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Acer's Fateful 1,000 Days

Hijacked by Success


Hijacked by Success


After three straight years of losses, Acer recently decided to reshuffle its management. Founder Stan Shih has been called to the rescue, but can he really save the floundering company?



Hijacked by Success

By Hsiao-Wen Wang, Elaine Huang, Liang-Rong Chen
From CommonWealth Magazine (vol. 535 )

For the third time in his illustrious business career, Acer Inc. founder Stan Shih recently found himself without a choice. At the age of 32, he had no choice but to start a business. Twenty-five years later, he had no choice but to break up his company, and now, at 68, he has no choice but to return to action.

At Acer's board meeting on Nov. 5, the news was grim. The company had posted a massive third-quarter loss of NT$13.1 billion, leading Acer chairman and CEO J.T. Wang to resign. The board of directors also recruited Shih in this time of crisis to head a "Transformation Advisory Committee" responsible for proposing changes in the company's "vision, strategy and execution plans."

"J.T. Wang said, 'Other brands have grown so much. Not being able to get the job done in three years, I should take responsibility,'" according to a person at the board meeting. Wang also hoped that Acer corporate president Jim Wong would succeed him as CEO and recommended laying off 700 people and cutting the salaries of high-level executives.

"Give Jim Wong some time. It should take him a year and a half at most to get results," the insider says.

The 1,000-day Retreat

The board deemed the changes necessary because of the company's plunging fortunes during the 944 days that elapsed from when former Acer CEO Gianfranco Lanci was fired to when Wang resigned. Its sales were nearly cut in half, it posted a loss for three straight years, and its global PC market share tumbled from second to fourth. (Table 1, Table 2)

Analysts estimate that the company will have to take another NT$28.8 billion in impairment charges on its intangible assets and predict more uncertainty in its future.

"He (Shih) is the one who brought in Lanci. Shouldn't he be held responsible? The company's losses have gotten out of hand. Can the founder not get involved?" asks an Acer executive bluntly. In fact, Shih, who has a deep sense of mission, was not able to stay on the sidelines.

Chatting with a reporter, a retired veteran of the pan-Acer Group revealed that Shih asked him if he was willing to help restructure the company, but he declined.

"All of those people are National Taiwan University Electrical Engineering Department classmates. Wong used to be a level below me and was one of my subordinates. Do you really want me to go get rid of him?"

Stan Shih: Another Strategic Turning Point

Shih, who comes from a humble background and lost his father when he was three, would follow his mother to the family's incense shop and sell lottery tickets and salted eggs from a small space in the store. Over the past 37 years, he has forged a pan-Acer Group that has annual revenues exceeding NT$1 trillion and helped transform Taiwan into a high-tech island. A son of Taiwan, he has represented pride and hope for the country.

When he first started his company, Shih preached the importance of microprocessor technology with missionary zeal. He later pioneered the IT industry "Smiling Curve" to encourage everybody to move toward the two ends of the value chain (R&D/technology and branding), which command higher value than the lower-value fabrication stage. His vision sparked a branding dream that gave Taiwanese the hope and opportunity to be on equal footing with the rest of the world.

That young entrepreneur has aged, his hair has turned gray, and he's even undergone coronary stent implantation, mirroring the maturing of the US$200 billion PC industry. Technology research firm Gartner Inc. reported that shipments by the world's five leading PC brands fell 8.6 percent in the third quarter from a year earlier, undermined by a huge shift in the global high-tech world.

The disruptive innovation caused by mobile devices, tablet computers and smartphones has emerged with such speed and strength that it has blown old stalwarts Microsoft, Intel, Nokia, Blackberry and Dell aside. The industry's standouts of the past have turned into falling stars, ultimately being sold or delisted or having their CEOs step down.

"We are now faced with our greatest challenge yet, and for sure it will not be easy to carry out the transformation," Shih wrote in a letter to Acer shareholders dated Nov. 7.

The 68-year-old Shih is being forced to take the knife to his company because of Acer's extended organizational inertia.

Three Brands – Three Stories

The three major PC brands in Greater China – Asustek and Acer from Taiwan and Lenovo from China – are currently following three distinct narratives. While Acer is mired in losses, Asustek reported third-quarter income of NT$4.8 billion, and Lenovo posted income of NT$6.5 billion, a quarterly record.

