From Minor Leaguer to Handset Titan
An exclusive deal with Chunghwa Telecom under its belt, once tiny Senao has catapulted from bit player to Taiwan’s top mobile phone handset distributor.
From Minor Leaguer to Handset TitanBy Victoria Sun
From CommonWealth Magazine (vol. 366 )
This is our best time in ten years,” exclaims Senao International president Peter Chiu, his voice betraying relief. “Synnex is a formidable foe, but victory is sweet indeed!”
After countless battles with Synnex over the annual NT$11 billion (US$336.9 million) procurement contract for Chunghwa Telecom (CHT), Senao emerged victorious. The decisive moment came on December 26 of last year, when the Chunghwa Telecom board of directors passed a resolution to purchase a one-third share in Senao International for NT$1.95 billion, awarding procurement rights exclusively to Senao as its handset distributor. With this decision Synnex was left flabbergasted as Senao took the entire NT$11 billion mobile phone handset purchasing pot for itself.
Market Share Flip-flop
With just one-quarter of Synnex's capitalization and sales volume of NT$16.8 billion last year, upon taking on the Chunghwa Telecom contract on its own Senao will squeeze past Synnex to become Taiwan's top mobile phone handset distributor. Senao and Synnex currently claim 36 percent and 48 percent shares of Taiwan's average annual sales of 7.5 million mobile phones, respectively, but this year the two companies are expected to flip-flop in terms of market share in the wake of the deal.
Synnex executives are hard-pressed to conceal their astonishment, as the company is projected to lose nearly one million handset unit sales as a distributor this year and suffer a subsequent drop of NT$5 billion in turnover, or the equivalent to 10 percent of its total sales in Taiwan (4 percent of its overall sales worldwide). Three days after the deal was announced, Synnex CEO Ecans Tu sent an email to all company employees stressing a strategy of spreading market share and risks overseas.
John C. Chang, president of the Nomura Research Institute's Taipei branch, offers that the loss of the Chunghwa Telecom purchasing deal will not actually have a significant impact on Synnex.
The key is Chunghwa Telecom's acquisition of a sizeable stake in Senao, continuing the trend of vertical integration between telecom and communications channels. As such, the brunt of the impact for Synnex falls on its mobile phone market.
In one respect, the telecom sector is gaining an increasingly strong influence over the mobile phone market. Over 70 percent of handset sales in Taiwan are sold with telecom industry subsidies, where phones are offered cheaper when bundled with service contracts than alone. The few retailers that go it alone without partnering with a telecommunications company are finding it harder and harder to survive. In another respect, the telecom industry lacks retail experience in guiding consumers through the use of a new phone, and integration of sales channels is necessary to compensate for the imbalance on the service side caused by an insufficient number of outlets.
Over the past two years four different telecom companies have taken over major or majority shares in retail operations, with Far EasTone taking over Arcoa, and Vibo working out joint ventures with Tecom and Aurora among them. With the first three of these partnerships currently losing money and the overall impact unclear at the moment, the move by resource-rich Chunghwa Telecom to take a major stake in “golden boy” Senao will be keenly scrutinized.
Senao's cooperative arrangement with Chunghwa Telecom ranges from basic handset procurement and maintenance services with related logistics, to establishing retail outlets, at which Senao will directly service Chunghwa Telecom customers.
At present Senao has expanded CHT's reach to 82 retail outlets in Taiwan. In the future, in addition to selling the existing line of CHT phones and service subscriptions, newer Chunghwa Telecom services, such as ADSL and MOD (movies on demand) set-top boxes, are expected to generate additional sales. On top of Senao's plans to expand CHT outlets to 180 stores by the end of 2007, Chunghwa Telecom is also aggressively planning to introduce sales of Asustek 3.5G laptop computers, Microsoft Xbox gaming, and products from IBM along with regular CHT services. The introduction of such products and services at Senao retail outlets can be expected to have a definite impact on conventional information technology sales channels.
“Information and communications products cannot be separated, and Chunghwa Telecom wants to offer consumers the finest services,” Chunghwa Telecom vice president Chang Feng-hsiung plainly states.
Senao worked a decade to achieve this kind of cooperation.
