consumer market. The rise of the consumer plays particularly well to Acer’s strengths.

True enough, but Acer for sure, should be doing better in China and for that matter, Japan, if it really wants to overtake Dell. Once Gateway and Packard Bell are fully digested, a biggish bolt-on acquisition in China would help greatly.

Without another acquisition or two, it is difficult to see just how Acer will overtake Dell – unless Dell decides to pedal backwards again. After a big stumble last year, Dell has recovered some lost ground in the PC market in H1, this year. The company’s move into retail in recent month appears to be behind much of the uptick. The company is in a honeymoon period with retailers, but how long can this last? Retail margins are lowest of all. Can Dell stomach this? No question about it.

But never mind Dell. Acer also has Lenovo, the world’s fourth biggest PC maker and until recently, no. 3, snapping at its heels. According to reports coming out of Germany, Fujitsu has lined up Lenovo to buy the consumer business of its European PC joint venture, Fujitsu Siemens Computers. That will close the gap in Europe.

So does Acer have any chance of overtaking HP? In a word, no. The company would need to build a server business, to build a service arm and to sell direct, if called upon by large corporates. And even then, it won’t be easy, as Dell, which has all these things in place, finds even now.

Does it matter? Does it matter if it fails to overtake Dell in the next three or four years? Not really. Acer’s success should not be predicated on the failure of bigger competitors. This is not a zero sum game: global PC shipments are still growing. And besides there is market share to be clawed still from the 30 per cent of the market controlled by “Others” – minus the bit that Apple owns, of course.

But it is easy to make mistakes in this market and it is easier to lose money – Acer’s operating margin is well under four per cent – and that is from a PC giant. It’s figures like this that made the likes of IBM and now Siemens want to get out of this business.

These days, the PC business is not simply the survival of the biggest. Without enthusiasm, energy and optimism, even the best run players might as well pack their bags and head for the exits. Acer has these qualities in abundance. Maybe, HP should be looking in the rear mirror, after all… ®

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