Asustek, founded by Acer, has performed relatively well, given the PC market's woes, but it has not let success undermine its sense of urgency. Asustek CEO Jerry Shen stands among the top executives in the industry and travels to markets around the world, but he once had so much anxiety he was driven to a psychiatrist. The company's chairman Jonney Shih has also hinted that if Shen does not perform, he will lose his job.

Even more galling for Acer has been Lenovo's rise.

Five years ago, Lenovo was running heavy losses while Acer's new distribution model was driving rapid growth. But in the second quarter of 2011, the first three-month period after Lanci left Acer at the end of March that year, the two rivals' market share trend lines intersected, with Lenovo on the rise and Acer on the way down. Lenovo's global PC market share rose to 12.2 percent in the April-June period, surpassing Acer's 10.5 percent. (Table 3)

Lenovo's steady rise reflects its status as the only global PC player to have successfully transformed itself in a difficult market, to the point of overtaking HP as the world's biggest PC vendor this year.

Lenovo Group chairman and CEO Yang Yuanqing flies somewhere different every week in his capacity as CEO of a global corporation, constantly communicating with customers and employees. He is so busy he rarely has the chance to engage in his favorite hobbies – ping pong and tennis.

Such drive has been less evident at Acer, with complacency setting in as top executives no longer embrace the company's once entrepreneurial and frugal corporate culture that stressed "eating rice congee with pickled cucumbers" and flying in economy class.

Wang's management style relies on delegating authority. Over the past eight years, he has successfully returned the company to profitability once, but he now has gotten used to living a more comfortable lifestyle, nurturing his preferred hobbies of wine tasting, majhong and golf.

Jim Wong, who will take over as CEO on Jan. 1, 2014, is a wine connoisseur. Though he has worked hard over the past three years, he has not forgotten his plan to retire to the Napa Valley and make wines for his own pleasure.

Once Near the Top of the World

So what actually went wrong for Acer during the fateful 1,000 days after Lanci's departure?

Three years ago, Acer was one of the strongest players in the global notebook market. In 2009, the Milan spring bathed in the joy of Acer people. A CommonWealth Magazine team visited Italy to report on the paths of success in Acer's headquarters in Milan and Taipei. Sitting in his Milan office, his glasses perched on his nose, the gum-chewing Lanci stared at his computer monitor looking at orders from distributors, sales and gross profit figures in real time.

With one click of a button, he could immediately access the orders received by Acer from distributors up to the minute and distributors' actual sales over the past week. With another click, he could see how many computers Acer's outsourced maintenance centers had repaired that day and how many calls the company's customer service center had received.

"I use targets to manage people and numbers to manage the business," Lanci told CommonWealth Magazine at the time, stressing that companies had to be managed through a financial prism, because nothing else was reliable. As he was speaking, he didn't forget to gulp down his sugar-free espresso.

"Our headquarters is wherever we are having a meeting," Wang once declared, portraying the cooperation between Italy and Taiwan as seamless. When Acer was at its peak, and confident it would climb to the top, Acer employees performed a "sorry, sorry dance" at a meeting of its suppliers. The dance was Acer's way of apologizing to HP beforehand before taking over its leading position in the PC industry. Acer's annual revenues in 2010 exceeded NT$600 billion, and it had a 12.9 percent share of the global market, trailing HP by 5 percentage points.

But it was during those euphoric times that the seeds of Acer's slide were planted. The company fell into three traps caused by its success.

Success Trap No. 1

Misreading the Future because of Conceit

Acer was so dizzied by the success of the Aspire netbook that it missed out on the tablet and smartphone waves.

When Steve Jobs presented the iPad in January 2010, he said of the netbook invented by Taiwan: "Netbooks aren't better at anything. They're slow, they have low-quality displays and they run clunky, old PC software." Yet Acer stepped up its promotion of the product and shipped more than 10 million units that year.

But the iPad quickly undermined the netbook business that had been partly responsible for Acer's rise, sending the company reeling even before Lanci left.

Bloomberg News described Acer as a victim of the iPad, but it wasn't that Acer failed to see the future.

