Taiwan's Big Brand Blues
Acer has suffered huge losses, and HTC has seen NT$900 billion in market value evaporate over the past two years. Why is the branding dream of Taiwan's high-tech sector crumbling?
Taiwan's Big Brand BluesBy Hsiao-Wen Wang, Elaine Huang
From CommonWealth Magazine (vol. 531 )
The winds of autumn have proved to be unsettling for the world's major high-tech brands, portending a new era of maturity in a sector accustomed to robust growth. Leading vendors have felt the pinch, with Apple's growth slowing and Microsoft acquiring Nokia after unsuccessful forays into mobile devices.
Two of Taiwan's most prominent high-tech brands, computer vendor Acer Inc. and smartphone-maker HTC Corp., have also seemingly entered the autumns of their lives after facing setbacks on several different battlefields.
Acer, Taiwan's branding standard-bearer after being founded 37 years ago, has suffered two consecutive years of heavy losses and was still showing few signs of emerging from its slump in the third quarter this year. Rumors are swirling that there could be a change in management or even that the company could be sold.
Sixteen-year-old HTC has lost NT$900 billion in market value in just two years. After hitting a high of NT$1,300 per share in late April 2011, HTC's stock price plummeted to NT$122 on Sept. 9, the lowest since the company went public in March 2002. Though the stock has rebounded in recent weeks, closing at NT$140 on Sept. 24, many believe the company faces a precarious future.
It will likely post a loss in the third quarter, and it is forecast to ship about 20 million smartphones this year, barely half of the total when the company was at its peak in 2011. It could be soon overtaken by upstart Chinese smartphone brand Xiaomi, which was launched just over three years ago.
Adding insult to injury, new product designs were recently stolen and sold by company insiders.
Even HTC's chairwoman acknowledges problems exist while trying to sound upbeat.
"I think smartphones are still in their infancy, and there are still plenty of opportunities, such as smart cities. There are inevitably ups and downs when building a brand," says HTC chairwoman Cher Wang, as confident as ever. "I need to get better. The CEO also has to get better."
So what exactly has happened to Taiwan's high-tech brands? Why has the country's high-tech sector, helped by tax breaks from the government, with access to the best talent and global markets, come out battered and bruised every time it has pursued its branding dream?
Could it be that only powerful and prosperous countries are able to spawn strong high-tech brands?
"From Acer and AsusTek to HTC, everyone is up against the same fundamental challenge," laments one brand entrepreneur in private.
Without a big home market, Taiwanese high-tech companies are naturally at a disadvantage in the crucial area of defining standards, such as source code for operating systems and basic communications patents. Taiwan is also not interested in adopting the Korean model of pouring the entire country's resources into forging one big brand.
"A small country has to concentrate its resources. To some extent, it has to put up with the spirit of capitalism," says Chiu Yi-chia, the chairman of National Chengchi University's Graduate Institute of Technology, Innovation & Intellectual Property Management. Taiwan's high-tech policies, Chiu says, put a premium on fairness and diversity and amount to a sheep (socialism) in a wolf's clothing (capitalism). As a consequence, Taiwanese tech brands, inherently disadvantaged from the outset, are pushed further off-balance as they take on the global market of 7 billion people.
Acer and HTC represent the leading companies of two different generations. Acer's battleground is the previous-generation notebook computer market of about 200 million units a year; HTC competes in the recently skyrocketing smartphone market of about 1 billion units a year. HTC has been building a brand for five years, Acer for nearly 40 years.
Yet the two vendors have suffered the similar fate of highly volatile corporate profits, and in fighting for market share, both have encountered the same two double-edged swords.
Double-edged Sword No. 1: An International Team
Over time, the two brands have seen major fluctuations in their earnings, but HTC's have been more dramatic than Acer's.
"HTC faces a market that is five times bigger than Acer's, but the time it's had to build a brand has been compressed to 1/6th the time Acer had, putting it under intense pressure. So HTC's sudden rises and falls are really not surprising," explains a high-tech entrepreneur. In today's tech wars, more resources are being brought to the fight than ever before, with a huge amount being burned in the money pit known as "brand marketing."
"It's hard for Taiwanese brands to survive. Samsung sells smartphones as if it were selling shampoo. It even trains it salespeople based on methods used by Proctor & Gamble and Tesco," says a former manager for Samsung in Taiwan. The manager explained that the Korean electronics giant treats tech brands as fast-moving consumer goods brands, pouring huge sums into marketing. It invests three times as much as HTC in sales support in Taiwan, and salespeople at any authorized retailer get a NT$500 bonus for every Samsung smartphone they sell.
Talent is another area where a major financial investment is necessary.
"If you want to fight a global battle, you need international talent," Acer chairman J.T. Wang once said. Acer has shown the willingness to offer internationally competitive salaries to hunt for talent around the world.
"Taiwan does not have a national image or market development advantages to sell, so Taiwanese companies must rely on salaries above the norm to hire top international talent," observes Bei Lien-ti, a professor in National Chengchi University's Department of Business Administration.
Yet Acer's practice of paying top salaries for both local and international talent have not translated to improving results.
