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Jonney Shih's New Tactics

Asustek Moves In on the iPad


Asustek Moves In on the iPad


Asus beat the market in 2012, generating growth in a slumping notebook sector. Here are the four strategies Asustek chairman Jonney Shih used to drive innovation – and success.



Asustek Moves In on the iPad

By Elaine Huang
From CommonWealth Magazine (vol. 515 )

Darkness has just fallen in the Taipei suburb of Guandu, and next to the swimming pool on the fifth floor of Asustek Computer Inc.'s headquarters, company chairman Jonney Shih sits in the lotus position, gently closing his eyes as if meditating.

CommonWealth Magazine's photographer simply asked him to assume the position of his choice for a photo, but one minute goes by, then two, then three. Shih remains in a monk-like trance, undisturbed by the music blaring from the building's speaker system during break time.

Only after about five minutes does Shih gradually pull his eyes open.

"Before I went on a three-day Zen retreat, I could not fold my legs over each other in the lotus position. But after working at it for three days, I was able to do it. People there told me that nobody who had not been able to cross their legs before the retreat was able to accomplish the feat in three days," Shih says with a shy smile.

Shih took the same dogged approach to swimming. Once during his early years with Asus while in the United States for a trade show, he was somehow drawn to the swimming pool at the hotel. He didn't know how to swim but figured he could learn by putting his mind to it. Shih went to the swimming pool one day just after noon, and when his subordinates realized at 8 at night they had not seen him since, they went looking for him, only to find him still at the pool, working on his technique.

An engineer by trade, Shih may appear gentle and good natured, but that friendly veneer hides an extremely stubborn disposition. He does not compromise or vacillate easily.

He has also pushed himself to improve as a public speaker, knowing that as the global spokesman for Asus products, his naturally monotone style would not resonate. He has worked diligently on his English and now communicates charismatically on any global stage.

That extremely persistent disposition is reflected in Asus's growth in a stagnant market.

Bucking the Trend into the Top Three

In 2012, the global notebook computer market nearly posted negative growth, but Asus, one of the world's major laptop players, posted an estimated NT$29 in earnings per share for the year, higher than that of chip designer MediaTek Inc. and smartphone vendor HTC.

"Everybody was hurting badly, but Asus earned more in the third quarter than in the first and second quarters combined. It shocked a lot of people," said Henry Lu, senior vice president of chip maker Micro-Star International Co., Taiwan's third biggest notebook vendor.

Asus has primarily benefited from its collaboration with Google on the Nexus 7, a hot seller in North America last year. It surpassed Apple's iPad in the Japanese market in January to become the best selling tablet computer there.

In the fourth quarter of 2012, Asus's combined shipments of notebooks and tablets catapulted to third in the world, surpassing Acer Inc., according to the company's internal calculations.

"Everything we're seeing now is the fruit (of Asus's work)," Henry Lu states bluntly, arguing that the company has entered a virtuous circle.

Shih is calm and collected as always when discussing these results, showing as much outward enthusiasm as when he meditates. An avid player of Go and other chess games who loves to play against himself, the Asus boss sees the market similarly as a competition with himself. He steadfastly searches for the optimal moves and sticks to his course even when challenges arise.

In 2009, for example, Asus sparked the global netbook wave with the EeePC, but ended up with an inventory crisis as the global economy stalled. The book value of its inventory rose higher than its first quarter sales, yet despite that and the split of its brand and manufacturing businesses, the company still held on to its large staff of R&D engineers.

"At the time, outside observers repeatedly criticized us for nurturing so many R&D people and the financial burden it created. They wondered why we wouldn't outsource our work to an outside factory," says Asus corporate vice president Samson Hu, memories of that dark period when analysts were writing off the company still fresh in his mind. The media consistently cast Asus in a negative light by holding it up against Acer, which was then praised for its streamlined operating structure and marketing power.

"Jonney wanted us to confront failure and learn a lesson," Hu says. In the face of external turbulence, "his mind was still set because he understood the reason for the fall and believed in our strengths. He didn't panic and shake up or abandon his game plan."

To be able to play his next move, Shih refused to cut R&D spending and in fact led Asus on a powerful innovation offensive.

"We wanted to make use of our competitive advantages," Shih stresses. He conceived four major strategies to revive the company's fortunes.

