acer and lenovo compare

The Icfai University Journal of Brand Management, V ol. VI, No. 2, 200954? 2009 Icfai Business School Case Development Centre. All Rights Reserved.*Team leader, The Icfai Business School Case Development Center, Hyderabad, India.E-mail: saradhi.gonela@https://www.360docs.net/doc/b213970823.html,

I n mid-2007, Acer, one of the world’s largest branded PC vendor with 5.9% market

share, reached a milestone. It became the third largest by acquiring Gateway, the world’s eighth-largest PC vendor with 2.2% market share. The combined share of these two companies is enough to dethrone Lenovo from its third spot, with 7.3%market share.1The acquisition also provided required scale for Acer, to challenge the top 2 PC vendors, Dell and Hewlett-Packard (HP).

In 2005, Acer set the goal of becoming the third largest, by surpassing Lenovo, the Chinese company that became an overnight heavyweight by acquiring IBM’s PC business.Back then, analysts opined that feat, if achieved, would be a fitting finale for the rejuvenating efforts of Acer. Forbes wrote, “that would mark a stunning turnaround for a company that nearly destroyed itself less than a decade ago.”2Since its inception in 1976,Acer’s journey had always been a roller-coaster ride, swinging between challenging the best in the industry and being marred in financial losses.

Acer: From Obscure to Obvious

Acer was started in 1976 by Stan Shih, an electrical engineer from T aiwan’s National Chiaotung University and his friends, under the name Multitech International with a capital of $25,000. Its objective was to capitalise in whatever way they could on the microprocessor chip, a hot invention at that time. The company survived by designing electronic products like hand-held electronic games for manufacturers in T aiwan. Shih was among the first to anticipate that the microprocessor, the brain of personal computers,would drive the new industrial revolution. From the early days, Shih encouraged a corporate culture that reflected his deeply held view that ‘human nature is basically good’and that there is no alternative to dealing honestly with people. Shih kept the engineers at Acer by sharing both technical expertize and profits. Shih learnt his business lessons when he sold duck eggs, as Fortune noted, “as a boy he learned the benefit of rapidly turning over inventory by helping his mother sell duck eggs in rural T aiwan.”3Further,Acer vs. Lenovo: Asian Brands’ Global Ambitions

Saradhi K Gonela*

Case Study

1Dean Jason and Chao Loretta (2007), “Acer’s Gateway Purchase Valuates it Ahead of Lenovo”, The Wall Street Journal (Asia), August 28.

2Orr Deborah (2005), “Acer Returns”, available at https://www.360docs.net/doc/b213970823.html,, November 28.

3Kraar Louis et al. (1994), “Y our Next PC Could be Made in T aiwan”, available at https://www.360docs.net/doc/b213970823.html, (Fortune ),August 8.

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Study “the profit on an individual egg was shell-thin. But sell enough of them, and a formula emerges: Low margins and high turnover can be a recipe for success.”4

Shih’s personal traits helped the company to win confidence of the employees from the beginning. Shih departed from the Chinese way of doing business and incorporated a professional environment at the company. “Traditional Chinese family companies often mix up company money and family money. Little information is shared with employees.I knew there had to be a better way of running a business.”5

The first success for Acer came in 1981, when it released Microprofessor, its first branded computer product and one of the world’s longest selling computers (even in 2005,the product is on the retail shelves). It was a simple and inexpensive training system for the Zilog Z80 microprocessor; it also helped as a learning tool for computer amateurs and university students and eventually became Acer’s first international hit. In the 1980s, to leverage low manufacturing costs in T aiwan, US companies like Compaq and IBM outsourced computer manufacturing to the T aiwanese companies. Acer was one among those companies, which made computers for western companies. Along with manufacturing for others, Acer also sold computers in its own brand name. In 1986, the company introduced a 32-bit PC using an Intel 386 microprocessor. It was next to Compaq and beat IBM to market the product. Staying ahead of IBM (an iconic computer-maker at that time)in introducing a product, helped in building goodwill among customers and sales increased substantially. In 1988, Acer went for its first public offer.