Top executives, including Walter Deppeler, the former chairman of the marketing committee and now a senior corporate vice president, Steve Lin, the president of Asia Pacific operations, and Oliver Ahrens, Acer's president for Europe, the Middle East and Africa, are all paid salaries of between NT$50 million and NT$100 million a year, more than Acer corporate president Jim Wong. But that has not stopped the company's global PC market share from falling to 8.3 percent in the second quarter of 2013 from 13 percent in the second quarter of 2010.
"They're paid high salaries, but there are no signs that the company is turning things around," complains one disgruntled Acer insider, who says that since former Acer CEO Gianfranco Lanci left the company in 2011 with a hefty severance package, Acer no longer has the financial wherewithal to hire such top-flight international execs.
As for HTC, it boldly bought a stake in American headphone brand Beats in a deal negotiated by former chief operating officer Matthew Costello, only to have to sell its stake to stop the bleeding from its investment.
The company also paid US$45 million for streaming video service provider Saffron Digital in early 2011, a deal brokered by chief strategy officer Ronald Louks. Louks left the company not long after, and HTC sold Saffron this year for US$47 million. The smartphone maker never did get the synergies from Beats or Saffron Digital it had hoped for.
"Can we really call using a bunch of foreign executives to make a bunch of cross-border acquisitions internationalization?" asked a resentful former HTC manager.
So why are Taiwanese tech companies so unable to work together with an international operations team over the long haul?
"Because Taiwanese do not have boards of directors with strong functions and sound operations," says National Chengchi University's Chiu, noting that the management of Taiwanese tech brands generally depends too much on an all-powerful CEO.
In contrast, in the United States, IBM's board was able to enlist Louis Gerstner to help revive the company, and Yahoo's board recruited Marissa Mayer to do the same at Yahoo.
"Only if the board mechanism is sound can the company build the strength of its management step by step," Chiu says.
Another key to brand marketing is finding an appropriate price point based on the product's positioning in the market. But because HTC's customers have been telecom operators and Acer's customers have been distributors, neither has been able to get a firm grasp of the end user, making it more challenging for them to develop insight into consumers' needs.
Double-edged Sword No. 2: Technological Prowess
HTC relied on its edge in technology, including producing the first Android smartphone, to become the preferred supplier of telecom operators around the world. But after riding its technology to the heights of the industry, HTC neglected the rapid shift in the smartphone market to mid-range and low-cost models.
As the smartphone market exploded over the past five years, HTC failed to see that the main competitive emphasis was evolving from functions to price.
"With Apple now resorting to highlighting the functions of its phones' CPU specs, you know that there is no longer much differentiation between products. You can't count on the brand alone to determine success or failure," says the chairman of an electronics contractor with annual sales of about NT$100 billion.
HTC's high prices have resulted in a backlash from telecom operators. "When all you're doing is assembling screens and CPUs made by others, what business do you have charging a high price? HTC needs to reposition itself. Its main competitors should not be Samsung or Apple but rather Sony, LG and Huawei," the president of a telecom company says bluntly.
Being able to reposition a company at any time is a necessary survival skill in today's brand wars, as Acer has also learned because of its limitations in product flexibility.
Acer relied on a single product category (personal computers) and an individual's strong control of a distribution channel (Lanci in Europe) to thrive, but as the market shifted to mobile devices and Lanci departed (leaving massive inventory in Europe), the secrets of its past success have turned into the catalysts of failure.
Also, determined to build up market share, Acer acquired the Gateway and eMachines computer brands in the United States in late 2007 and Dutch computer maker Packard Bell in early 2008, but those acquisitions have turned into heavy burdens (eMachines no longer exists). The declining value of its sub-brands forced the company to take an "intangible asset" impairment charge of NT$3.5 billion in early 2013, a development that has seriously weakened Acer.
How Small Countries Can Outwit Rivals
Over the past 40 years, Taiwanese tech brands have yet to develop management capabilities across borders, across different fields and across product lines. "Using the same management system to handle different markets and different products only leads to trouble," says Chu Po-young, a professor in the Department of Management Science at National Chiao Tung University.
So does that mean that companies from only the world's biggest economies – the United States and China – can fight the battles for scale and platforms in today's global high-tech wars?
"Small countries can still outwit bigger rivals, as long as they understand how to focus," says Liu Shuen-zen, a professor in National Taiwan University's College of Management. Taiwan can open a new battlefield and cultivate B2B brands, he suggests, pointing to the Swiss model as one worth emulating.
"Switzerland emphasizes 'precision and focus.' Through its sharp concentration and technical proficiency, Switzerland commands 80 percent of the global market for ink used on bank notes, and its watches generate high margins," says Liu, who believes Taiwan could also become a global "hidden champion" in several niche markets.
Following an arduous journey will not be without reward. Though equipment manufacturer ASML is the last company standing in the Dutch semiconductor sector, the world's semiconductor vendors cannot do without its lithography system, and its gross margin last year was 42 percent.
England's attempt to create its own Silicon Valley may have failed, but Cambridge gave birth to ARM Holdings, which developed the architecture on which most of the processors used in smartphones around the world are based. The company may be relatively small, but by leveraging its strength, it has been able to deal powerhouse Intel a severe blow.
Acer and HTC are both likely to post losses for the third quarter, and their short-term prospects remain uncertain. But considered over the longer term, the hard road traveled by Taiwan's high-tech brands remains worth pursuing. After all, success is built on the pillars of failure.
Translated from the Chinese by Luke Sabatier