Company Triumvirate Finds Synergy
Ten years ago Senao's Big Three triumvirate of executives clearly saw the future trend of upstream-downstream integration of telecommunications and retail. With this goal in sight they embarked upon their long-term plan for cooperation with Chunghwa Telecom, keeping their eyes on the prize for a full decade.
Senao, a small company with just NT$700 million annual sales at the time, inked its first mobile phone procurement contract with CHT in 1998. Company founder Paul Lin, a graduate of DongshrJunior High School in NantouCounty, sought out Peter Chiu, then Motorola's first corporate president, and Bruce Chiu of Taiwan's largest mobile phone retailer, Aurora, to form the Senao Triumvirate. Together, the trio would work towards the objective of inking the company's first contract with Chunghwa Telecom.
Mutually complementary in their roles, the trio's individual members shared the same goal: to gain exclusive distributorship of Chunghwa Telecom's mobile phone business and thus tap into CHT's unrivaled resources. Founder Paul Lin is most familiar with Senao's resources, Peter Chiu's background in foreign businesses enhances his flair for marketing, and Bruce Chiu leans on his roots in retail to concentrate on front-line sales.
In 1998 Chunghwa Telecom relinquished its mobile phone distribution rights, because as a state-run enterprise, its elaborate purchasing procedures were utterly unable to keep up with increasingly shorter product lifecycles. However, distribution rights to CHT came with a prohibition on rights to the mobile phone business of such private telecom service companies as Taiwan Mobile or Far EasTone.
Neither Synnex nor Aurora, both significantly larger companies at the time, was willing to enter into an exclusive business arrangement with CHT. In contrast, little Senao eagerly seized upon the chance to partner with CHT and hone its skills. “Senao, a tiny third-rate company, was able to check off the item on the top of its list and obtain licensing rights for a first-rate telecommunications company,” relates company vice president Bruce Chiu, touching on the crucial factor facilitating the company's continuous growth.
On successive occasions in 1998, 2001, 2003 and 2006, Senao retained its exclusive CHT mobile phone distributorship. “At the time the other channel retailers were thinking we were stupid to agree to exclusive licensing, but look who's bigger now,” states Bruce Chiu, stressing that the company's executive trio has maintained laser-like focus on the same vision for the past decade: stick with Chunghwa Telecom.
“Usually one doesn't see people take such a risky approach to business. But Senao had vision and bet their chips on market leader CHT. And they were right,” says Chang Feng-hsiung, senior vice president of Chunghwa Telecom. “Senao is courageous, and has demonstrated great loyalty to Chunghwa Telecom,” he adds.
“We're like a stubborn bull, charging towards our target,” says president Peter Chiu.
Bold Moves Pay Off
In 2000, small fry Senao helped big shot Chunghwa Telecom achieve a momentous victory.
Private sector telecom companies were taking aggressive postures at the time, going out of their way to subsidize handset prices, while the expansion of Chunghwa Telecom's mobile phone base stations was hampered by government procurement regulations. With the acquisition of Trans Asia Telecom in 2000, Taiwan Mobile leapfrogged over Chunghwa Telecom, becoming the market leader with 300,000 more subscribers than CHT.
In response, CHT and Senao strategized about ways to turn the situation around, with mobile phones offering attractive features at affordable prices. Following evaluation, Senao selected one particular Motorola model, purchasing 200,000 units in a single order costing NT$1.16 billion. It bears mentioning that Senao's monthly sales at the time were only NT$700 million, a fact that weighed heavily on the mind of Bruce Chiu as he signed the order, his hand trembling. Sales were phenomenal right off the bat, with 20,000 units in the first week alone, yet still with some distance to make up from the partnership's goal of 300,000. Then, following an intense two-hour debate outside CHT's headquarters, during which they stood and smoked two packs of cigarettes, Bruce Chiu and Paul Lin decided to go for broke and order another 200,000 units.
After a third order for 300,000 more units, Senao ended up selling 700,000 phones bundled with Chunghwa Telecom subscriptions, restoring CHT atop the market.
