Acer Group’s China Manufacturing Decion

1.The students should see validity in each of the ‘don’t go’/go/’wait’ arguments separately. Perhaps the ‘go’ decision is the easiest to justify upon examination of the case facts. Hence as an exercise, it is necessary to thoroughly analyze other alternatives.

Solution:

[Acer had moved into China the very next year the case study was prepared in 1998, i.e., in 1999 under the stewardship of Gianfranco Lanci as the director of the company and J. T. Wang, the chairman and chief executive]

The “GO” Approach

* The most important reason for moving into China could be the huge lucrative market and the immense opportunity the market of China presents Acer with.

* China being a huge market waiting to be exploited would also necessitate the reduction of lead times of ordering parts from Taiwan and owing to the restrictions of direct transportation facilities between China and Taiwan, Acer would need to setup a manufacturing facility as well as a shift the assembly lines into China for serving the fragmented markets of China

* The economy of China is on a roll and hence the growth potential of the country is immense making it very lucrative for any company for that matter to invest in the country and more so for Acer since China uses the highest number of PCs, second only to USA. The enormous size of its economy can boost the company by unforeseen standards.

* China would allow the company of Acer to move upward from the present position of the 3rd largest PC manufacturer. This could actually lead to Acer increasing its revenues manifold and then exploit the other booming markets as well like the whole of Latin America.

* The HR issue of the Taiwanese managers working in China can be sorted out Acer hires elsewhere other than Taiwan and sends them to China with a huge paycheck since the rewards of operating in China are also huge.

* China’s huge size can actually make it possible for the company to exploit the economies of scale and the cheap labor can boost the margins of the company, the profits of which can be re-invested into any other international operations.

* To bypass all the problems of investment, we suggest that Acer only becomes a supplier in mainland and then after becoming aware of the tricks of trade in China, ventures into the country as a manufacturer.

The “DON’T GO” Approach

* The political scenario isn’t exactly encouraging for Acer, a Taiwan based company to move into Mainland China. The history of the countries and the consequent and continuing antagonism between the two countries can create acute problems for the company as aptly demonstrated by the case of Formosa Plastics. Political pressures, forced red tapism and unfair regulations on the part of the Chinese or Taiwanese government may seriously hamper the profitability of such an investment in China

* Investment and commercial ties are restricted between the two countries and hence Acer could find itself at a disadvantage in raising a plant out there in the mainland. Though there are encouraging signs of the fact that China and Taiwan becoming a part of WTO and then subjected to the same WTO regulations, things will be enough murkier and we wonder whether it is worth the risk of investing such huge capital in the mainland

* Huge cultural differences between the two countries would create immense problems for the management. The western influence of the Acer would come into direct conflict with the communist influence prevalent on the mainland China. The attitude towards the workers is exactly poles apart for Taiwanese and Chinese companies and so are the counter reactions on the part of the workers. Where Acer considers its employees as a part of their extended family, they might face problems doing the same to the Chinese people. Added to this is the HR issue of convincing the Taiwanese managers of joining the company in China in this present atmosphere of mistrust and conflict between the two countries. The deeply entrenched family values and prioritizing their children’s welfare could pose a serious problem for the Acer’s HR managers in convincing the managers to relocate for two to three years. Even the perceived value of a manager’s post in China to an Acer’s manager in Taiwan was not that high. This compounds the HR issue further.

* The lack of direct transportation facilities and custom restrictions between China and Taiwan compounds the problems further for Acer before they even venture into China

* The vendors who are so important for the Acer might not agree to the mainland as they did for Juarez given the strained relationship between China and Taiwan.

* The issue of security of Taiwanese workers and mangers in China has been aptly demonstrated in the case. Occasional murders and kidnappings of Taiwanese in the mainland don’t speak much about the security of the Taiwanese people in the mainland. The administration’s handling of the issue put a further doubt on the part of the Taiwanese workers on their safety in the mainland. The rating system can reduce Acer’s options in locating the manufacturing site.

* The local manufacturers are already deeply entrenched into the Chinese market and it may take some effort on the part of Acer to put them out of the business. They might pose a serious threat to Acer’s visions and plans in Mainland China

The “WAIT AND WATCH” Approach

* With the WTO regulations being come into force on both China and Taiwan, it might be suitable for Acer to foray into the Chinese market at a later date. The artificial restrictive problems that they may face now may no more be there once the regulations are in place and hence it’s no use burning the fingers right now. The transportation and other restrictions are bound to come down in due course. So it’s better for Acer to wait and bid their time rather than venturing into China and then beat a hasty retreat when their plans go haywire, of which there is a high probability.

* Acer should take time and also encourage its vendors to move into China along with them as they did for Juarez. Hence they should bid time and then when situation is favorable convince their vendors more easily about moving into China. There is very little chance of convincing them successfully right now, given the present scenario.