In the late 1980s, aiming to break the T aiwan pattern of copycat manufacturers and to expand on a global scale, Shih steadily invested in making original products under Acer’s own brand name. T o supervise this process, Shih recruited senior executives from outside,and one among them was Leonard Liu, a Ph.D. in computer science from Princeton, a 20-year veteran of IBM and IBM’s highest-ranking Chinese-American executive. In 1989,Shih recruited Leonard Liu as Acer’s president.

Liu led Acer into making an array of acquisitions, instead of joint ventures. For instance, in Germany, Shih proposed buying 50% share of a local distributor, but Liu insisted on 100% acquisition—the IBM way. Eventually the German management team was turned from owners to employees and as a result, Acer made losses from that investment. In a similar way, Liu persuaded Shih to buy 100% of Altos, a US minicomputer company, for $90 mn. Upon doing so, Acer paid hefty severance payments to its key managers. Losses in the company’s US operation, called Acer America (operations in the US started in 1983-1984), largely accounted for Acer’s three unprofitable years (1990-1992). Shih, who believed in giving a second chance to people, supported Liu by thinking that IBM was the best managed company; and with the experience of IBM, Liu was more experienced and capable than anyone at Acer. But, Shih realized that Liu was not an entrepreneur and that he had been delegated too much and too early. Eventually in 1991, the company made losses to the tune of $22.7 mn on sales of $985.2 mn; of those 4Kraar Louis (1995), “Acer’s Edge: PCs T o Go”, available at https://www.360docs.net/doc/b213970823.html,, October 30.

5Ibid.

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Brand Management, V ol. VI, No. 2, 200956losses, about $40 mn were from US alone and the insiders opined that inventory problems were responsible for the losses.6Instead of blaming Liu for Acer’s losses, Shih took personal responsibility and resigned in January 1992. Acer’s board refused it and issued a public statement in support of Shih that read ‘we admire and confirm the outstanding leadership ability of Chairman Shih’. After that Liu and most outside managers left Acer.Shih comprehended that there were too many layers in management (as the company expanded across the globe) and the decision-making was rather slow. On top of that, the employees neither had sense of ownership nor could they share risks. In the early 1990s,since Liu’s departure, Shih transformed Acer into a network of separate and independent companies, which mutually cooperated and existed under one brand. Managers of Acer Peripherals, which manufactured monitors and keyboards, owned shares in their division.Acer Peripherals sold components to Acer Computer International, the Singapore-based marketing company. But Acer Computer International was free to buy from other sources,if Acer Peripherals’ prices are higher than the competitors’. Shares of these companies were distributed among the employees and were also listed in local stock exchanges. This made all the independent companies competitive, apart from making the employees independent and accountable.

Further, Shih opened 39 assemble sites around the world. Uniform quality was ensured by establishing strict and uniform quality standards and testing procedures for all the sites.Just-in-time delivery schedule from factory to the assembly site was established to keep the inventories low. This helped Acer to respond quickly to the changing demands of various local markets and ‘to serve fresh PCs everywhere, not stale models’. Insiders of Acer call this fast-food strategy that was inspired by the McDonald’s approach (of preparing hamburgers in the local markets) to assemble Acer PCs locally, while still maintaining consistency. Acer’s inventory turnover was more than seven times a year,making it one of the efficient PC companies that sells through retail channels (some companies had done away with the conventional channels to follow direct-to-customer strategy—often called ‘the Dell Way’). By 1995, its high turnover earned Acer a 34%return on equity compared to an industry average of 15%-20%. This approach also provided flexibility of using latest variations of computer parts in assembling processes.Thus making it easier for Acer to produce all parts in T aiwanese and Malaysian plants and send the parts embedded with advanced technology to the assembling sites from Bangkok to Buenos Aires by air. Acer reduced expenses by buying internally. Internal buying,combined with low margins, allowed Acer to undersell any company by 5%-10% anywhere in the world. As Acer made almost everything itself and did not rely on various suppliers,it assured retail customers everywhere a uniform quality. In September 1995, Acer Computer International was floated at Singapore, marking the listing of Acer subsidiaries in the local exchanges. In the quest of becoming a global company, as Shih says,“eventually Acer will have a majority of local ownership in each country and no one will 6LaPedusMark and McHale T om (1996), “T aiwan’s T wist On Japanese-Style Strategy: T o Understand T aiwan’s Energetic Electronics Industry, Understand Acer Inc.”, available at https://www.360docs.net/doc/b213970823.html,, (Electronic Buyer News), August 28.

