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Analysis: BenQ move sparks optimism and anger

Employees of BenQ Corp hold banners during a protest in front of the headquarters of Siemens in downtown Munich, Germany, yesterday. The Taiwanese company had announced it will seek insolvency protection for the German mobile phone operation leaving some 3,000 employees with an uncertain fate. BenQ acquired the German mobile phone operation from Siemens last year. PHOTO: AP

BenQ Corp (明基) chairman Lee Kun-yao (李焜耀) said it was the biggest adventure of his life when he created the BenQ brand five years ago, a brand he hopes to develop into a household name worldwide.

This global dream remains elusive, though not for want of trying. Taking what seemed like a short cut by absorbing the loss-making mobile phone unit of well-known Siemens AG last October did not have the desired effect for BenQ. Instead, it has become a colossal burden to the company's operation, as most experts warned.

"The merger was doomed to be a flop," said Wang Deng-cheng (王登城), an analyst at Yuanta Core Pacific Securities (元大京華證券).

Not a single company in the world, even century-old Siemens of Germany, would be able to revive a company with massive 150 million euros to 200 million euros (US$190 million to US$254 million) in quarterly losses as BenQ Mobile tried to do, Wang said.

The analyst's remark came a day after BenQ, Taiwan's top mobile phone maker, announced on Thursday night that it would file for insolvency protection for its German handset unit, BenQ Mobile GmbH & Co OHG, at the local court in Munich as the firm has no intention of injecting further capital into the unit.

"It was a painful decision that had to be made to safeguard the interests of BenQ's shareholders and investors."

Lee Kun-yao, BenQ Corp chairman

Over the past three quarters, BenQ has booked a loss of about 600 million euros (NT$25.165 billion) resulting from BenQ Mobile, which is comparable to the company's total capital of NT$26.25 billion (US$794 million).

"It was a painful decision that had to be made to safeguard the interests of BenQ's shareholders and investors," Lee told reporters on Thursday in the company's Taipei headquarters, with the signs of both disappointment and regret written on his face.

"We have missed the targets we set previously and we don't expect it to be easy to limit the losses in the short term," Lee said, adding that the company's board believed it would be unlikely that the firm would break even in the middle of next year, as it forecast last month.

Lee blamed constant postponements in the launch of new products in the short life cycle handset industry, as well as an uncompetitive cost structure, as the main reasons behind the company's failure to rein in mounting losses.

The company's decision to sever its financial ties with the German handset unit to stem losses, as well as plans to review financial positions at its handset units in Brazil and other locations, received investors' support yesterday.

Shares of BenQ jumped to almost their 7 percent daily-limit to close at NT$19.45 on the Taiwan Stock Exchange, better than the decline of 0.03 percent in the benchmark TAIEX Index. Even so, the company's share price has been battered by nearly 45 percent so far this year.

Vincent Chen (陳豊丰), who tracks the handset sector for CLSA Ltd in Taipei, yesterday upgraded his rating on BenQ to "out-perform" from "under-perform."

"It sounds like a good exit plan leading to a fast turnaround," Chen said in a report released yesterday.

BenQ Mobile's plan to seek insolvency protection would help BenQ to turn around in the fourth quarter of this year, or the first quarter of next year, a year earlier than expected, Chen said.

Saying he agreed with BenQ's decision to put BenQ Mobile into the hands of the German government, Chen also raised the target price to NT$21.5 over the next 12 months from its previous NT$18.6, implying about an 11 percent upside from yesterday's closing price.

Taiwan Ratings Corp (中華信評), a local arm of Standard and Poor's, said there had been no immediate impact on BenQ's corporate ratings after the planned legal action in Germany. The company's `twBB+' long-term and `twB' short-term credit ratings will remain intact, Taiwan Ratings said in a statement yesterday.

BenQ said the firm would continue to sell BenQ-Siemens brand cellular phones, but would divert its focus back to its familiar Asian markets. With the German handset operation possibly under receivership in the final quarter, the company expected the fourth-quarterly loss would improve significantly as the firm would not have to cope with a massive loss from BenQ Mobile.

"BenQ will go back to its previous operation pattern, in terms of balance sheet, [after fixing BenQ Mobile through legal action]," said financial executive Eric Yu (游克用).

Though BenQ would stop booking huge losses soon, the company would face many challenges in operating its own-brand business, Yuanta Pacific Securities' Wang said.

Wang said he was concerned about whether BenQ would have the right to sell phones under the BenQ-Siemens brand name as it claimed without breaking the takeover agreements with Siemens.

Besides, unions representing 3,000 workers in Germany could hold large-scale protests against any possible closure of factories after the court's receivership, Wang said.

According to BenQ, some 1,400 employees in Munich as well as 1,600 at the Bocholt and Kamp-Lintfort sites in North-Rhine-Westphalia would be affected by the insolvency protection action and protests were held yesterday.
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