BenQ makes a big bet on Siemens

A Chinese promotion girl shows off the latest mobile phones from Taiwan's BenQ, at a launch in Beijing last week. PHOTO: AFP

Can 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 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 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' 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 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 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.

Siemens handing over about 6,000 workers of the handset operation to BenQ, which has around 14,000 employees around the globe.

Chen BenQ to start booking losses in the third quarter of next year and possibly into 2007.

JP Morgan analyst Johnny Chan shared the same worries with Chen, citing China's TCL Group as a precedent. TCL Multimedia and TCL Communications acquired the loss-making French handset businesses Thomson and Alcatel. Both found it far more difficult than expected to turn around the businesses due to competition and slower progress in cutting costs, Chan said in the latest report.

"Both stocks have seen significant de-rating in the past six months. We suspect BenQ's share price could follow a similar pattern in the next 12-18 months," Chan said.

Chan he would revise his earnings forecasts to reflect the acquisition in due course. BenQ remains on the "Short" side of JP Morgan's Asia Pacific Tech Trading Portfolio with a target price of NT$27 for 2005, he said.

Despite pessimistic consensus from analysts, International Data Corp (IDC) said there were some positive aspects of the BenQ-Siemens deal.

"The purchase of Siemens' handset unit will help BenQ expand its brand presence in Europe and Latin America, where Siemens has grabbed a solid market position, as BenQ only has a strong customer base in Asia," said Terry Tsao (曹志堅), managing director of IDC Taiwan.

With Siemens' market position and BenQ's strong manufacturing capabilities and cost control, Tsao believes BenQ has a good chance to become one of the world's top handset vendors.

Indeed, it is too early to decide now to where the acquisition, rife with uncertainties, will lead BenQ. But as Tsao concluded, one thing's for sure: established European and US players are facing mounting competition from rising Asian stars.