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Innovative Asustek Stuns the World

The Lion Shows it Can Dance

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Having made an impressive debut in the sub-notebook market with the introduction of Eee PC, will Asustek get an additional boost from splitting its contract manufacturing and branded businesses?

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The Lion Shows it Can Dance

By Hsiao-wen Wang
From CommonWealth Magazine (vol. 387 )

In 2007 Asustek, headquartered in a gleaming office tower on the Guandu Plain outside Taipei, again stirred conflicting feelings among the global giants of the computer industry, as the indispensable contract manufacturer emerged as a serious competitor in the branded business.

Asustek has repeatedly hit raw nerves in the computer industry with its innovative force. The company's innovative efforts were recently capped by the release of the Eee PC, Asustek's formidable entry into the great new realm of inexpensive notebook computers. Valued at NT$39.3 billion this year, ASUSTek displaced Trend Micro as Taiwan's most valuable international brand.

Asus is expected to sell more than five million Eee PCs next year, which could make pale the sales figures of even leading innovator Apple, which sold 4.3 million of its MacBook notebooks over the last four quarters.

Henry King, Goldman Sachs' head of research for Asian technology companies, asserts that "the birth of the Eee PC proves Asustek's capacity for innovation." King believes that the Eee PC is an innovative product destined to succeed in the market precisely because it is not a device conceived in the ivory towers of academia. The Eee PC is priced right, is the right product and offers the right functions, he offers.

Taiwan, which still finds it hard to shed its humble beginnings as the world's contract manufacturer, can finally get a measure of payback this time. The arrival of the novel Eee PC has shaken the dominance of "Wintel," an acronym for PC operating system maker Microsoft and CPU maker Intel, the two giants that hold the entire computer industry in a stranglehold. Both companies were keen to jump on the bandwagon of the cheap notebook wave rolling out from Taiwan.

Jerry Shen, who oversaw the Eee PC project and will take over as CEO of the reorganized Asustek at the beginning of next year, recalls that six months ago when the Eee PC was in its initial stage of development, no one thought that Asustek would succeed. Initially Microsoft was unwilling to cooperate, and only when Asustek switched to a Linux operating system did Microsoft begin worrying that its PC operating system monopoly could be jeopardized. Should the Eee PC become a success, many first-time notebook users such as women and younger people would become familiar with Linux, they feared. With these thoughts, even Microsoft eventually came around.

At first Intel was also not on board the Eee PC project. When overtures to the world's biggest chipmaker fell on deaf ears, an anxious Shen approached the industry's number two company, AMD, to discuss cooperation.

Now, not only has the Eee PC won full Wintel support, but in user surveys on the on-line shopping portal Amazon and technology review site CNET the Eee PC has been outshining other popular electronic gadgets such as the MacBook, Nintendo's game console Wii, and Apple's iPhone as Americans' most coveted Christmas present.

Thanks to Asustek, the world has stood up and taken notice of Taiwan's potent potential for making the transition from emulating others to innovating on its own.

Products represent the engineers' hearts and souls. The Eee PC, which hit the market after just a little more than half a year of development, reflects Asustek top management's uncompromising commitment to technology.

Presently every third computer around the world has an Asustek motherboard inside; one out of every 22 notebook computers worldwide was manufactured by Asustek or is an Asus brand computer. Asustek is already the world's number one manufacturer of motherboards, graphics cards, and wireless network communications products. And thanks to aggressive development of its own-brand notebooks, Asustek has already become the world's eighth-largest notebook brand, crowding out Japan's Sony Corp.

"Asus notebooks are actually doing the best in Europe," reveals Jonathan Tsang, Asustek's vice president for sales and marketing, who will become vice chairman and chief branding officer at the reorganized Asustek. While Asus occupies only an unspectacular seventh rank in the European PC market, its notebooks are selling at the relatively high average unit price of 1,900 euros in Paris, about twice the price of comparable notebooks. As a result, profit margins for Asus notebooks are three times higher than those of Taiwanese archrival Acer.

In an exclusive interview with CommonWealth Magazine, Asustek Chairman Jonney Shih begins scribbling with a thick black pen on the back of our interview outline. Marking certain phrases and crossing out others, Shih eventually writes a single line in thin, vigorous characters that epitomizes the Asustek Group's new vision: "A leading world-class company in the new digital era."

