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Peter Maa

Acer is the third largest PC manufacturer in the world by unit sales after Dell (DELL) and Hewlett-Packard Company (HPQ), and the second largest manufacturer of notebooks (laptop computers) by unit sales after Hewlett-Packard Company (HPQ).^[1] The company is based in Taiwan and produces the Acer, Gateway, eMachines, and Packard Bell brands. ^[2] The company has historically succeeded by competing on low-cost value computers, but with the acquisition of Gateway (August 2007)^[3], eMachines (August 2007)^[3], and Packard Bell (January 2008)^[4], has begun to market these brands toward higher-end segments. In addition, in 2008 Acer introduced its new Gemstone Blue home entertainment system product line of notebooks, which feature Dolby Surround Sound, Blu-ray player, and a 16:9 HD Display.

Acer's primary products are its laptop computers, which accounted for 71% of sales in 2008. ^[5] With the 2008 economic downturn, consumers have begun purchasing more netbooks--popular low-cost scaled down versions of notebooks, which has benefited the company. In 2008, Acer positioned itself as the market leader by sales in netbooks. ^[6] Netbooks are also popular in emerging markets, where the company has the highest sales growth rates, as the market for PCs in developed countries has mostly matured. ^[7]

On April 14, 2009, Acer's CEO J.T. Wang said in an interview that he projects Acer will overtake Hewlett-Packard Company (HPQ) as the No. 1 notebook manufacturer in the world by 2011, powered by sales growth in netbooks and slim notebooks with long battery life. ^[8] In 2008, Acer was the only top-five laptop maker to gain market share.^[8] According to estimates by Daiwa Securities, Acer's market share rose from 14.7% to 17.7% in 2008, while Hewlett-Packard Company (HPQ)'s share dropped to 20.9% from 21.5% and Dell (DELL)'s share dropped to 13.8% from 13.9%. ^[8]

The company will expand into televisions and e-books by 2014, according to the company's founder Stan Shih.^[9] Acer is cognizant of the fact that the PC industry has reached maturity, and is aiming to expand into other products. It will likely outsource production of televisions and e-books, in the same way it uses outside manufacturers for computers. ^[9]

Business Overview

Multibranding strategy

Since its inception, Acer has established a cost leadership strategy, with products generally priced below $1,200.^[10] Profit has been historically driven by volume sales rather than driving up margins. Starting in 2007, the company has been looking to enter the high-end notebook market, where margins are much higher. Rather than repositioning its own brand into the high-end market, the company has acquired other PC brands. With the acquisition of Gateway, Packard Bell, and eMachines, the company is targeting the medium to high-end market segments, keeping the Acer brand in the low-end range. ^[10]

Another entry Acer is trying to make in the high-end market is by introducing its Gemstone Blue home entertainment system product line of notebooks. In 2008, Acer introduced these notebooks, which include cutting-edge features such as Dolby Surround Sound, Blu-ray player, and a 16:9 HD Display.

Business and Financial Metrics

Acer Revenue and Net Income, 2005-2008^[11]

Acer Q12008 Revenue by Geography ^[12] Note: EMEA stands for Europe, Middle East, and Africa

In 2008, Acer reported $16.65 billion in revenue and $357.8 million in net income, and was the only top 5 notebook manufacturer to gain market share, largely due to its success in the netbook market.^[11][8] In early 2009, Acer surpassed Dell to become the #2 notebook manufacturer in terms of unit sales. ^[13] From 2005 to 2007, Acer's revenue grew from $9.65 billion to $14.21 billion, with net income rising from $256.9 million to $398.5 million. ^[11] With slowing global consumer demand in 2008 coupled with the cost of acquiring Gateway and Packard Bell, Acer's net income fell to $357.8 million. ^{[11] [3]} In 2009Q1, revenue fell 7% to NT$119.1 million from NT$127.4 million a year earlier. ^[14]

Business Segments

Although Acer's corporate structure is organized by geography, its sales are best interpreted by product line.

