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June 30, 2000 VOL. 29 NO. 25 | SEARCH ASIAWEEK

Asiaweek Pictures
Coming from Acer: Digital Recipe Book

Oh, To Be Young Again
One of Asia's oldest New Economy companies refuses to age gracefully. In fact, Stan Shih's Acer is fighting like mad to regain its edge

Youthful energy is abundant at Acer's Digital Services offices in downtown Taipei. Physically separate from the more traditional -- and drab -- surroundings of the corporate headquarters in the city suburbs, the office is decorated to feel, well, unlike an office. In one meeting room, the assembled sit not on chairs but on swings fastened to the ceiling. Staff members can lounge outdoors on a balcony during coffee breaks. The floor plan is open and designed to encourage interaction. No enclosed offices. Even the boss, Digital Services CEO George Huang, one of Acer's founders along with Stan Shih and others, gets only a cubicle (though slightly separated from the rest). His employees all come to work casually dressed and are free to decorate their workstations as they please. Huang, 51, would be happy to go along, but he feels the need to continue wearing a shirt and tie: "I still have to meet bankers," he says with a smile.

In many ways, the Digital Services headquarters looks like a Silicon Valley research and development center. That's deliberate. In other ways, Acer, which claims to be the world's No. 3 computer maker, wants to emulate Sony. And Acer people even talk of the company as a new Softbank or CMGI. The challenge is for Acer to be all of these things -- and to still be itself. "The company has a lot of disparate attractive things," says Matei Mihalca of Merrill Lynch in Hong Kong. "But we live in an age of convergence so you have to pull it all together." At Acer, they know they have to.

The Acer Group is big: 34,000 employees and sales of $8.4 billion. The group's flagship Acer Inc., which makes personal computers and related products, is now one of Asia's graybeard technology companies outside Japan. Though profits of Acer Inc. jumped to $243 million, 193% higher than 1998, much of the improvement came from one-time asset sales. Revenues actually fell 24% in the same period. Shih knows that a host of low-cost computer manufacturers is forcing down prices and cutting profit margins to the bone. In May, even IBM said it was ending its long-time arrangement with Acer for the manufacture of desktop PCs under contract -- though it would continue to source notebook computers from the company. At the same time, Acer decided to pull its PCs from U.S. markets.

Asiaweek Pictures
Coming from Acer: Equities Monitor

For Shih, long an advocate of constant, evolutionary change, there was never any question that the company would adjust. Acer had grown up making computers for others. Today, having successfully expanded and marketed its own brand name, it is not about to get out of the personal computer business. But Shih has known for some time that the old desktop standby cannot maintain the company forever. A new generation of consumers is coming of age in places like India and China, and they want easy and cheap access to the Internet. For Acer and others, the challenge is to produce low-cost devices to suit their needs that won't be priced so low that profits are nearly impossible. For all those reasons, Shih aims to make Acer the Sony Corp. of Taiwan, turning out handy, small, reasonably priced Internet appliances with the customer's needs foremost.

Sony looms large in Shih's mind. He is a keen admirer of the late Morita Akio and the global giant he built. "Sony started growing with its export business," Shih explains. "It was global and innovative. In terms of re-engineering, they were ahead of other Japanese companies." By no coincidence, Acer has achieved similar status in Taiwan through much the same means.

In practical terms, Shih's desire to turn Acer into another Sony gives concrete direction to a vision he began to describe in 1997. At the time, speaking to a conference in San Francisco, Shih coined an abbreviation for the direction he wanted to take his company: the XC concept. "XC" which doesn't actually stand for anything specific, means Internet-enabled appliances to Shih. These could be anything from digital cookbooks (see photo opposite page) to home health monitors to electronic business cards. The unifying characteristics: They are portable, affordable, and they help make the Internet useful to everyday life.

