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  Tom Blackett BenQ and Siemens: A Tale of Two Brands
by Tom Blackett
November 20, 2006

In September this year, BenQ Corporation of Taiwan announced that it was withdrawing financial support from its German mobile phones business—formerly owned by Siemens—thus forcing the unit into administration. BenQ had acquired Siemens' mobile phones division in October 2005 after the parent, Siemens AG, had agreed to pay BenQ US$ 316 million to take the loss-generating business off its hands.

BenQ had felt that with its experience of efficient manufacturing, and its eastern entrepreneurship, it could make the unit pay, particularly as it was available at negative cost. BenQ expected to save as much as $500 million in costs, and gain a similar amount in sales from the acquisition by 2006.

In early November, BenQ posted a record quarterly loss of $369 million, compared to a net income of $600,000 in the third quarter of last year, as it wrote off $330 million of its investment in the German handsets unit. BenQ has failed to post a profit for four straight quarters and has now lost $1.1 billion since acquiring the business.

 
 

BenQ, which changed its name from Acer Communications & Multimedia in 2001, had hitherto been phenomenally successful and is the world's sixth-largest mobile phone maker. It started out making electronics for other companies in 1984, but in recent years has been making its mark as a brand-name business, from where analysts reckon BenQ now gets around 30 percent of its sales.

BenQ's acquisition of Siemens' business was driven by its desire to become a global brand. Siemens added distribution strength, production capacity (it was estimated to produce 20 to 30 percent of BenQ's mobile phones sold in the second quarter of this year), and a brand name of note. So where did it all go wrong?

The reasons, as yet, are unclear. But what is almost certain is that the task of absorbing the Siemens unit distracted senior management at BenQ at a time when the market for handsets continued to grow—and at a phenomenal rate in Asia. Mobiles' share of BenQ's revenues halved from 32 percent to 16 percent of fourth-quarter revenues while Nokia and Motorola forged ahead.

What is also practically certain is that BenQ underestimated the intractability of German labor laws and the trade union IG Metall. Staff cuts would have been necessary to make the marriage work, but these clearly proved impossible to make within the timescale planned.

Finally, BenQ's pockets just weren't deep enough to absorb the cost of turning around the loss-making Siemens unit, or the company had a sudden—and dramatic—change of strategy.

The battlefield is now strewn with casualties.

BenQ's strategy to become a global brand is for the time being in tatters. The company has announced a new plan to focus on the high-margin niche market, rather than the highly competitive mass market. It plans to launch 14 new handsets in 2007 and will cut its capacity by 40 percent. BenQ's chairman Lee Kun-Yao has said that the company will now concentrate on China and other Asian countries because these are handset markets with the highest growth. But it will return to Western European markets because these are essential to any company wishing to build a global brand.

Furthermore, BenQ has debts of close to $300 million and plans to sell assets and investments worth a combined $2 billion to refinance the company's future development.

And shareholders have seen the value of the business dropping by 39 percent in the last 12 months.

What about BenQ Mobile GmbH? The losers here have been in the workforce, which is scheduled to be slashed from 3,000 to 1,100. Siemens AG has pledged a fund of $25 million to help BenQ's workforce, and a special program for those about to lose their jobs to obtain further qualifications. It has also offered former BenQ workers priority when it comes to applying for jobs at Siemens. But Siemens' brand—certainly in relation in mobile phones—has been tarnished, and the unit has said that when it does emerge from administration its future will probably lie in non-branded production of handsets.

There has also been collateral damage. Infineon, the chipmaker, has in the past been very reliant on its sales to BenQ. It has now announced that it will lay off 400 workers globally and take charges in the 2006 financial year totaling $100 million.

Overall, BenQ has fallen victim not just to the strength of competition within the mobile phone market, but also to its own vaunted ambition. The Siemens deal looked too good to be true, and in the end this is just what it was.

 
   
   Tom Blackett is Deputy Chairman of the Interbrand Group.



 
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