Five years ago, Wang predicted that smartphones would be the next US$200 billion market, and he even acquired mobile phone maker E-Ten Information Systems Co. But Acer still missed the future, turning into a blind swordsman aimlessly thrashing about.

In the first half of last year, Acer invested in the ultra-thin Ultrabook series pushed by longtime partners Microsoft and Intel. In the second half, it devoted its resources to Microsoft's widely criticized operating system, Windows 8. Because of these missteps and inability to read the market, Acer remained in the doldrums, in stark contrast to Asustek, which gained an edge with the Nexus 7 tablet it developed with Google.

"There is no longer a single type of computing architecture. Competition today revolves around two things – first, who bets right on the future, and second, who has the ability to get to that future," says Wanli Wang, a CIMB Securities analyst who covers downstream hardware makers in the Asia-Pacific region.

Comparing Asustek and Acer, Wang says Asustek bet on Google and developing software services while Acer clung to hardware and notebooks rather than shifting some of its resources to mobile divisions.

Success Trap No. 2

Low Margins Prevent Change

Acer has been the Taiwanese phoenix that repeatedly rises from the ashes. "But why has Acer been so slow to change over the past three years?" wonders Academia Sinica researcher Chu Wan-wen.

The logic behind Acer's success for over a decade had been strictly controlling costs. If Dell's operating expense ratio was 9 percent, and HP's was 15 percent, Acer was determined to keep its expenses at 7 percent of sales. While Wall Street was demanding high gross margins from Dell and HP, Acer targeted net margins of only 2 percent. That made it possible for the belt-tightening company to share some of its profits with distributors, who were also making 2 percent, and lure them into an alliance to take on Dell and HP.

The model's upside was that personnel costs remain fixed as shipments and sales rose, creating a consistent cash flow and building economies of scale. But on the downside, the low margins left Acer without the funds to develop new businesses.

Acer also ignored the fact that no business model is "the right one" forever, and when the company's winning formula took to the ruthless smartphone battlefield, its flaws were mercilessly exposed.

In the technology- and capital-intensive smartphone battleground, innovation and staying power are king. Apple took a year to develop the unconventional champagne gold color for its iPhone 5S, but even the iPhone only has a product cycle of four to five months.

"The smartphone market is the world's only single product business worth over US$100 billion. The development cycle is longer than the product's life, making smartphones a game that requires high profit margins to support it," says a former consulting firm executive.

"When your sales volume and profits are unstable, your supply chain also becomes unstable, and even how your CPA amortizes your depreciation is different than when you were running higher margins," the executive adds, explaining why many mobile phone companies such as Nokia and Motorola had trouble recovering once their sales volume and gross margins fell.

Acer's business model, which stressed 2 percent net margins and 7 percent operating expense ratios, set the foundation for six consecutive years of strong growth. But when Acer decided in 2000 to spin off its manufacturing operations into Wistron Corp., it also lost its R&D capabilities and essentially became a marketing operation. When the mobile device revolution arrived, Acer's net margin was on the decline and its R&D spending was less than 1 percent of revenues. The company was like a top sprinter with a nagging injury, unable to push ahead no matter how hard it tried. (Table 4)

"The sector's ecosystem changed, and ROE (Return on Assets) changed. Did you (Acer) change your strategy and organization? No," says Ji-Ren Lee, a professor in National Taiwan University's College of Management. He believes Acer's inability to change with the times reflected the mindset of entrepreneurs in Taiwan's computer kingdom, who were hijacked by their past success.

"It was not that they didn't know what to do; it was that they didn't have the ability to do it," Acer founder Shih lamented in an interview with CommonWealth Magazine last year.

On a recent visit to Taipei, Clayton Christensen, the management guru who coined the term "disruptive innovation," repeatedly reminded Taiwanese companies of the dangers in following the conventional wisdom "focus on your core competency." In today's rapidly changing world, Christensen said, companies should continuously work on cultivating new core competencies.

The Acer run by J.T. Wang was too focused on its own successful model and did not invest in the future or nurture new core capabilities.

"In contrast, Asustek recruited many software engineers to fight for survival and pursue transformation," says C.W. Chen, chief researcher at the Industrial Technology Research Institute's Knowledge-based Economy and Competitiveness Center.