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Study be able to say that we are a T aiwanese company. Some people talk about control with 51%ownership. But I control through an intangible approach, common interest.”7By doing all this, Shih increased the autonomy of the company’s divisions—so that each division was responsible for either manufacturing a particular part of the product line (such as monitors and keyboards) or for marketing all of Acer’s products in a particular part of the world.T op management at Acer had ‘a network of personal relationships’ among the division presidents, who worked with Acer for more than a decade. The strategies worked for the company and in 1994, International Data Corp. ranked Acer 7th worldwide and 9th in the US market. In 1995, Acer’s sales reached $5.8 bn, an 81% jump from 1994. Profits recorded a growth of 101.5% in 1995 to $413 mn. The company’s US market share grew from 2.4%in 1994 to 3.6% in 1995, where Acer’s PC sales grew 80% by surpassing HP’s 127%growth.8Upbeat by the success, Acer set a target of becoming a $15 bn (in sales) company by the turn of the 20th century.

But the market conditions changed, adversely affecting Acer. In the late 1990s, the US computer-makers, particularly IBM (others include Hewlett-Packard, Compaq, etc.), which have been outsourcing their computer manufacturing to Acer—apprehended that they were helping their competitors. It was felt that Acer would leverage its contract manufacturing business to undercut prices in the branded PC business. Another rationale was that Acer left its logo on the computer parts it made for other companies, and the companies did not like a competitor’s logo appearing on their products. Eventually, the US manufacturers abandoned their manufacturing contracts with Acer, and Acer lost substantial revenues. On the other hand, surge in the sales of unbranded PCs in the US market pressurized Acer, which operated at the lower end of the US PC market. In 1999,Acer withdrew from the US branded PC market, where its market share fell from 4.7%in 1996 to 2.2% in 1999.9In 2000, Acer lost $60 mn on revenues of $2.7 bn in the branded PC operations. In 2001, the contract manufacturing business further slipped. That year IBM’s share in Acer’s contract manufacturing business fell to 26% from 53% in 2000.10Most of the contract manufacturing business was taken away by upstarts such as Quanta Computer Inc. and Hon Hai Precision Industry Co. For 2001, Acer’s total revenues fell from $5.8 bn in 1999 to $3.2 bn.11

Under these challenging circumstances, the company was restructured in 2000-2001 to distinguish different operations. The contract manufacturing business was named Wistron and the peripherals unit, along with consumer electronics division, was named BenQ.Wistron, in which Acer had 40% ownership and BenQ, in which Acer’s holdings were reduced to less than 30%, were spun-off and the branded PC operations were allocated the 7“Acer’s Edge: PCs T o Go”, op.cit .

8“Taiwan’s T wist On Japanese-Style Strategy: To Understand Taiwan’s Energetic Electronics Industry,Understand Acer Inc.” op.cit .

9Einhorn Bruce et al . (2004), “Acer: Riding A Hot Streak”, available at https://www.360docs.net/doc/b213970823.html,, May 17.10Madhav Phani T and Gayatri D, “T aiwan’s OEM Industry: Acer’s Branding Dilemma”, available at https://www.360docs.net/doc/b213970823.html, 11Ibid.

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Brand Management, V ol. VI, No. 2, 200958flagship Acer brand. Acer kept minority stakes and several board seats in the spin-offs,but gave liberty to the new companies. Thus, the spin-offs helped Acer cut costs, as it got components from outside vendors and factories at competitive prices. The other divisions that were spun-off include AU Optronics, manufacturer of liquid-crystal display panels,Ambit Microsystems, maker of broadband communication equipment, and ALI Corp., that designs and makes specialty chips.

