IPad Causes Collateral Damage in Taiwan

Acer's CEO resigns amid slow PC sales and a delayed start in tablets

By Bruce Einhorn

Taiwanese companies followed a simple strategy to get to the top of the global electronics industry: When all else fails, cut prices. During the depths of the financial crisis, for instance, Taiwan's Acer and Asustek Computer undercut their bigger stateside rivals by focusing on small, inexpensive laptops known as netbooks. By early 2010, Asustek had become the world's No. 5 PC maker, measured by shipments. Acer shoved aside Dell (DELL) to reach second place, and executives at the Taipei-based company said it was only a matter of time before they passed Hewlett-Packard (HPQ) to become the biggest computer manufacturer in the world.

Now, all else really has failed. Acer revised its sales forecast downward in October and then again in March. On Mar. 31, Chief Executive Gianfranco Lanci suddenly resigned; the company said he'd disagreed with other board members over strategy. Why the change of fortune? Steve Jobs and the iPad, which went on sale in April 2010. Low-end machines from Taiwan couldn't match the appeal of Apple's (AAPL) tablet, which cost about the same. Global laptop sales, which had been rising by double-digit rates before the iPad, collapsed; they grew just 1 percent in the first quarter of 2011. The post-PC era began last year, and Taiwan got blindsided.

Companies there are only now coming out with tablets of their own. Acer says it will launch several tablets soon, and Asustek has begun accepting orders for its Eee Pad Transformer tablet. Both contenders are more than a year behind Apple. "It's not about having the products out there, because everybody else in the industry also has products out there," says Bryan Ma, a Singapore-based analyst with IDC. The question is, "How do you have that cool factor?"

In the PC era, the Taiwanese could count on cooperation from Microsoft (MSFT) and Intel (INTC), which provided early access to chip design changes and operating system upgrades. In the tablet era, it's more complicated. Microsoft and others are developing tablet operating systems, but Google (GOOG) is furthest along. Acer and Asustek plan to use Android, the search company's operating system for mobile devices, in their upcoming tablets. But the tablet-specific version, code-named Honeycomb, is taking longer than expected because Google has been focused on smartphones, according to Lillian Tay, an analyst with Gartner (IT) in Singapore. "Where are you going to get the most bang for your buck?" she says. "Unfortunately, it is now in phones." Motorola Mobility (MMI) was given access to Honeycomb ahead of the Taiwanese. "The inhibiting factor right now is the availability of the correct operating system," says Tay. "Everyone is waiting."

Demand for plain-old computers is hardly disappearing. Gartner expects sales to rebound and grow by 10.5 percent this year. That's comfort only in the short term, though. The tablet market is growing far faster: Research firm eMarketer estimates tablet sales will climb 178 percent in 2011, and Apple, with its head start, will maintain a 74 percent market share even in the face of increased competition.

To make up for lost time, Acer and Asustek may fall back on the strategy that worked so well with personal computers: Undermine the competition with lower prices. Yet Apple, never known for inexpensive products, has priced the iPad so aggressively that the tablet has actually become a low-cost option. "Apple wants to gain share as quickly as they can so nobody else can come in and make money," says Kirk Yang, managing director with Barclays Capital (BCS) in Hong Kong. "That's just killed everybody." As the Taiwanese are learning, in the iPad era, the old price-cutting playbook needs an update.

The bottom line: Acer and Asustek have gotten a slow start in tablets in part because Google has made its smartphone operating system a priority.

With Rishaad Salamat. Einhorn is Asia regional editor in Bloomberg Businessweek's Hong Kong bureau.