One year ago, a high profile acquisition got me into trouble. It seemed to directly contradict some broader themes that I have written about extensively. A number of my clients and colleagues used the news of the acquisition to question whether these themes were valid. At the time, I was skeptical about the acquisition and recent events appear to justify this skepticism.
What was the acquisition? It was BenQ’s acquisition of the mobile telephone equipment business from Siemens.
What were the themes it appeared to challenge? First, I have anticipated that all companies over time will unbundle into three much more focused business types – infrastructure management businesses, product innovation and commercialization businesses and customer relationship businesses. Second, I have pointed to the success of a new generation of Chinese companies that are in fact growing very rapidly by pursuing business models focused on one of these three business types – their success stems from their focus and relentless efforts to get better faster by working with others. Third, I have made the case that at least two of these business types – infrastructure management businesses and customer relationship businesses - are highly scalable and can provide the foundation for rebundling strategies that leverage the benefits of focus as well as economies of scale and scope in order to generate significant economic value.
Well, the BenQ acquisition was certainly an exception to these patterns. Based in Taiwan, BenQ is not very well known to the general public in Western countries, even though many people use their products on a daily basis. The reason: BenQ makes mobile telephones, as well as a variety of other consumer electronics products, that are sold under the brand names of prominent Western companies. It operates as a contract manufacturer making, and in many cases designing, consumer electronics products for other companies. So, in my terminology, BenQ had become very successful as a focused infrastructure management business, leveraging not only low wage rates in Asia but rapid incremental innovation to deliver increasingly sophisticated and reliable products in markets around the world. It has developed world class capabilities in terms of managing high volume, routine processing activities and designing products for manufacturability.
All well and good – very consistent with the broader themes I have described. But the Siemens acquisition that took effect in October of 2005 came out of left field. Now BenQ was diversifying from a focused behind the scenes manufacturer and designer into a full-fledged product innovation and commercialization company with its own brands and distribution operations in Western companies. This was certainly contrary to the broader pattern of unbundling and rebundling that I have described. It also suggested that one major Chinese company was departing from the tight focus that had driven its early growth and success.
What was going on? Well, from the beginning, this was an unusual acquisition. It turns out Siemens was actually paying BenQ to take over its ailing mobile telephone business – it paid out 250 million euros to BenQ to support the venture and invested an additional 50 million euros in newly issues shares of BenQ as part of the transaction. BenQ had already been a significant contract manufacturer for Siemens mobile telephones, so I guess the assumption was that, by combining the two elements of the business, BenQ would be able to overcome the financial difficulties that Siemens had experienced in the business.
If that was the assumption, it proved to be horribly wrong. Siemens’ payments to BenQ at the time of the acquisition pale in comparison to the 600 million euro losses sustained by BenQ’s mobile division since the acquisition. The Financial Times reported on September 29, 2006 that BenQ was pulling the plug on the former Siemens operation, as its Munich-based subsidiary filed for insolvency:
BenQ Corp in Taipei said it had decided not to put any more money into the business because if it had it might have threatened its own survival
Now, undoubtedly there were many factors contributing to BenQ’s difficulties following the acquisition. Siemens' mobile telephone business was a relatively marginal player – it was number six in an industry where the top five handset companies account for 80% of the mobile telephone market. The mobile telephone business is an intensely competitive industry in which the increasingly concentrated service providers have growing bargaining power relative to equipment vendors.
But BenQ was venturing into a very different business type with different economics, skill requirements and even business cultures (not to mention national cultures). In its efforts to master this new business type, it risked losing focus both in terms of management attention and financial resources. This was particularly unfortunate as competition was intensifying in its core business.
BenQ also apparently alienated many of its other customers. In its contract manufacturing business, BenQ served many of the other major handset product companies but, as it forward integrated into selling its own handsets, BenQ found it more difficult to avoid being viewed as a potential competitor by its contract manufacturing customers. As the International Herald Tribune reported on September 29, “. . . BenQ’s contract sales [of mobile telephones] have fallen to fewer than two million handsets a quarter, compared with five million per quarter last year.”
There’s a more fundamental issue here. Many Chinese companies unfortunately suffer from something that I have described as Western envy. Despite enormous success in pioneering innovative business models and business practices, many entrepreneurial Chinese companies still have a sense of inferiority and want to look like larger Western companies with their own manufacturing, R&D and sales and marketing operations. The irony is that, just as many Western companies are unbundling (in part offshoring and outsourcing to more focused Chinese companies), many Chinese executives are tempted to build more tightly bundled operations that mimic the model many Western companies are abandoning. About a year ago, I wrote about a similar cautionary tale provided by Moulin Global Eye Care, a Hong Kong company.
Chinese executives appear particularly envious of the product brands owned by many Western companies. Once again, this is ironic given the growing evidence of the general weakening of product-centric brands and the emergence of very different kinds of brands. These new brands are much more compatible with the kinds of focused businesses that are being built by Chinese entrepreneurs.
BenQ’s stock price rose following the announcement of its decision not to pour any more money into the business it acquired from Siemens. Hopefully, BenQ’s executives will heed this message from its investors and return to the focused strategies that led to its early success.
In the meantime, rather than viewing the BenQ acquisition as a troubling exception to a broader set of patterns that I see playing out on a global level, I can now point to it as an example of the deep challenges executives will encounter if they ignore these patterns.