Success Trap No. 3

Fatal Management Flaw – Overdependence on One Person

What has been hardest for Acer to get over is that Lanci, who turned Europe into the company's strongest market, went to work for Lenovo after getting fired. He has helped the Chinese company strengthen its presence in the pan-European market at Acer's expense while remaining mired in a lawsuit with Acer for his alleged breach of a non-compete clause.

When he defected to the enemy, "Lanci knew Acer's strategy. He first used low pricing to bring down Acer in Europe and then sealed off China," says an Asustek executive.

In the 1,000 days since Lanci left, Acer's pan-Europe market share has fallen from 21.7 percent to 10.5 percent while Lenovo's has soared from 5.9 percent to 14.3 percent. The 10 percentage points lost by Acer have been grabbed by its fierce rival. (Table 5)

That's not how it was supposed to be. Lanci plus Wong was once thought to be an invincible formula for success.

But now, without Lanci's command of distribution channels and the insight it offers into consumers' needs, Acer has nobody who knows what key components or distribution channels will most influence consumers' buying intentions in the coming two weeks.

"It's like having an Army without a general to lead the way," says a person familiar with Acer's operations.

Acer's mismanagement was actually exposed more than two years ago when Lanci was pushed out the door.

"Lanci's chaotic channel-stuffing in Europe was exposed when inventory problems erupted. Firing him wasn't going to solve the problem," says a veteran of the high-tech sector.

"If Acer hadn't simply placed its faith in him and instead actually looked at certain warning signals, such as rising inventory levels in distribution channels, it would have asked if Lanci wanted to push down prices and whether it was a reasonable strategy. Acer did not have such a monitoring system. In a company that can really reach a large scale, this kind of warning system has to be everywhere," the high-tech veteran said.

In other words, one hand didn't know what the other was doing at Acer at the time, a situation that not only reflected the inability of Taiwanese companies to manage international talent but also the inability of a "weak culture" to accept a powerful one. Acer's total dependence on one CEO turned out to be a fatal management flaw.

Stan Shih's Two Big Challenges

Shih, who has always had a big heart and tends to believe that people are fundamentally good, is now facing challenges that overshadow anything he's encountered before.

The first challenge is Shih himself and his sentimental personality, which critics say did not serve him well as a member of Acer's board during the company's recent turbulence.

Many people suspect Shih is too "softhearted" and incapable of being tough with the Acer executives who worked with him to build the company into a world power.

"Stan Shih recognized the problems Acer was having, which shows that the board did not fulfill its functions and should bear some responsibility," says UBS analyst Arthur Hsieh, a member of the bank's Asia IT hardware team.

Acer's corporate governance failed when it was most needed. Sources tell CommonWealth Magazine that the board of directors waited until May 2013 when Wang first talked about resigning before it set up a search committee to look for possible chairman and CEO candidates.

Shih's second major challenge is dealing with change both internally and externally.

"During Acer's previous overhauls of the company, the personal computer sector was growing. This time, the sector is going through a major upheaval," says a former Acer executive who personally experienced two of the company's major transformations.

Internally, the Acer family is on the decline. Externally, the sector's model has changed. Both present formidable obstacles to Shih as he tries to turn the company around.

A Mirror of Taiwan

CommonWealth Magazine has conducted its "Most Admired Company" survey for 19 years. The only executive on the "Most Admired Entrepreneur" top 10 list for all 19 years has been Stan Shih. One of the first generation of Taiwan's high-tech entrepreneurs, Shih has entered the eye of restructuring storms three times and managed to reengineer Acer every time. In his eyes, giving up represents the only form of failure.

Acer's founding, rise to prosperity and crises stand out as a microcosm of Taiwan's economy.

Acer's bumpy road in building a brand mirrors the difficulties Taiwan has faced in transiting to a knowledge-based economy.

The four green letters of the Acer logo carry the dreams of Taiwan's high-tech sector to extend their presence into the international arena.

When Shih was stacking triumphs, many hoped to emulate his road to success. Now that Shih and Acer find themselves in a difficult predicament, Taiwan is waiting to see if this avid Go player can make a strategic move to break free from enclosure, and open a new scenario for victory.

Translated from the Chinese by Luke Sabatier