US embassy cable - 05TAIPEI731

UNCLAS SECTION 01 OF 03 TAIPEI 000731 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: N/A 
TAGS: ECON, TW 
SUBJECT: ACER - SETTING AN EXAMPLE FOR TAIWAN FIRMS 
 
 
Summary 
------- 
 
1. (U) Acer Inc., one of Taiwan's largest IT firms, has 
achieved remarkable success in an area where few Taiwan firms 
have ) developing a successful brand name.  Former Chairman 
Stan Shih's managament has been key to Acer's success.  Under 
Shih, Acer reorganized to focus on brand marketing, 
cultivated successful marketing channels in Europe, kept 
costs down through effective inventory management, and 
developed a quick and flexible leadership structure.  Shih's 
leadership offers useful lessons.  It remains to be seen 
whether Acer's success will continue without his driving 
force.  End Summary. 
 
2. (U) Acer Inc. is achieving what few other Taiwan IT firms 
have been able to do.  Despite the island's formidable 
presence in the IT industry, Acer is one of only a handful of 
local companies that has established an internationally 
recognized brand name.  The growing value of the brand has 
led to increasing sales.  iSuppli, a market research firm, 
recently announced that Acer had the fifth highest global 
market share in 2004 PC sales and was closing in fast on 
number 4 Fujitsu-Siemens.  In fact in the fourth quarter of 
2004, Acer was fourth behind only Dell, HP and IBM.  Unit 
sales in 2004 were up 44 percent from previous year.  Acer 
has been particularly successful in Europe, where it ranks 
number 3 for PC sales overall and number 1 for laptops.  A 
number of factors have contributed to Acer's success; not 
least of which is the personal management style of former 
chairman Stan Shih, one of the founding figures of Taiwan's 
IT sector. 
 
Focusing on the "Smile Curve" 
----------------------------- 
 
3. (SBU) Key to Acer's success is the major reengineering of 
the firm implemented under Shih's leadership in 2000.  Shih 
is widely known for describing the "smile curve," which shows 
that the highest value-added occurs at the beginning and the 
end of the process of designing, manufacturing and selling a 
product.  Shih argued that Acer and Taiwan firms in general 
should focus on high value-added processes, namely research 
and development and design at the beginning of the "smile 
curve" and brand management, marketing and sales at the end. 
With that goal in mind, Shih reorganized all of Acer's 
affiliates and subsidiaries into three firms:  Acer Inc., 
Wistron and BenQ.  Acer Inc. now focuses on the end of the 
"smile curve," marketing Acer brand products around the 
world.  Wistron focuses on the beginning and the middle of 
the curve as an original design manufacturer (ODM), which 
designs and manufactures products for Acer as well as other 
firms.  Much of Wistron's manufacturing, the low value-added 
center of the "smile curve," takes place overseas, especially 
in the PRC.  The third firm, BenQ, continues to be both an 
ODM manufacturer as it also markets its own brand name 
products.  It was allowed to evolve separately from the other 
firms and is now almost completely independent.  Acer 
President for International Operations, T.Y. Lay, told AIT/T 
that Acer now sees BenQ only as a competitor. 
 
4. (U) In the process of these changes, Shih focused and 
unified the new Acer Inc.  As he describes in his book 
"Millennium Transformation ) Management Change for Acer," 
published last year to mark his retirement, the 
reorganization of Acer was implemented to follow his "three 
ones and three pluses" strategy.  His "three ones" are one 
global team, one brand, and one company.  The structure 
emphasizes unified management and horizontal integration 
among all of the company's various international divisions 
(one global team).  In addition, Acer Inc. would only sell 
Acer brand name products (one brand) and no other firm would 
be allowed to use the name (one company).  The "three pluses" 
mean that Acer will use more suppliers, sell more products 
and use more marketing channels.  A key point in the "three 
pluses" strategy is that Acer would continue to use Wistron 
as an ODM manufacturer, but breaking with past practices, it 
would also contract manufacturing from other firms as well. 
 