The independent Wistron increased its share of T aiwan’s Original Equipment Manufacturing (OEM)12 market. Shih forced Wistron to be competitive in the market by making Acer free to order hardware from Wistron’s rivals, thereby denying Wistron with readymade market. After the spin-off, Wistron won a contract to make PCs for Dell,proving that competitors are no more apprehensive. On the other hand, by 2002, the broadband equipment manufacturing division, Ambit Microsystems was selling 95% of its broadband networking gear to Apple Computers, Dell, IBM, Cisco Systems and Alcatel.In the mid-1990s, the company sold half of its output to Acer.

With other operations being spun-off, Shih concentrated on building Acer into a global PC brand. With an urge to streamline Acer’s manufacturing process, Shih further enhanced the ‘fast-food approach’. Engineers were ordered to design a standard structure without screws for all Acer models. The modular components of unfinished computers were shipped to distributors across the world. The distributors got price-sensitive components just in time to do the final assembly. All the components could be assembled together in 30 seconds. For the US market, Acer exported computers without the microprocessors and thereby saved 4% on tariff charges. Microprocessors were bought from Intel.

Acer adopted low-cost manufacturing and unconventional distribution strategies.It outsourced all its production to low-cost Chinese factories and shunned direct sales,instead marketed through distributors. Acer also drove price wars in the industry that had taken a toll on Dell and HP . It typically under-priced competitors by 5%-10% and offered retailers a major share in profits than rivals. Eventually, Acer’s profit margin was reduced to 2%, which was roughly about half of HP or Dell, but sales soared. By 2004, this approach helped cut inventory to a 45-day supply and boosted overall revenues per employee to 40%,to over $250,000. By keeping a tight control on operating costs and turning over inventory more than eight times a year, Acer made profits, while most of its competitors, emulating the same strategy faced losses.

The major success for Acer came in Europe. In 2000, Gianfranco Lanci, who was the chief of T exas Instruments’ Italian operations,13 was made head of Acer’s European operations. Lanci targeted corporate customers in Europe. Lanci teamed up with 12OEMs are companies that make desktop and laptop computers, handheld personal digital assistants, and other electronic devices for resale under other companies’ brand names. Before the spin-off, Acer dominated the T aiwan OEM market, but the clash of interest of a PC seller and contract manufacturer pulled Acer down from the top spot.

13In 1997, Acer bought T exas Instruments’ laptop computer business.

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Study distributors like Ingram Micro Inc. and T ech Data Corp.; and consumer-oriented retailers such as Carrefour and Dixons, across Europe, for retailing Acer PCs. By building distribution and retail network with the established players, Lanci increased the reach of the Acer without investing in expensive direct-selling channels and infrastructure. This strategy helped Acer to come closer to customers, unlike competitors who concentrated on building direct selling network. Eventually, by the end of 2004, Acer became top-selling laptop brand in Italy, Germany, Spain, the Netherlands and Austria. Sales of Acer grew more than $2 bn by 2004. The same strategy was implemented in US when Rudi Schmidleithner, a long-time associate of Lanci was handed over US operations in 2003.Schmidleithner targeted small businesses and pushed laptops, the fastest growing computer segment in the US PC market. In the late 1990s, Acer focused on the individual customers rather than corporate customers. The problems that handicapped Acer then were after-sale service, warranties and returns from hard-to-please consumers. In Asia,Acer has 2.1% market share in China, the biggest market of the region and is a leading PC seller in its home market, T aiwan; and in Thailand, where the government is in the midst of a campaign to boost computer literacy, giving Acer a chance for strong growth.While global PC sales grew at 14.7% in 2004, Acer’s sales grew at 34.5%. It was believed that Acer had gained on the top four PC vendors: Dell, HP , Lenovo (which purchased IBM’s PC business) and Fujitsu Siemens. In the course, Acer surpassed Fujitsu Siemens, to become the fourth largest PC seller. Steven T seng, an analyst with Yuanta Core Pacific Securities in T aipei, remarks, “most people couldn’t see a turnaround happening, but Acer has a decent brand that’s quite successful in Asia and Europe. It’s been a remarkable comeback.”14 Time notes, “Its strengths are flexibility and a willingness to buck conventional wisdom. While other PC companies were abandoning traditional sales channels to compete with Dell’s Internet-based direct-sales model, Acer stuck with conventional distributors such as Ingram Micro. The strategy allowed Acer to reach larger markets without building a costly direct-sales infrastructure.”15

