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Fri 13 Oct 2006 08:00 PM

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Acer setting the pace

Taiwanese vendor Acer has bucked the downwards trend in the PC sector by concentrating on emerging markets and adopting a flexible indirect route-to-market channel strategy

The global IT industry came back down to earth with quite a bump during the second quarter of this year. The soaring profits firms in the industry made during late 2004 and early 2005 have fallen away this year.

Some big names in the industry such as Dell and Intel have had to take a serious look in the mirror following record drops in income during the first two quarters of 2006.

The PC industry has been hit particularly heavily by this recent slowdown in the global IT market and revenue growth and profitability have become major concerns for vendors.

The wider IT industry slowdown, plus other factors such as CPU vendor competition, the saturation of mature markets and the well-publicised delay to Microsoft’s Windows Vista operating system, have all affected the sector.

Growth of both notebook and desktop computers has stuttered since the third quarter of last year, with analyst firm Gartner’s figures showing desktop growth is now down to a meagre 4.3%, and, while the notebook market is still growing at a healthy 27%, the number of units being shipped is still significantly less than on the desktop side.

Many PC vendors have experienced a similar decline in growth as the market. However, one company that is still showing healthy growth is Acer.

While other firms have been showing PC shipment growth of, on average, between 10 and 13% this year, the Taiwanese firm has been posting numbers up as much as 45%, claims Gartner.

Announcing its fiscal second quarter results at the end of August, the world’s number four PC vendor revealed its revenue was up 10.9% year-on-year from US$2.03 billion to US$2.25 billion, while its profits increased 36% from US$69.91million to US$95.10million.

Not a bad way to celebrate your 30th birthday.

At Acer’s annual global press conference in Monte Carlo, Monaco, last month, president Gianfranco Lanci said the company’s revenue would exceed US$6 billion for the first time this year, adding around US$1 billion in sales on 2005.

“Acer has consistently outperformed the industry during the first half of this year and achieved better results than our direct competitors,” Lanci told the audience.

“We are the only player in the market consistently showing good growth.”

For H106 Acer’s PC sales grew by over 40% compared to the industry average of just over 10%, according to Gartner.

Unsurprisingly much of this growth was driven by the vendor’s notebook business, which grew by around 50% year-on-year.

But Acer’s desktop PC sales increased during H1: Gartner’s numbers show Acer posted a rise in shipments of over 25%.

So how is Acer doing it? What is its trick? Emanuele Accolla, vice president, Acer Europe, Middle East and Africa (EMEA), told IT Weekly that in the current climate in which mature markets are showing signs of saturation in the desktop space, PC vendors needed to be much smarter about their business approach in order to sniff out areas of growth and maximise those areas’ revenue potential.

This is why so much of Acer’s efforts are being spent developing its notebook business and establishing itself in emerging markets, two areas that are driving the industry’s growth.

“It is correct that globally there is stagnation in the desktop market, but within the stagnation there are areas with a certain dynamic and we play in those areas,” explains Accolla.

“That is why when you look at the desktop side we are showing a much better growth than the rest of the industry worldwide.”

He says that stagnation was happening in mature markets such as the US and Western Europe, but not in emerging markets, especially not in the Middle East and Africa (MEA) region.

Steve Brazier, Canalys CEO and president, a guest speaker at the conference, backs up Accolla’s comments.

Brazier says Canalys research has found that during this “uncertain period” in the PC industry, vendors such as Acer who were well-established in emerging markets were able to shield themselves from the full effect of the PC sector slowdown in the mature markets.

“Those companies that have a good presence in the emerging markets are doing better,” he points out, suggesting that some of the problems Dell has faced recently were partly due to its heavy reliance on the US and Western Europe.

Within EMEA, which accounted for around 55% of Acer’s revenue during the first half of this year and 65% in H105, the Middle East is by far the fastest growing region for the industry.

During Q206 Canalys figures show PC shipments to the Middle East increased by around 40% compared to around 2% in Western Europe and under 10% for the whole EMEA region.

“The Middle East is one of the most interesting areas in the world. The rapid growth is giving our company a lot of good business,” Accolla claims.

He says Acer has seen solid market demand in the UAE, Saudi Arabia and other Gulf countries, which was being driven by consumer spending and considerable government investments, as well as impressive growth in Egypt and Turkey.

The vendor has been especially proactive in the public sector and last month finalised deals with the Jordanian, Omani and Bahraini ministries of education worth in the region of US$15million.

The largest deal, a US$12million tender in Jordan, was for 12,000 of Acer’s Veriton desktop computers.

According to Gartner, Acer, the number three PC vendor in the region, experienced 77.3% market share growth across the whole of MEA in Q206, over double that of any other vendor in the market, increasing its share to 8.6%.

In the desktop space it posted an increase in market share of 67.9% and in the notebook market, where it is the number two vendor, it grew 84.1% to control 17.9% of the market.

Accolla says the reason for such positive results was that Acer approached MEA in the same way as it approached mature markets and with a long term strategy instead of looking at the region as a way of making quick money in the short term.

“We took this strategic direction around four or five years ago and address the market very strategically. We execute the same strategy here as we do in the rest of the world,” he says.

“This is different from other vendors that consider MEA as a kind of opportunistic market where you can do some business on an ad hoc basis,” he adds.

Accolla believes that Acer took this approach because the vendor thinks the market has incredible potential in the future, especially countries such as the UAE, Saudi Arabia, Turkey and South Africa.