Strategy 1: The 'Transformer' Offensive

From the time it was first founded, Asus has always been an engineer-oriented company, with technology the top priority. Even when the company split up in 2008, the brand side of the business kept a strong R&D staff. In fact, "R&D and innovation" have been important cornerstones of Asus's breakthroughs.

When Apple rolled out the iPad in mid-2010, it rewrote the rules of the game and disrupted the high-tech sector's existing ecosystem. Asus was engaged in restructuring its operations, but it leveraged its edge in notebook computers to jump into the tablet market in March 2011 with the Transformer Pad – a tablet computer with a detachable keyboard.

"That innovation smashed the standard definition of a tablet computer as a single flat panel established by Apple's iPad. It also broke through the lack of differentiation among Android tablets in the market," says Yeh I-hau, chairman of touch-sensor vendor Elan Microelectronics Corp.

The Transformer tablet was Asus's most important creative breakthrough after the EeePC. It forced the whole world to take note of Asus's innovative capabilities and even drew the attention of Google's vice president of engineering, Andy Rubin.

Rubin, who crafted the Android operating system, had yet to pioneer a successful product that proved Android could match Apple's iOS in forging a tablet legend, but suddenly Asus offered hope.

Strategy 2: Raising Visibility with Google

In March 2011, Shih unveiled the Transformer tablet in North America. A month later, Google expressed interest. Shih, Asustek CEO Jerry Shen, and Samson Hu, who was responsible for mobile devices, brought the Transformer to Google's headquarters, where they met with Rubin.

A year later, shortly after the conclusion of the Consumer Electronics Show in January, Rubin flew to Taiwan for private talks with Shih and Shen on releasing a tablet computer within six months. The US$199, 7-inch Nexus 7, that would later prove wildly popular, was born.

"This tablet had a high performance-price ratio, but we were really pushed to the limit," says Elan's Yeh, whose company supplies touch controller ICs to Asus.

To give users the best possible touchscreen experience, Shih and Shen pushed Elan to develop one new touch screen IC specification after another looking for the best possible components. Even after the new tablet hit the market, Asus requested Elan to work on new touch screen IC specs, made available by Internet download. The result was that Elan engineers generally lived at Asus and Google, regularly working into the early hours of the morning.

"But it was worth it. It was a sweet burden," Yeh says.

The success of the Nexus 7 enabled Asus to harvest the fruit of its innovation. At the beginning of the fourth quarter last year, the company's combined shipments of notebooks and tablets leaped past Acer to rank third in the world.

"The Transformer tablet and Nexus 7 were in fact important turning points," says the executive of one of Asus's contractors, who believes that their emergence strengthened the confidence of both Shih and Shen in the company's in-house innovations.

Asus then moved aggressively to build on those successes by releasing the Padfone, a "Transformer" concept combining a smartphone and tablet designed to get the company back into the smartphone market. Last June, it also introduced a dual-screen Ultrabook called the "Taichi."

Leveraging the R&D capabilities it has amassed in developing notebooks and mobile phones, "Asus rolls out a new 'Transformer' concept product almost every six months, reflecting the wisdom of cultivating its own R&D staff," says Sean Yang, a senior analyst in the Memory Industry Research Division at DRAMeXchange Tech Inc. Yang contends that Shih, in his role as a brand and R&D commander, has sparked a global "Transformer" vogue, and led most other non-Apple vendors to copy Asus's Transformer concept in developing new products.

Strategy 3: Pressing for 120%

In the high-tech environment, where gadgets have short product cycles, getting a product out quickly is critical. Shih and Shen zealously track the progress of each project, because any delay in releasing a new device may sharply curtail its peak profit period.

"Asus's execution is really strong because authority is very centralized. The CEO is reviewing products until 11 or 12 at night. There aren't many CEOs on the front line like that today," observes an executive at one of Asus's suppliers.

That centralized authority's pervasive control over the company's R&D program is evident in many ways.

As the Padfone 2 was being developed, for example, senior specialist Henry Huang was on the 13th floor of the company's headquarters when he received a call asking him to make adjustments to the product's "audio wizard" software.

"It was the user interface, and it affected the entire product line, and it had to be taken care of by the next day," says Huang. "I immediately made a call and got our Israeli engineer out of bed to have him change the software."