Despite this spectacular feat, Senao was unable to rest on its laurels and coast along in an exclusive distributorship with CHT. The next year (2001), CHT decided to award distribution rights to two companies, pitting Synnex against Senao. With the CHT partnership accounting for 80 percent of its revenues, Senao suddenly saw half of that handed to Synnex, imparting the lesson that in business, all glory is fleeting.
Fortunately, in the early days of the business under Paul Lin's direction, Senao had been Taiwan's leading wireless telephone distributor and manufacturer and had retained a viable client base from that time. Re-establishing its mobile phone procurement, logistical and maintenance services network with over 2000 telecommunications outlets islandwide, Senao quickly reduced the CHT partnership to 45 percent of total revenue, stabilizing operations.
“I don't know how we made it through that time,” says Lin, reluctant to even think back to Chunghwa Telecom's perceived “betrayal.” Still, despite such dreadful treatment, Senao remained resolute in its bullish spirit.
When Chunghwa Telecom asked Senao and Synnex to help out and open authorized service centers in 2006, Paul Lin didn't hesitate to plunk down over NT$50 million, opening 82 outlets in eight months. In contrast, Synnex opened just 36 over the same period.
As Chunghwa Telecom vice president Chang Feng-hsiung relates, whereas in the past families might keep the same phone for 40 or 50 years, in today's age of the cell phone people often get a new one in an average of less than one year. Plus, with the increasingly complex functions of mobile phones, and keeping in mind the future integration of home televisions and phones with the Internet, “Retail outlets are able to help us explain the increasingly sophisticated end-user products to consumers,” says Chang.
Senao knew that it had to find ways to complement Chunghwa Telecom, so that with Senao aboard CHT could gain a turbo boost that would in turn demonstrate Senao's worth. Chunghwa Telecom's service outlets were generally located near government agencies, closing at 6:00 p.m. and staying closed on weekends. For its new service centers, Senao strategically targeted locations within reach of mass rapid transit stations, and chose to stay open until 10 o'clock at night. When Chunghwa Telecom updated upstream facilities, Senao acted as “nerve endings,” face to face with consumers on the front lines demonstrating new telecom services such as how to access the Internet and use email with a mobile phone. Work in the trenches such as this prevents CHT's annual investment of over NT$10 billion in new facilities from going to waste.
“We [Senao] took the right position before they [CHT] had even said a word,” remarks president Peter Chiu, adding, “It's like dancing the tango: you know where to move to help your partner without having to say anything.”
Over 700 of Senao's 1200 employees work in service on the front lines. And while many of its competitors' outlet staff are temporary workers, all of Senao's are formal company employees, each of whom is required to take 70 hours of credits to learn how to recommend the products and services best suited to customers' needs. These efforts speak for themselves, as Senao outlets consistently outperform competitors' sales figures. While Synnex's communications division took a 15 percent loss in revenue last year, Senao chalked up 6 percent growth, which Peter Chiu attributes largely to the concerted efforts of the sales force in promoting 3G (third-generation) handset business.
Nimble Battle Cruiser
Nearly a decade of preparations and waiting by Senao were rewarded on 26 December 2006 when Chunghwa Telecom's board approved the acquisition of a controlling stake in Senao. At long last, Senao became CHT's exclusive, long-term, stable partner.
“Chunghwa Telecom chairman Hochen Tan says CHT wants to build a fleet,” relates Paul Lin. “In that case, Chunghwa Telecom is the aircraft carrier and Senao is a nimble battle cruiser.
Paul Lin personally experienced another difficult challenge with CHT's acquisition of a controlling share in Senao when Chunghwa Telecom insisted that it purchase Senao shares at the discounted rate of 46 percent. For Lin, this meant that at the same time he was putting a billion NT dollars into his own pocket he was “losing” the same amount.
“You give away some to come out ahead in the end. Senao's outlook for the future is better, and our employees have a bigger stage to perform on,” offers Lin in his typically buoyant way.
With a decade of dedicated work and patience, Senao has gone from Taiwan's smallest mobile handset retailer to the market leader. And the stubborn bull is now the belle of the ball.
Translated from the Chinese by David Toman
Chinese Version: 神腦國際 笨牛變手機龍頭