The major challenge for Acer had been its operating margin. In 2004, the company posted profits of $219.7 mn with an operating margin of 1.7%, compared to Dell’s 8.6%.16One explanation for low profit was Acer’s lack of strong corporate client base, which was more lucrative than the individual customers. Apart from that, analysts believed that the lack of knowledge about the future needs of end-users would prove to be a major weakness.In general, the T aiwanese companies are the followers of the western companies in manufacturing and are lacking in R&D expertise. W estern companies are comprehensively ahead of T aiwanese companies. This is because scientists and engineers at US’ and Europe’s top research universities have a broader view, not only of the technology but of the way people use it. However, Acer is trying to forge a culture of innovation by building a $294 mn R&D centre in T aiwan. T o focus more on R&D, Acer entered into an alliance 14Huang Nellie (2005), “How to Revive A Fading Brand”, available at https://www.360docs.net/doc/b213970823.html,, June 25.

15Ibid.

16Ibid.

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Brand Management, V ol. VI, No. 2, 200960with the computer science lab at the Massachusetts Institute of T echnology. “Shih is hoping that MIT’s leading-edge Project Oxygen 17 will open a window into the future of computing, and he plans for Acer to be the first to leap through.”18 But industry watchers opine that the company cannot match the R&D budgets of IBM and other leading computer companies of the world.

However, executives at Acer expressed confidence that they would meet their target of becoming the third biggest PC vendor by 2008. As Gianfranco Lanci, who was appointed as the president in January 2005, expressed that “starting from 2000, we had been through a major re-engineering at Acer and we were able to build a very solid foundation for the future. I think Acer has demonstrated in the last three years that if you have the right strategy, the right business model, and consistent implementation of those two, you can be successful.”19Forbes writes, “the nice thing about being the underdog is that you can tell yourself you have nowhere to go but up.”20

Lenovo: The Chinese National Champion

Lenovo Group is the China’s biggest IT enterprise and PC maker , and is partly owned by the Chinese government, which holds 27% stake in it.21 Established as Legend Group in 1984 in Beijing, the company started off as a distributor for HP’s printers and peripherals and IBMPCs. By the late 1980s, it started designing and production of computer motherboards; by late 1990s, it began manufacturing its own line of PCs. By 1998, Lenovo became the biggest PC producer and vendor in China producing 770,000 computers a year.In 2000, the company with an intention of becoming an ‘all-round IT service provider’,ventured into cellphone production and also started offering IT services. In April 2003,the company changed its name from Legend Group to Lenovo Group. Its major Chinese clients comprised government and leading corporate houses. The company virtually created a market for PCs by developing Chinese Character Card that translated English operating software into Chinese characters, making computing easy to use for the Chinese.Its PCs became extremely popular among Chinese consumers because of their user friendly,tailor-made designs and customized solutions for various customer needs—including the Yangtian and Kaitian enterprise desktops and Tianjiao and Fengxing consumer desktops.Roger Kay, president of Endpoint T echnologies Associates Inc., says, “the Lenovo guys are 17Acer is one of the corporate sponsors of MIT’s Project Oxygen, a 5-year mission to develop ‘pervasive, human-centered computing’. Many of the technologies that are being developed through Oxygen, such as computers that respond to body gestures and facial expressions, will not be part of consumer products for years. Many might not succeed at all. But merely by gaining access to the research, Acer engineers are expected to learning how to think about the future of computing.

18Bray Hiawatha (2002), “Acer Embodies Taiwanese Climb Up Manufacturing Food Chain.”, available at https://www.360docs.net/doc/b213970823.html, (The Boston Globe), June 24.

