why Acer should quit the PC business
the journal of Michael Werneburg
twenty-seven years and one million words
An assignment in my Marketing course: advise Acer on whether to buy the Hewlett Packard PC division. Here's what I wrote.
HP’s recently announced intention of selling its PC unit has received considerable attention in the market. HP’s stated reason for exploring the sale of its PC market was the low yield of the product line, estimated at 5.5%; when compared to its other major business lines, the PC line appears to be a relatively low-profit unit for HP. HP remains the market leader despite its publicly declared intention to “consider options” regarding the business line.
By comparison, Acer is now an unprofitable and mid-size player in the global PC market. Acer’s sales have fallen sharply by some 40% in the past two years, while competitors such as HP, Apple, and Lenovo have not only weathered the weaker economy in better shape but have aggressively expanded sales. Lenovo in particular has grown tremendously, surpassing Dell to take second place in global sales.
Acer’s recent problems appear to be three-fold: an over-focus on low-margin netbooks, which are now cooling rapidly as a market-segment; an over-focus on developed nations, where sales are not growing strongly; and a failure to innovate as strongly as its competitors. Acer has been following the lead of smaller, more innovative players such as Asus (which Acer followed in diversifying into netbooks) and Apple (which Acer followed in deploying a series of tablet and touch-based smart phone consumer products). Acer is again now playing catch-up with tablet manufacturers such as Apple and Amazon in exploring the use of cloud technology to service its tablet users, and so far has been unable to respond to developments by Apple and Amazon to offer rich media experience. Acer’s inability to offer its own operating system further compounds the problem of margins even for smart phones and tablets, where Acer must pay a royalty to Microsoft—either Windows for desktops, Android for smart phones on every unit sold.
On inspecting the Hewlett-Packard opportunity, we see a unit with a profile that is strikingly similar to that of Acer. Though larger than Acer’s existing business lines (including smart phones and tablets), the HP unit offers a product set that does not in itself resolve Acer’s issues of profitability. The HP personal computer product line, largely sourced from third party OEM’s and entirely based on the same Windows-patented platforms as Acer, fail to offer Acer a substantial change in product differentiation. Moreover, the HP and Acer product lines are already similarly geared to the same mix of buyers: that is, sub-$1000 buyers, both consumer and corporate, in mature markets. Acquiring the HP personal computer line would not help Acer gain entry to the growing market in China and other parts of the developed world.
Finally, it is simply not clear that Acer has the cash to buy the HP PC business unit, which is valued at $10-12 billion.
For these reasons, our recommendation is that Acer should not buy the PC unit of Hewlett-Packard. At the same time, we would offer two alternative strategies for Acer to pursue.
Alternative Strategy #1: BRIC (play it safe)
Acer at present is a manufacturer of commodity PC hardware. The low-profit products are manufactured by Acer and by third-party suppliers.
If Acer wishes to expand this business model, it can do so in developing nations. In particular, the four-country “group” of Brazil, Russia, India, and China is undergoing strong growth. These economies, worth $9 trillion in 2011, is expected to continue to experience such growth that by 2050 they will rank among the top national economies, at first position (China), third (India), fifth (Brazil), and sixth (Russia). By 2020, the BRIC countries are expected to be home to 1.6 billion middle class earners.
This twenty year forecast for middle-class growth in the BRIC countries is an excellent market opportunity for Acer to expand its existing business model based on low-cost products. While total earning power of individuals in the BRICs remains lower than in the developed world, the market for PC’s, tablets, and smart phones is set to explode in that region. In fact, China has already overtaken the US as the top market for PC’s. Given that Acer is headquartered in a Chinese-speaking nation, China would seem the perfect entry for Acer to the BRIC market.
Alternative Strategy #2: Sell the Acer PC business
Acer has been, for several years, outsourcing the entire manufacture of its products to suppliers such as Quanta, Compal, and Winstron. Manufacturing is no longer a priority for Acer:
“Acer’s management considers the manufacturing sector to be of little value… In practice, the implementation of this business model means that Acer is shifting from being a manufacturer to a pure brand company that markets and distributes its products, while leaving the actual production process in the hands of contract manufacturers.” (Slob, 2005).