"Shih was a visionary in that he foresaw the advent of the Palm Pilot and the $500 PC," says Mihalca, who covers Internet developments in Asia. "People are moving toward lower priced Internet-access devices, tablets or what have you -- the XCs." He adds: "Clearly, Acer is well-positioned to succeed. The environment now favors companies that have access to capital and companies with a brand name. The challenge for Acer is to pool all of its resources, have a very strong Web presence and take that regionally, which they have not yet done." Mihalca likens Acer's transition to what South Korean consumer electronics maker Samsung is trying to do.

Asiaweek Pictures
Coming from Acer: Teenage Digital Society

Acer's product diversification so far has been rapid. The company already exports set-top boxes and antennas to Japan and the U.S. that enable Internet access through the television, and is the No. 1 producer of GSM mobile phones in Taiwan. Acer aims to become the major player in Internet-enabled devices such as personal digital assistants and other digital appliances. Add to these devices the company's ambitions in Chinese-language Internet education, entertainment and e-commerce services such as its family-oriented portal, a highly successful online game network and electronic greeting card site -- and the scope of Acer's latest evolution becomes clearer.

As for Acer's other role models, Huang expects part of the company will develop along the lines of Softbank, which has bought dozens of small dotcoms and computer companies over the last several months. The Acer Group seems a little late to this investing game, though it has made some purchases. Also, it recently said that it has taken a 40% stake in a $260 million venture capital fund, half of which will be devoted to buying companies in the U.S. and the other half in Asia, mostly in the Greater China region. Managers of the new fund said they expect to achieve 300% to 500% yields in five years. "The timing is favorable to us," says William Lu, co-manager of the fund and president of Acer Technology Ventures (ATV) Asia Pacific. "Prices of our potential investment targets are a lot cheaper now compared with three months ago. Our targets will be companies with unique content, not just dotcoms selling nothing but a dream." Building this wide network should help Acer make inroads in the next-generation Internet business. "Most of our business partners in the long run will be services and applications providers," says Simon Lin, CEO of Acer InfoSystems Group. "They will all help each other." And help boost demand for Acer's XC devices.

The Acer transformation is far from over. In addition to the many Web-friendly products the firm will be designing and marketing over the coming years, there will be a push to find content and develop software. In April, the company announced that it had joined Taiwan's China Development Bank in buying a 30% stake in Hong Kong movie distributor Golden Harvest Entertainment (echoes again of Sony). Huang, the Acer Digital Services CEO, says his group aims to develop content for all the digital appliances the group plans to produce. "Our goal is for digital and software-related business to account for 15% of group revenue by 2010."

Shih likes to talk about the past structural changes he's made at Acer, especially devolving decision-making down the line and spreading it throughout the company. In some respects, say analysts, it is now time to see how the structure performs. "Basically, it's a matter of execution," says Mihalca. He says Acer has developed an interesting strategy for providing Internet appliances, services and applications that can enhance one another.

Many analysts think very highly of the company and place buy or, at worst, hold recommendations on the stock. But even those who are generally positive fear it may be spreading itself too thin -- trying to do too many different things at once. "The issue with Acer up to now is that it has not been focused," says Mihalca. "The strategies have not all converged coherently in what is supposed to be a very powerful combination. But they are in the process."

Shih accepts the criticism that his company might be able to achieve higher profits if it were more centralized. "But I want to make new opportunities for the company," he told Asiaweek. "There is a trade-off. Usually, we are ahead of the curve. We have to diversify. You can't do just one thing or another. I like to think diversity -- in products and management style -- is the strength of Acer." Simon Lin, CEO of Acer InfoSystems Group, recalls the Sony example to explain why Acer needs to be more than just a computer maker: "Sony is a huge company, but it doesn't have just a single product. This is the Asian company approach. We can't just focus on one sector."

In April, Acer sought to promote its new Internet appliances and ventures by holding what it called an "e-Life" exhibition outside Taipei. This included the release of a short film Acer In Space, which featured scenes of 21st-century life on board a spaceship. Shih made a cameo appearance as a poker-faced commander. Later, he delighted guests by cuddling a robot baby that reacts happily to hugs and play, blinks its eyes and even cries like a real infant. This was a Stan Shih the public doesn't often see: engaging, playful, relaxed. A good role model for the 21st century Asian CEO.

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