19“Acer Appoints European President for Global Expansion”, available at https://www.360docs.net/doc/b213970823.html,, November 2004.20“Acer Returns”, op.cit.

21Lohr Steve (2006), “State Department Yields on PC’s From China”, available at https://www.360docs.net/doc/b213970823.html,/2006/05/23/washington/23 lenovo.html, May 23.

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Study the original PC company in China, so they’re a kind of comparable to what IBM was in the US. They’re the reliable original guys out of Beijing University.”22

The company credits its success in China to its relationship and transactional business models. T o target and establish long-term business relationships with big enterprises,Lenovo follows relationship business model, under which it receives bulk orders of pre-configured PCs from big enterprises. On the other hand, to target small- to mid-sized companies and individual customers, the company follows transaction business model—serving customers with common requirements and those who need lesser customization.This model helps to capture the market in small cities as well. Chinese considers Lenovo as a symbol of Chinese entrepreneurship and nation’s most trustworthy brand. The company markets PCs for all customers, ranging from $300 bare-bone desktops to most sophisticated Pentium speedster. Lenovo has been leading the Chinese PC market successfully since its inception and wants to continue the legacy forever.

Lenovo’s key advantage in China is its huge network of retail outlets. It established itself in the vastness of the country, with over 9,000 retail stores and other sales outlets.Amit Midha, president of Dell China opines, “they’ve (Lenovo) been the first player to get out on the fringes in the smaller cities and towns. They manage 15,000 promoters.They manage 78,000 shops in China. It’s massive.”23Lenovo manages what is often termed as an efficient supply chain network. With around 12 distribution centers, it very often fulfils orders on time. Small orders are even delivered by bicycles. Subsequently, by 2004,Lenovo dominated the Chinese PC market with over 25% market share. Yang Yuanqing,Lenovo chairman, explains, “the key advantages of Lenovo are two-fold. First, we are well positioned in high-growth areas, such as emerging and SMB markets. Second, we have a very clear strategic focus on our PC business. With this strategy, we continue to sustain our strong momentum in China while enhancing our relationship business outside of China. At the same time, we are expanding our transaction business outside of China.Going forward, we will continue to implement our strategy with decisive and persistent execution to keep the growth momentum.”24

The company believes that an efficient supply chain system helps the product to be quickly delivered to the end user. Computers tend to depreciate and become outdated easily, owing to continuous drumbeat of cheaper and faster technology, once they move out of factory as finished products. So if the product takes more time to reach the end user,profits will decrease. Therefore, to deliver the products faster in the global market, Lenovo started building manufacturing units in every geographic region it operated, for saving shipping time and costs. Subsequently, it established global presence with the production and distribution facilities in US, UK, Mexico, Malaysia, Hungary and Brazil. T o be successful in other markets, Lenovo plans to implement its China-based supply chain 22“Dell’s China Dilemma: How to Reach Consumers in a Challenging Market”, op.cit .

23Ibid.

24“Lenovo Reports First Quarter 2006/07 Results”, available at https://www.360docs.net/doc/b213970823.html,/news/us//en/2006/08/1Q06-07.html, August 3, 2006.

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Management, V ol. VI, No. 2, 200962model in other parts of the globe. William Amelio, president and CEO of Lenovo, says,“the way to get a world-class supply chain is to have a rich mix of transaction business and relationship business. A dual model is inherently more complex, but with SAP we can do it because we have a better IT system that can better support our business.”25Lenovo’s chairman Y ang Yuanqing says, “we want to have more market share in the future—and that means building a strong dynamic business model built on a flexible IT platform. In the future, innovation will not be based on product and technology alone, but also on the very business model that drives it.”26

In the quest to make Lenovo a global brand, it entered into an agreement with the International Olympic Committee in 2004, to sponsor technology for the T urin and Beijing Olympic Games. Furthermore, the company inked a marketing and partnership deal with the National Basketball Association in US, to promote its Lenovo brand. The 2005 acquisition of IBM’s PC division for $1.75 bn helped Lenovo to become the world’s third biggest PC maker after HP and Dell and overtaking Acer in the process. However,gaining in scale could not be of much help to China’s legendary PC maker . Competition intensified both in domestic and global markets. In the Chinese market, Dell has always been a closest rival, leveraging its global experience and strong brand name. In the global market, Acer—a rank below Lenovo—openly declared its intentions, to dethrone Lenovo and take its third spot.