The Israeli engineer that Huang shook out of bed was the head of Waves Audio Ltd., a leading supplier of software-based audio signal processing tools that won the 2011 Technical Grammy Award for companies.

"You not only have to solve problems, but you have to do it immediately," Huang says.

Though Asus nearly pushes its engineers to the breaking point, the results are evident. The Nexus 7 made in collaboration with Google was expected to take at least six months to get to market, but it only took four, and earned positive review.

"We call that 120 percent effort," says Asustek vice chairman Jonathan Tsang, who recently worked with Show Chuan Memorial Hospital on a hospital cloud system. "You have to reach high to be able to pick the fruit, and that's what makes you want to pick it. There is a degree of hardship, and that's why it makes you feel pain or frustration if you don't succeed."

Strategy No. 4: Pragmatic Operations

A careful analysis of Shih's innovative breakthroughs reveals not only a certain degree of idealism but an even greater passion for hard numbers.

Fueling Shih's innovative products has been the injection of revenues from Asus's main sources of income – motherboards and notebooks. That has given the company relative freedom to innovate and withstand the relatively lackluster sales of such innovations as the Padfone and Taichi dual-screen Ultrabook.

The success of the Nexus 7 and Transformer tablet, on the other hand, has only reinforced the company's bottom line by enabling higher volume purchases that lower component costs.

Shih is helped by having a numbers wiz like Shen at his side. "He is really super with numbers," says DRAMeXchange's Yang, who has been personally witnessed the Asus CEO's mastery of figures.

Yang once attended a meeting at which Shen dissected the cost of solid state drives, a critical memory storage component. "By looking at how many wafers were used, how many chips they could be cut into and the yield, he estimated the cost of a solid state drive," recalls Yang, who says Asus's purchasing system is very exacting because its top executives are so good with numbers.

"That's especially the case when it comes to mobile devices, where components account for 90 percent of the cost," he says.

Moving toward a Low-cost Strategy?

As much as Asus is committed to innovation, analysts are now wondering if the company plans to adopt a low-cost, high-volume strategy.

Following the release of the inexpensive Nexus 7 last year, Asus rocked the industry again when it recently introduced another super-thin notebook – the Vivobook – for under NT$30,000, a price many outsiders feel barely covers the company's costs.

Hu, Asus's corporate vice president, rejects the criticism, saying that the price is simply the result of the computer vendor's broad product mix.

"There are a lot of product lines, with low-end items increasing market penetration and medium and high-end products boosting earnings," Hu says.

Arthur Liao, an analyst with Fubon Securities Investment Services Co., discovered when he studied the market shares of Asus's notebooks that "high-end products over US$899 have a 24-percent share of global notebook sales, and most of that is in the hands of Apple and Asus," confirming that the company derives most of its profits from medium- to high-end items.

"But the growth rate of its mobile devices is also very important, because it will further diversify Asus's products," Liao says.

If Asus does have a shortcoming, especially when measured against rival Acer, it may be marketing.

"Compared with Acer's distribution and marketing strength in overseas markets, Asus is relatively weak in this area. And compared with Lenovo's hiring of foreign professionals to penetrate overseas markets, Asus has remained a very 'localized' company," says an executive at one branded notebook vendor, suggesting it is a weakness the company will have to address if it wants to firmly establish itself as an international brand.

Even Shih agrees that "in terms of management, we have in fact been a bit slow" and admits that cultivating talent stands out as essential to making a company stronger.

Making innovative "moves" on the global high-tech chessboard has enabled Asus to overcome its troubles and emerge ascendant, but Shih has never shown excessive joy over the comeback, knowing that new challenges may not be far away.

"In Go, sometimes you make a move and can't put the finger on it why it is not right – you only know that the tables are turning against you," Shih says, fully aware that as a Taiwanese brand with limited resources, he is locked in a formidable battle in which he cannot relax for even a minute.

Shih knows that one wrong move can force a company to concede its leadership status to a close pursuer, which is why he insists that the wheels of innovation never stop churning.

Translated from the Chinese by Luke Sabatier

Jonney Shih

Born: 1952

Current Position: Chairman, Asustek Computer

Education: B.A. in Electrical Engineering from National Taiwan University 

MBA from National Chiao Tung University

Background: Vice President, Acer Inc.