Keeping the Middle Man Happy 
---------------------------- 
 
5. (SBU) Some credit Acer's cultivation of marketing channels 
for its recent success, particularly in Europe.  With Dell's 
remarkable gains using direct internet sales to consumers, HP 
and IBM have also moved toward direct sales that cut out 
distributors and retailers.  However, Acer has committed 
itself to working with distributors and retailers, many of 
whom find themselves increasingly left out by manufacturers 
that are becoming competitors.  As Lay explained, there will 
always be good distributors and retailers; Acer's strategy is 
to form cooperative relationships with them.  Working 
together they can increase sales to mutual benefit. 
 
No Secret - Lower Costs 
----------------------- 
 
6. (SBU) Direct sales to the consumer, which cut out the 
overhead and profits of distributors and retailers, offer a 
price advantage.  When asked what secret allowed Acer to stay 
competitive on price while preserving more traditional 
marketing channels, Lay said there was no secret )- it was 
all about lower costs.  First, he cited Acer's efficient 
inventory system.  By working closely with suppliers and 
distributors, and using advanced logistics systems, Acer is 
able to minimize inventory at every stage.  The firm uses a 
hands-free delivery system.  The products are never in Acer's 
Inc.'s possession, but are instead shipped directly from the 
ODM manufacturer to the distributor. 
 
7. (SBU) Lay also emphasized Acer executives' low-key style 
and low compensation.  Smiling, he said that while HP's Carly 
Fiorina had six jets at her disposal, all Stan Shih ever had 
was one BMW.  He also claimed that Fiorina's salary could 
cover all of the top management at Acer.  Acer's headquarters 
just outside of Taipei seems to underscore Lay's comments. 
Although large and functional, the building is by no means 
opulent, especially in comparison to the sparkling new 
offices of some other major Taiwan high-tech firms like TSMC 
or Asustek.  (Comment: Nevertheless, we can only conclude 
that savings from lower executive management costs are 
limited, and Acer's competitiveness relies more heavily on 
inventory management.  End comment.) 
 
Virtual Headquarters 
-------------------- 
 
8. (SBU) Another advantage that Lay described is the fast and 
efficient decision making of Acer's top management.  Further 
illustrating Acer's horizontal integration, Lay told us that 
the firm is led by an executive committee that consists of 
just a small handful of executives from the main office and 
the heads of each of Acer's regional divisions, each a very 
experienced leader in the PC industry.  According to Lay, 
Acer operates out of the virtual headquarters where this 
group meets frequently via teleconferencing.  He says their 
great strength is that they can arrive at decisions quickly 
and implement them around the world almost instantly. 
 
Shih's Style 
------------ 
 
9. (SBU) Lay believes that this executive committee 
management structure has worked because of Shih's personal 
style.  He said that Shih is full of creative ideas but 
encourages his staff to challenge those ideas.  There are 
other examples of how Shih's style and personal philosophies 
have distinguished Acer from other Taiwan firms.  When Shih 
retired, he was succeeded by J.T. Wang the firm's former 
President.  The fact that Shih did not replace himself with a 
close family member stands in sharp contrast to many Taiwan 
firms.  Even more notable, Wang was replaced as president by 
Gianfranco Lanci, the former President of Acer EMEA (Europe, 
Middle East and Africa).  Very few Taiwan firms have 
foreigners in such high-level positions.  Lanci's elevation 
is indicative of Shih's active internationalization strategy. 
 
 
Comment ) Lessons For All 
------------------------- 
 
10. (SBU) The example of Acer reveals some useful lessons for 
Taiwan firms.  However, others, including U.S. firms, could 
also gain from studying its success.  Perhaps one of the most 
useful pieces of advice in Shih's book, and one his firm has 
followed, is that the old models of success will not 
necessarily work in the future.  One of the biggest questions 
is whether Acer's success will continue without Shih's 
driving force.  End Comment. 
PAAL