It took Asustek 18 years to make it from behind the scenes as a maker of branded computer parts to center stage as a maker of own-brand system notebooks. This transformation has given the Taiwanese brand visibility and recognition around the world. One might even call it "Taiwan Outside."

And slowly the world takes note. In an article titled "Asustek Steps Up Onto the Main Stage," the Wall Street Journal wrote that the Taiwanese company "is quietly storming the global personal computer market."

Since 2003 Asustek's turnover has tripled and has reached new heights during the plateau period of high growth. This year Asustek has made great strides, with revenue nearing NT$730 billion and a 25% growth rate. Profits are expected to top a record NT$30 billion. The Asustek Group has firmly established itself as Taiwan's second largest privately-run company, behind HonHai Precision Industry Co., which boast an NT$1-trillion turnover. Next year Asustek is expected to become Taiwan's second NT$1 trillion-revenue enterprise if the revenues of its own-brand business and contract manufacturing are combined.

Amorphous Amalgamation

What makes the 100,000-strong Asustek Group a winner? Built on the shoulders of technocrats, ASUSTek has a low-key engineer's personality.

For outsiders it is very difficult to capture a full view of the Asustek Group. Asustek's product line is both expansive and diffuse, ranging from its traditional core business of motherboards, to PCs, industrial computers, servers, handsets, game consoles and LCD TV sets. Juggling design, production, and contract manufacturing, Asustek's business model has become a unique mixture of branding, electronic manufacturing services (EMS), and original design manufacturing (ODM).

The larger the company gets, the longer its battle lines extend, leading to severe management bottlenecks, running the risk of declining efficiency as the organization expands.

"Great trees are good for nothing but shade," says Sharon Su, an ace technology analyst now serving as Asustek's chief investment officer, pinpointing the problem. "At Asustek the strong business units become stronger, while the weaker ones find it hard to improve. It is a matter of resource allocation," she adds. In comparison to foreign computer firms, which set out clear rules to follow, things are rather blurred at Asustek, Su concedes.

"Before the split-up of the company things were really murky," says Tony Tseng, senior director of equity research at Merrill Lynch Global's Taiwan office. "Everyone was eating from the same big bowl, making it impossible to know which units were profitable and which ones were losing money," Tseng added.

Renowned business strategist and National Taiwan University professor Tang Ming-je does not mince words in assessing the company. "It's incomprehensible," he says of Asustek's structure, adding: "It is seriously chaotic, but there is order within that chaos. The company follows its own logic."

Where does the order within Asustek's chaos manifest itself? Industry analysts and Asustek executives alike point to the company's solid product development capability.

Productive in the Trenches

At Asustek's 16-story headquarters in Beitou all lights are shining brightly. After passing through a long corridor on the fifth floor cluttered with motherboards, we arrive at a small, nondescript conference room without windows. Crammed with desks piled with all kinds of random items with no partitions between them, the dull light of fluorescent lights cast over the bare white walls, the room feels like a prison-like cage.

But this uncreative temporary office with the sign "Big Room" on its door is where some 20 engineers holed up for more than half a year to doggedly develop the slim, cute Eee PC.

"If you squeeze more than 20 core people into one place, they will be able to solve problems just by looking up (to ask a colleague). For specification problems they can consult the product manager or software people; for heat dissipation issues they turn to the structural designer; for design problems they can immediately seek advice from industrial design," Shen relates in explaining the rationale behind cramming people together. When people work closely at each other's side, communication becomes much more efficient, says Shen, whose dogged persistence in carrying out projects earned him the nickname "Taiwanese Water Buffalo."

Anxious, Shen herded the development team into the Spring City Resort in Beitou like sheep, locking them up for two days and two nights of intensive, round-the-clock work to complete work on the Eee PC's user interface prototype.

When Asustek showed Intel the Eee PC prototype that had been developed in under a month, Intel staff began to call the Asustek boss's pet project "The Jonney Machine."

That moniker stuck and was subsequently picked up by the U.S. media. In November Fortune Magazine portrayed Shih with an article titled "The Jonney Machine," reporting that the device might lead to Asustek's breakthrough as a computer brand in the U.S.

Products represent the engineers' hearts and souls. The Eee PC, which hit the market after just a little more than half a year of development, reflects Asustek top management's uncompromising commitment to technology. Jerry Shen, who will take over as CEO of ASUSTek after the company shake-up, was the driving force behind development of the sensational new Eee PC.