The Rivalry

Acer acquired Gateway, a renowned US PC company in mid-2007 for $710 mn 27reordering the competitive landscape both in the US and global computer industry. During the quarter before the deal, Gateway had 5.6% market share in the US PC market, while Acer had 5.2%. Combined market share placed it third behind Dell and HP with 28.3% and 23.4% of market share, respectively.28The deal provided Acer with a famous brand in the US and access to prominent electronic retailers, such as Best Buy and Circuit City. Acer began marketing through Best Buy in 2007 and through Circuit City in 2006. The acquisition provided Acer the size and scale to cut procurement and component costs in the US, which could eventually be passed onto the rest of the globe. Size does matter in the global PC market, as demonstrated by HP and Lenovo, with the respective acquisitions of Compaq and IBM’s PC division.

The deal also helped Acer to increase its market share in Europe. By acquiring Gateway,Acer also acquired Packard Bell with a strong presence in western Europe, which Lenovo also wanted to acquire. In Europe, Acer had 14% market share by mid-2007 and Packard 25“An Industry Leader”, available at https://www.360docs.net/doc/b213970823.html,/germany/company/investor/reports/gb2006/en/success-stories/lenovo-2.html

26Ibid.

27Richtel Matt (2007), “T aiwan’s Acer to Acquire Gateway”, available at https://www.360docs.net/doc/b213970823.html,/2007/08/28/technology/28gateway.html, August 28.

28Ibid .

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Study Bell had 3% market share. Acer’s acquisition of Packard Bell hurts Lenovo much deeply than it appears. The deal would have helped Lenovo address one major weakness it inherited as a result of acquiring IBM’s division in 2005—Lenovo did not possess as strong a brand image among individual consumers, as it has with corporate customers.As consumer notebooks are expected to be the new growth drivers in the global PC industry, lack of strong brand could prove to be dearer for Lenovo, as the industry is ruled by Dell, HP and Acer, already quite strong and aggressive in that area.

With the acquisition, Acer moved to second place overtaking Dell and behind HP .Being strengthened in US and European markets, Acer jettisoned Lenovo, which had become world’s third largest PC maker almost overnight by acquiring IBM’s PC division.However, the Gateway acquisition will have little effect on the Asian market (excluding Japan), where Lenovo leads with about 21% market share and Acer far behind with 6.6%.Lenovo is “successful in China, [but] we are growing everywhere”29, opined J T Wang, chief executive officer, Acer. Kevin Chang, an analyst in T aipei with Credit Suisse Group, said,“For Acer, getting bigger is a survival issue,” he further added “Y ou need to be a top-three player to make a sustainable profit.”30

Lenovo hopes to guard its Chinese ground to maintain the required scale. Ravi Marwaha, senior vice president of Lenovo Group, in charge of global sales, says, “the most important thing is to make sure that Lenovo continues to grow in China. The Chinese market is the company’s primary concern and will act as a growth engine driving Lenovo’s expansion in global markets.”31With 60% of the Chinese living in rural areas, there was a huge untapped potential for the PC sales. Therefore, in August 2007, Lenovo launched a low-cost computer priced at $199 for them that included educational software and a television plug-in. This move of Lenovo differs from the industry trends. HP , Dell and to some extent, Acer have resorted to lessen the impact commoditization—by making PCs,especially notebooks, highly personal and stylish devices, rather than ‘one size fits all’products. Observers opine that the strategy seems to be working as HP and Acer recorded strong sales of notebook computers during 2007. This growth for the two companies came amid recent sluggish demand for desktop computers and that too when the products are increasingly become commodities.