Acer 2008 Revenue by Segment^[5]

• Notebook (71% of revenue): Notebooks are Acer's most profitable product, generating NT$417 billion in revenue in 2008.^[5] Within the past decade, growth in notebook sales has far outpaced growth in desktop sales. For example, in 2007, overall notebook shipments grew 33.8%, while desktop shipments grew only 4.8%.^[15]
• Netbook (9% of revenue): Netbooks are an emerging type of scaled-down portable computer, that are designed to be cheap, light weight, and easy to use. Acer is the #1 producer of netbooks worldwide by unit sales, with a 38% market share.^[6] According to Mika Kitagawa, principal analyst for Gartner's Client Computing Markets group, "In the North America market, the economic crunch created more interest in the sub-$500 segment."^[16] In a December 2008 survey, 70% of consumers looking to buy a laptop in 2009 said a netbook was an attractive alternative.^[17] Netbook sales were the fastest growing segment in 2008, and Acer stands to gain more than companies such as Apple (AAPL) and Sony (SNE) that have decided not to participate in the netbook market.
• Desktop (12% of revenue): Annual revenue growth in desktop sales has slowed from 50.2% from 2004 to 2005 to 3.8% in 2008^[18][15] as consumers demand more laptops. The company expects desktop sales growth of 3-4% from 2009 to 2011. ^[15]
• Display (5% of revenue): Acer manufactures LCD monitors, HDTVs, and projectors. ^[19] In addition to consumers, the company is targeting businesses and governmental agencies for volume sales. ^[20] In North America, Acer has grown from the No. 10 display supplier in 2004 to No. 4 in 2008 behind Dell, HP, and Samsung. ^[21] Worldwide, LCD display growth was 26% in 2007, while Acer reported almost twice that growth in LCD display sales. ^[22] In 2007, revenue from display sales rose 17% from NT$59.45 million to NT$69.69 million. ^[19]
• Other (3% of revenue): Acer offers information security management, software systems development, data center services, and other IT support services.^[23] In addition, in 2008, Acer acquired E-Ten, a Taiwanese manufacturer of Pocket PC phones and PDAs. ^[24] In April 2009, Acer announced 8 new smartphone models, looking to develop traction within the mobile market. ^[25]

Trends and Forces

Acer is well positioned to take advantage of growing notebook demand

In 2007, overall notebook shipments grew 33.8%, while desktop shipments grew only 4.8%.^[15] Acer's focus on notebooks will be advantageous to growth in the long term. From 2006 to 2011, the company's consumer notebook shipments are expected to grow 19.9% annually and corporate notebook shipments 17.7%. ^[15] In contrast, PC sales and prices are already declining. Interactive Data (IDC), a global market analytics company, anticipates global PC sales to be down 5.3% in 2009 as consumers search for cheaper units in a bad economy.^[26] Analysts expect companies with higher exposure to the notebook computer market, such as Acer, to maintain higher growth momentum. As a percentage of total sales, notebook sales rose to 68% in 2009Q1 from 63% a year ago, while desktop sales fell to 12% from 17% a year ago. ^[27] However, since overall revenue declined in Q1 2009 to $3.4 billion from $3.9 billion a year earlier, notebook revenue in the first quarter of 2009 fell to $2.31 billion from $2.46 billion a year earlier. ^[27]

As market leader in netbooks, Acer is set to benefit as a suffering economy boosts Netbook sales

Acer Netbook Market Share, 2008Q3^[6]

In 2008, netbook sales skyrocketed to 11 million units from 182,000 in 2007, driven by rising demand as consumers trade down from more expensive notebooks or desktops.^[28] In the third quarter of 2008, the company established a 38% share of the netbook market, making it the leading manufacturer of netbooks by unit sales. ^[6] In the first quarter of 2009, netbooks grew to account for 20% of overall notebook sales worldwide.^[29]

Emerging Markets are growth centers for Acer sales growth

Acer has demonstrated strong emerging market growth, with sales in Asia Pacific and China growing 25% and 68% year-over-year, respectively, in 2008Q1. ^[10] The market for PCs has matured in developed nations, leaving emerging markets as viable growth opportunities. In 2004, US and Western Europe accounted for 32% and 23% of the overall PC market, respectively.^[7] By 2010, these proportions are expected to decline to 23% and 21%, according to Interactive Data (IDC),^[7] suggesting the increasing importance of Asia Pacific and other emerging markets. Furthermore, with government and telecom operators building broadband infrastructure at a faster rate in developing countries, complementary demand for PCs is also expected to rise. ^[7] For example, Dell (DELL) and Vodafone Group (VOD) have partnered to provide a free netbook with a two-year $70 per month 3G wireless contract. ^[30]

Acer benefits from depreciating dollar, subject to market fluctuations

USD accounts for 90% of Acer's expenses compared to 20-25% of its revenue, so the company benefits from a depreciating USD.^[31] Since mid-2008, the Taiwanese dollar (TWD) has appreciated markedly against the US dollar. The Euro (EUR) accounts for 40% of Acer's annual revenue, so an appreciating euro would benefit the company's bottom line.^[31] From July 2008 to May 2009, the Euro has fallen 16.2% against the dollar, though the two currencies have been making wide fluctuations in value in 2009. ^[32]