Let's turn back the clock to a stormy typhoon night in September. It was already after 11 p.m. and Shen was just about to leave for home "a bit earlier" than usual, when he got a phone call from Shih. Shih told him that his wife and children, who were trying out the Eee PC at home that night, had found it clumsy in certain respects. So Shen and Shih stayed on the phone until around 2:30 a.m. troubleshooting together.

Asustek's passion for technology and commitment to fundamental training are personalized in Shih. "I always doubt whether he has slept at all," says Shen, clearly in awe of his boss's work ethic.

Shih used to design electronic circuits and package goods himself. During the peak season he would help out in the factory, opening himself up to assembly line workers who gave him grief for being too slow, shooing him away. "Get out of here. Go to the back and move boxes," they taunted.

Despite being chairman and CEO, Shih has never lost his love for technology. He even used to read while driving to satisfy his insatiable curiosity for new developments, oblivious to his haphazard swerving about. Eventually T.H. Tung, after witnessing Shih's hazardous driving style, persuaded him to hire a driver. For a long time Shih had refused to hire a driver, citing his vegetarian diet since high school and abstention from stimulants like alcohol or coffee.

Parting Company

On the one hand Asustek has achieved big successes in a low-profile manner, finding a blue ocean niche in the red ocean of the computer industry. However, all this has not helped solve the managerial chaos resulting from the clash between the group's own-brand and contract manufacturing businesses.

Asustek counts some 15 business units under its wings, which tend to use consensus decision-making. On top of that there is no clear distinction between the values that rule contract manufacturing and those underlying the own-brand business. Consequently Asustek has had trouble clearly identifying future growth drivers and major economic indicators.

"In contract manufacturing you need to go all-out to secure very large orders, but at first you might not make any money. However, a brand needs to yield very good profits right from the beginning," says Shih pointing out the dilemma. "So how are you going to reconcile these contrary approaches to make staff feel comfortable?" There is no such thing as a free lunch - it's an eternal dilemma," he added.

Moreover Asustek is known for its generous corporate culture that puts people first. While this employee-oriented approach has allowed the company to attract a lot of talent, it also makes it difficult to implement decisions in a top-to-bottom manner. "Even a section chief can go right up to Jonney and give him a piece of his mind," Shen admits frankly. Jonathan Tsang, who will become vice chairman and chief branding officer at the reorganized ASUSTek, is the heart and soul of the ASUS brand, and a stickler for details.

Internal and external problems brewed after Asustek lost its major OEM clients, Sony and Apple. As a result of those losses, the company finally decided this past summer to separate its production and own-brand business units (see Table).

Separate Ways Inevitable

"Separation helps clarify management indicators, giving neither side any excuses," explains Su, who will become CIO of Pegatron, the PC-related manufacturing arm, after the shake-up. Failure by either side to close deals will show poor performance, and own-brand business and contract manufacturing will no longer be able to point fingers at each other.

In the future the mother company Asustek will be in charge of the own-brand segment, while Pegatron and Unihan, which makes casings, modules, and non-PC goods, will handle the OEM business. Their foremost challenge will be convincing clients that they have truly completely separated and smoothly completed the handover in order to secure Asustek's growth for the coming five years. Sharon Su, who will become chief investment officer of Pegatron after the restructuring, is expected to accelerate the pace of mergers and company integration after Pegatron goes public.

"The greatest challenge for Asustek and Pegatron will be persuading customers that they make decisions completely independently; that they play entirely independent roles. Only then will there be any hope for success," says Acer founder Stan Shih. The split-up can only be considered complete if profits from contract manufacturing are no longer reinvested in the brands of the mother company, which in return compete with the branded products of OEM customers, the Acer boss explains.

Therefore Asustek has emphasized that the restructuring does not mean spinning off subsidiaries from the mother company, but rather dividing the company group into two mutually independent entities of comparable size that are equally good. "It's like releasing two huge lions to sprint on their own," likens Asustek's Jonney Shih.

Fair enough. The question is whether the lions that spring from the mother lion will be able to grow into huge ones. The great wide green savannah plains are out there waiting for the answer.

Translated from the Chinese by Susanne Ganz

Keywords:

好友人數