Lenovo is said to be trying all to win over Acer. One immediate strategy is strengthening Lenovo brand by taking Think laptops away from IBM brand. Lenovo bought the Think brand from IBM, along with its PC division. Lenovo as a brand has been gaining recognition in the US and European markets, with the help of its advertising and sponsorship campaigns. William Amelio, Lenovo’s CEO, says, “by making substantial progress on all of our critical priorities over the past few quarters, we’re now a stronger,29Einhorn Bruce (2007), “A Racer Called Acer”, available at https://www.360docs.net/doc/b213970823.html,/globalbiz/content/jan2007/gb20070118_038922.htm?chan=search, January 29.

30Ibid .

31“China Still Key for Lenovo PC Sales”, available at https://www.360docs.net/doc/b213970823.html,/200505/20/eng20050520_186033.html, May 20, 2005.

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64healthier company. One important sign of this progress is our decision to completely transition our Think products from the IBM brand to the Lenovo brand two years earlier than planned.”32

Acer is targeting large distributors in China as it had done in Europe and US, to establish strong presence in the critical Chinese market, which is growing at around 40%a year. Chinese consumers prefer to buy from retailers, who answer their queries and offer after-sales service. This provides an advantage for Acer and Lenovo, over the companies indulging in direct selling. However, beating Lenovo in its own backyard can prove to be difficult for any foreign company, leave alone Acer. The company has not ruled out the option of acquiring any of Lenovo’s rival, to make quick advances. Even in US, there are challenges for Acer—particularly in marketing multiple brands through same retailers such as Wal-Mart, Comp USA and Circuit City. Acer has marketed itself as a relatively high-end brand, while Gateway has catered to the lower end of the market. And a more daunting challenge could be integrating a company that is losing market share. Apart from this, the company has to develop credibility among corporate customers and be aggressive in selling to small businesses—the two areas Lenovo is ahead, thanks to all the work done by IBM.

As the PC industry gets concentrated in the hands of fewer players, more consolidation is expected. And then having a strong presence in the US will become a differentiating factor for companies’ fortunes. As both companies have proven their acquiring skills, the battle between Lenovo and Acer becomes more intense. Businees Week writes, “the rivalry between the two companies isn’t just about desktops and notebooks. It’s also about some unfinished business from 1949, when Mao Zedong took control of the mainland and sent Chiang Kai-shek fleeing across the T aiwan Strait. Lenovo is the top computer company in China and many communist officials look at it as leading the Chinese challenge to become a global tech power. Acer is the champion from T aiwan, an island that is trying to maintain its status as a global tech hub while politically resisting Beijing’s efforts to absorb it back into the Chinese motherland.”33

32Einhorn Bruce (2007), “The Good Times Roll at Lenovo”, available at https://www.360docs.net/doc/b213970823.html,/globalbiz/content/nov2007/gb2007111_099085.htm?chan=search, November 1.

33Einhorn Bruce (2007), “With Gateway, Acer Foils Lenovo”, available at https://www.360docs.net/doc/b213970823.html,/globalbiz/content/aug2007/gb20070827_278512.htm, August 27.

65

Case

Study 1HP 14,695 19.011,921 17.823.32Dell 11,31414.69,66114.417.13Acer*7,3949.64,611 6.960.34Lenovo 5,8267.54,7627.122.35T oshiba 3,029 3.92,544 3.819.0

Others 35,12245.433,502 50.0 4.8

All V endors 77,378100.067,001100.015.5

*Acer 7,3949.65,9048.825.2

(with Gateway)

Annexure

T op Five V endors, W orldwide PC Shipments*, Fourth Quarter 2007 (Preliminary)(Units Shipments are in thousands)

4Q07Market 4Q06Market 4Q07/4Q06

Rank V endor Shipments Share (%)Shipments Share (%)Growth (%)Note: *IDC estimates prior to financial earnings reports.

Source: “PC Market Still Strong in Q4 with Solid Growth Across Regions, According to IDC”,https://www.360docs.net/doc/b213970823.html,, January 16, 2008.

Reference # 25J-2009-06-05-02