“We look at these countries not only for what we are doing today, but also for the potential that the countries are going to express in the future,” he adds.

Accolla estimated MEA would probably grow somewhere between 10 and 15% over the next five years, but due to rapid expansion in other EMEA emerging markets such as Russia, MEA would still only represent less than 15% of the total units shipped, only slightly more than it makes up today.

“What is going to happen over time is Eastern Europe and Russia are going to give a much bigger contribution, especially Russia,” Accolla points out.

“So globally MEA volume may even grow by 100% in three years from now, but it will still represent less than 15% of the total.”

Taking notes

The rapid transition from desktop to notebook is another factor shaping the PC market that both Accolla and Canalys’ Brazier highlighted, a trend that also has contributed towards the slow growth of the desktop market in certain areas of the world.

Currently around 60% of Acer’s revenue comes from its notebook business, with just 16% coming from selling desktop PCs.

The rest of Acer’s sales come from its display business and other products such as its range of PDAs and MP3 players.

Vendors that have a strong presence in the notebook sector are also the ones showing the most impressive growth.

“We are focusing more on notebooks as we do not consider the notebook market to be in the situation that the desktop market is in terms of saturation,” explains Accolla.

“We are observing globally a scenario where whoever is purchasing a notebook is not typically a first buyer, which means there are people who have desktops who are purchasing notebooks in addition to their desktop and people who are replacing desktops with notebooks.”

For strong players in both the notebook sector and emerging markets, such as Acer, there is a magnified positive impact on their growth as emerging markets like Saudi Arabia and Egypt are seeing a rapid transition from desktops to notebooks.

In 2005 sales of notebooks in Saudi Arabia more than doubled from 161,561 units to 331,258, almost overtaking desktops, of which 353,766 were sold in the Kingdom last year, according to market research firm IDC.

The group’s figures show Acer’s notebook sales for 2005 increased by 132.5% in Saudi Arabia, making it the number one vendor in the Kingdom with 30% of the market, and 90.5% in the UAE, where it is the number two player behind HP.

Another reason Acer is doing so well, and a factor that is perhaps not as obvious, is its channel strategy.

Indirect strategy

The vendor has a completely indirect route to market that gives it much more flexibility and adaptability in coping with changes in the market and addressing the channel appropriately.

“We are the only vendor who is truly distributing products indirectly. That makes our strategy much clearer than anybody else’s strategy because other vendors play two different roles and the channel is easily confused,” Accolla says. “In our case we have a very clear rule and we stick with that.”

According to Canalys, Acer distributed around 20% of its products through a one-tier system and the remaining 80% though a two-tier system in the EMEA region during Q206. It did not ship any units directly.

Another vendor who also shipped all of its units indirectly in EMEA during the second quarter was Toshiba.

The Japanese vendor, which is also a big player in the notebook space, experienced worldwide sales growth of 27.4% during Q2, second only to Acer.

“One of the reasons Acer has been so successful is its indirect model,” Brazier says.

He claims that research has shown the indirect route to market is working much better for vendors than the direct model.

Again, he gives the example of Dell, renowned for its build to order and direct approach to the market, and comments that he does not think it was just a coincidence the vendor that shipped the most units directly — 80% were shipped directly in EMEA during Q2 — was the one having the biggest problems adapting to the changing market.

Although Acer sticks to a strictly indirect channel model, it maintains direct contact with all of its large corporations such as Emirates Airlines, which it signed a deal with in June, and government organisations such as the Jordanian Ministry of Education.

The vendor also retains direct control over after sales support — owning call centres and support centres — which allows the company to have a greater deal of control over and knowledge of customer satisfaction levels and to respond quicker to changing customer requirements.

“In Europe this strategy has gained us great advantage because we can deliver both in terms of cost-efficiency and it is also very good in terms of controlling directly what we are delivering to customers,” comments Accolla.

“If you look at the big noise that was made recently about Dell collapsing on service worldwide and they then decided to spend a fortune to restore consumer confidence you can realise how important customer service is,” he adds.

Just as the most significant areas of growth in the PC industry are in emerging markets and technologies where there is still a lot of scope to expand, such as the Middle East and the notebook sector, the same too could be said for Acer.

While Acer has been operating since 1976, it was only six years ago that it spun off its manufacturing business — now called Wistron — to focus on becoming a global PC brand in its own right.

It could be argued Acer is still an emerging company itself and therefore a long way from reaching a point of saturation and stagnant growth Dell is currently attempting to overcome.

Acer saw an increase in global sales of 34.7% in Q206, though still only shipped 2.8 million units — not even a third of the units Dell shipped in the same quarter.

Acer obviously has the right strategy of targeting high-growth segments of the market to maximise its own revenue potential, and its indirect channel model looks as if it will give the vendor more protection from swings in the market that have been Dell’s achilles heel.

But it will be interesting to see how Acer fares in five or so years time when these high-growth markets that it has been tapping into have slowed down.

Already it is planning for the future and has identified mobility, the enterprise and convergence as key markets that will experience significant growth in the coming years.

The industry will have to wait and see whether the vendor can anticipate and tackle these and other market segments as successfully as it has the notebook and emerging economies.

“It is correct that globally there is stagnation in the desktop market, but within the stagnation there are areas with a certain dynamic and we play in those areas."

“It is correct that globally there is stagnation in the desktop market, but within the stagnation there are areas with a certain dynamic and we play in those areas."

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