Competition

Acer is the third-largest vendor of PCs (laptops and desktops) worldwide with a 9.4% market share, after Dell (DELL) and Hewlett-Packard.^[33] Acer's other significant competitors in the PC market include Lenovo Group (LNVGY), Toshiba, and Apple. The desktop market is highly fragmented, with the top five companies accounting for only 55.2% of the global desktop market share.^[34] This results from the large number of small, low-cost manufacturers, which hold around 44.8% of the desktop market.^[35]

Acer Worldwide PC Marketshare Q1 2009 ^[1]

Notebooks

In notebooks, the top nine companies hold about 85.5% of the global market, and the segment has shown strong growth driven by sales in developed countries and the proliferation of wireless access.^[36]

Acer Worldwide Notebook Computer Marketshare Q1 2009 ^[1]

References

1. ↑ ^{1.0 1.1 1.2} Acer 2009 Q1 Investor Conference Presentation, page 10
2. ↑ Hoovers, "Acer, Inc."
3. ↑ ^{3.0 3.1 3.2} PC Magazine "Acer Buys, Will Preserve Gateway, eMachines Brands"
4. ↑ CNET "Acer officially lands Packard Bell"
5. ↑ ^{5.0 5.1 5.2} SinoPac Securities Analyst Report, Acer (2353 TT), page 9]
6. ↑ ^{6.0 6.1 6.2 6.3} [http://www.guardian.co.uk/technology/blog/2008/dec/10/acer-asus-netbooks Digitimes, "Acer leads netbook market while Apple loses market share," December 2008
7. ↑ ^{7.0 7.1 7.2 7.3} SinoPac Securities Analyst Report, Acer (2353 TT), page 14]
8. ↑ ^{8.0 8.1 8.2 8.3} Bloomberg, "Acer Aims to Take Hewlett-Packard’s Laptop PC Lead"
9. ↑ ^{9.0 9.1} Bloomberg "Acer to Expand into TVs, E-Books, Founder Shih Says"
10. ↑ ^{10.0 10.1 10.2} SinoPac Securities Analyst Report, Acer (2353 TT), page 5]
11. ↑ ^{11.0 11.1 11.2 11.3} Hoovers, "Financial Information: Acer Financials"
12. ↑ BNP Analyst Report, Acer Inc, page 18
13. ↑ Maximum PC, "Acer Beats Dell to Become Number Two Notebook Maker"
14. ↑ Acer Inc. Q1 2009 Investor Conference, 29 Apr 2009, page 3
15. ↑ ^{15.0 15.1 15.2 15.3 15.4} SinoPac Securities Analyst Report, Acer (2353 TT), page 3]
16. ↑ VNUNET "Netbook sales drive PC growth"
17. ↑ NPD, "Netbook Sales are on the Rise, but will that hurt the Overall PC Market?"
18. ↑ Acer 2005 Annual Report, page 22
19. ↑ ^{19.0 19.1} Acer 2007 Annual Report, page 32
20. ↑ "Acer to focus on display products"
21. ↑ ChannelWeb, "Despite Strong Year For Acer, Challenges Remain"
22. ↑ Acer LCD display market
23. ↑ Acer 2007 Annual Report, page 13
24. ↑ "Acer buys smartphone maker E-Ten"
25. ↑ Mobility Site, "Acer Formally Announces 8 Smartphones"
26. ↑ PC sales seen down 5.3 pct in 2009 – December 3, 2008
27. ↑ ^{27.0 27.1} Acer Inc. Q1 2009 Investor Conference, 29 Apr 2009, page 16
28. ↑ Acer leads netbook market while Apple loses market share - December, 2008
29. ↑ Daily Tech, "Netbooks Grab Nearly 20% of Notebook Market"
30. ↑ Gizmodo, "Dell And Vodafone To Sell 3G Netbook Bundle For $0 Upfront"
31. ↑ ^{31.0 31.1} SinoPac Securities Analyst Report, Acer (2353 TT), page 7]
32. ↑ Federal Reserve Board, EXUSEU, U.S. / Euro Foreign Exchange Rate
33. ↑ Gartner Says Worldwide PC Market Grew 16 Percent in Second Quarter of 2008 July 16, 2008
34. ↑ Gartner Says Worldwide PC Market Grew 16 Percent in Second Quarter of 2008 July 16, 2008
35. ↑ Gartner Says Worldwide PC Market Grew 16 Percent in Second Quarter of 2008 July 16, 2008
36. ↑ Notebook computer market share 1Q08
37. ↑ ^{37.0 37.1 37.2} Notebook computer market share, Q1 2008