The strategy has unencumbered Acer from the direct costs of manufacturing, but it has not been able to consistently capitalize on the brand-based strategy—margins have been thin enough that the Acer Group as a business is a money loser.
We recommend that Acer look strongly at selling the PC business. Margins in personal computers are now so low that Acer’s margins are in the range of 2.3%, compared with 21.5% for Apple’s mobile business and 50% for Amazon’s cloud services business. Acer has recently initiated both a mobile computing product line and a cloud services division.
We propose that the Acer PC unit be sold and that Acer's money, engineering and marketing expertise be applied to more profitable lines of business. A very possible buyer is Lenovo, which has a strong corporate client base but which could grow tremendously with Acer’s consumer-oriented product line. The recently departed ex-CEO of Acer, surely a party familiar with Acer's abilities in the consumer market, is now with Lenovo. We propose that the funds raised be put into the mobile arena and/or into cloud services.
Alternative Strategy #2a: mobile and webOS
HP is in possession of some assets that could assist Acer in a turnaround. The assets of the former Palm corporation, purchased by HP in 2010, are of particular interest. At first glance, the unit seems to be a hazardous area: HP failed to make a profit on their 2010 purchase of Palm for $1.2B.
But Hewlett-Packard, which has had four CEO’s in the past ten years, only gave the platform seven weeks to succeed before scrapping the product line. HP’s failure seems to have been one of execution, particularly in marketing. At the time of the product launch, former HP CEO Leo Apotheker described webOS thus: “We are all excited about our WebOS platform, the devices and that we announced and the incremental opportunity that WebOS provides. The enthusiasm and the anticipation for WebOS exceeds even our most optimistic expectations.”
Before scrapping the products, HP managed to sell out the devices by lowering the price to $200. This is instructive: the platform itself is a commodity, and is not itself an earner. For this reason, we recommend that Acer look at buying the webOS intellectual property and not the HP mobile product line itself.
The former Palm platform “webOS” is widely regarded for its multi-tasking, media, and browsing abilities. As a mobile operating system (OS), it is also free of encumbering licensing requirements, unlike Android. Owning an OS outright would give Acer a break from license fees to Microsoft (and others), and would go a long way to shelter Acer from the recent trend to patent litigation in the mobile space.
Most importantly, though, acquiring its own OS would give Acer the ability to innovate strongly. Not only could Acer differentiate itself with an able OS of its own as the core of its entire range of products, but it could offer the benefits of its operating system to other vendors, including those not in the mobile market directly. Media and social network players could be approached for joint projects based on Acer’s platform that would protect the potential partners from the licensing and lawsuit issues mentioned above. Facebook, for instance, has identified the mobile space as being immensely important to its future business development.
Given the explosive growth in the mobile space, we recommend that Acer produces the products and aligns itself with partners that will offer a strong platform with a rich media and social networking experience. HP bought the webOS assets and business line for $1.2B in 2010. Given that HP was unable to sell its own webOS-based products at a profit, we advise that a lower purchase price could be offered for the intellectual property.
Our proposed strategy is that Acer use the webOS intellectual property to complement its own assets and hardware expertise and build a platform upon which profits will be derived from both hardware sales and the provision of content from media partners, not the hardware alone. The sale of the existing PC business would arm Acer with the needed capital for such a venture.
Alternative Strategy #2b: Cloud Services
With the purchase of iGware, Acer has initiated a cloud services line of business. Given the margins enjoyed by Amazon, which has a mature cloud services business line and reaps a 50% profit margin on the business, this seems a much better area for Acer to invest its money and energy.
Acer enjoys one competitive advantage in being well-situated to take advantage of the Asia-Pacific market for cloud services, which is expected to triple to $5 billion in size by 2014. Acer also has considerable experience in designing and marketing the commodity computer systems upon which cloud services are built.
With attractive margins and explosive growth expected in the near term, we advise that Acer would do well to invest in this market. Again, the sale of the existing PC business would arm Acer with the needed capital for such a venture.