BenQ makes a big bet on Siemens

Can an obscure Asian brand turn into a top global handset vendor overnight, by buying into an industrial titan? That's the wager BenQ Corp (明基), Taiwan's biggest mobile phone manufacturer, is making as it acquires the ailing handset operation of the world's No 4 cellphone vendor Siemens AG.

The high-profile purchase marked the beginning of another adventure for BenQ Chairman Lee Kun-yao (李焜耀), who has steered the one-time electronics manufacturing unit of computer vendor Acer Inc toward becoming a consumer electronic brand in its own right.

In the past three years, BenQ has begun to win global attention with its innovative product design. But its weak brand awareness among consumers has been little help to sales.

Even on its home turf, BenQ is losing market share to rival Inventec Appliances Corp (英華達) in a head-to-head race.

To sharpen its brand operation, BenQ decided to take a shortcut to the global mass market when opportunity knocked, following in the ambitious footsteps of Chinese electronics vendors Lenovo Group Ltd (聯想) and TCL.

"We hope the BenQ-Siemens brand will bring BenQ to the world," said Lee, during the press conference announcing the take-over last Tuesday.

Analysts said BenQ could risk seeing weakening profitability with the deal.

"BenQ is getting paid for taking a risk," said Vincent Chen (陳豊丰), an electronics analyst with CLSA Ltd (里昂證券) in Taipei.

"With the experience of Lenovo and TCL a reminder of the difficulties in turning around weak western brands, we are very cautious about what BenQ can achieve with Siemens," Chen said.

According to the agreement with Siemens, BenQ will sell cell phones under the co-brand BenQ-Siemens over the next-five-year period after the cost-free take-over of Siemens' handset division headquartered in Munich, which takes effect October 1.

Siemens will give the Taiwanese company 250 million euros to help fund the unit's operations, and will spend another 50 million euros to get a 2.5-percent share of BenQ. Siemens is expected to regain investor support by disposing of the money-losing unit. The short-term reaction to the deal was good: shares of Siemens jumped to 62.94 euros, their highest level since January, in the mid-day session after the announcement in Frankfurt.

But for BenQ investors, a real concern is whether the inexperienced company will be able to succeed where the veteran German electronics company could not, by transforming Siemens' money-losing handset unit into a cash cow.

Siemens' troubled mobile phone division posted its fourth consecutive quarterly loss in the first quarter of this year, with little sign of improvement ahead. The division has lost 500 million euros over the past year.

That doesn't seem to faze Lee, who with a confident smile told reporters in Beijing last Wednesday that his company aimed to turn around the new handset operation in two years, after breaking even next year.

Lee's promise sounded unrealistic to most industry watchers, who said it would be an uphill task for a small Asian company like BenQ to save a Western giant that's on the wane.

BenQ will have to overcome difficulties similar to those faced by Lenovo and TCL, CLSA's Chen warned.

Those difficulties include safeguarding Siemens' falling market share and trimming operating expenses and manufacturing costs, Chen said. BenQ said it hopes to trim US$500 million in costs in the first year of the acquisition.