* With time the strained relationships will get better as international trade becomes a necessity and economical relations become independent of the political relations.

2. What were Acer’s core competencies in the manufacturing realm? (Discuss particularly with respect to “Stan Shin’s Smiling curve given in the case”)

Solution:

The smiling curve defines all those factors that add value to the company or to the product or to the customers.

The two end of the smiling curve depict high value addition and the middle portion depicts low value addition. The greatest value addition to any product is possible at two stages of the product cycle, one at the creation stage which is on the left hand side of the smiling and another at the consumption stage which is at the right hand extreme of the smiling curve.

As seen from the diagram we can conclude that highest value addition takes place at the inception of prototype followed by production of parts and module parts production.

Then again at the consumption stage the sales and after sales services provide the highest value addition. The assembling part gives the thinnest profit or value addition.

Now looking at the “smiling curve” of Stan Shih we can easily understand the various parameters that add value to the products of Acer computers.

* Acer’s most important core competence is manufacturing PC with innovative technology. The company believes in providing fresh technology to be enjoyed by everyone and everywhere.

* As the manufacturing sector is maturing, and the vendors are slashing prices

* It is very important that the branded PC manufacturers produce PCs that serve various purposes like connecting smoothly with other devices, thus Acer concentrated on venturing into semiconductor, consumer electronics and communication arena that could be serviced with the help of their existing PC business.

* Acer’s main competence was the ability to provide customer with original design manufacturing and global logistics services to increase added value.

* Basically differentiation and innovation is the core competence of Acer computers.

* One of Acer’s major strategic moves was to divert a sizeable portion of its business towards 3E, education, e-commerce and entertainment as they are the latest trend of world market.

* Apart from innovative technology the other major competences that Acer acquired was a strong distribution channel. Acer had 120 enterprises in 44 countries supporting dealers and distribution in over 100 countries. The major strategy of Acer to enter foreign market was forming joint ventures to establish distribution systems and marketing and promotional activities in the local market. Apart from this they insisted on recruiting local managers and local people to have stake in their company so that they consider the company to be their own venture and eventually add more value to the company. This strategy called “local touch” is one unique strategy that helped them immensely to penetrate foreign market.

* Vendor development was another key factor for their success. They had such a strong fleet of vendor that their suppliers were ready to move to any part of the worlds to supply raw material to them.

* Acer’s logistics was also a very key factor in their success. Acer devised a term called perishable whereby they procured the most perishable components locally and others from manufacturing sites worldwide via air freight or sea transport. Components crucial to the inventory were transported to the local assembling sites via air.

* Their services to the people of the places were they were established was another factor that helped them to succeed. First of all they adapt their product according to the need of that country or region and then they take up social responsibility towards the local people. So adaptation is another key competence they had.

3.What are Acer’s primary considerations in choosing a manufacturing site on the mainland?

Solution:

Acer’s primary considerations in choosing the mainland for the manufacturing site:

Chinese economy is one of the fastest growing economies, and hence any forward looking company would try to venture into China to exploit the mammoth size of the market. In fact for a company like Acer China presents itself with the best opportunity since the country is the 2nd largest user base of PCs, second only to the USA. Hence the huge market size is perhaps the first reason why Acer would like to venture into China.

Secondly, China presents itself with the opportunity of cheap labor and hence reducing the input costs to boost margins.

Thirdly, the huge market size of the economy would enable the company to exploit the economies of scale and hence become a larger player in the world PC market.

Fourthly, China also gives the opportunity for Acer to launch new technologies in the fragmented market of China and the market being fragmented gives a lot of opportunity to Acer to try out new varied technologies without the fear of losing the market altogether.

Finally, China can work out as a hub for much greater international operations since Taiwan itself being of small size can restrict Acer’s.

Acer’s primary considerations in choosing a manufacturing site on the mainland:

The most important factor which is to be considered while choosing a suitable location of manufacturing plant is safety of workers and their families. ACER would need to take extra precaution for the safety of its employees as kidnapping and murders are frequent on China’s mainland. ACER will have to identify locations which are relatively politically insensitive and which are having influence of western culture since they are more adept in working under the western influence.

ACER is planning to implement “The Art of War Strategy” in Chinese Mainland. This would require having its manufacturing site near larger markets and strategic locations from where ACER would have least operating costs. Apart from transportation costs, it also includes input costs like manpower cost and raw material costs. It would need to identify a location with optimum operational costs (as low as possible with taking care of other factors). Therefore, reduction in operating costs and high concentration of markets would bring in “Economies of scale”.

The success of Acer’s efficient logistics practices would dependent on basic infrastructure facilities available near manufacturing plant as well as near other key operational areas like distribution centers. These facilities include road and rail transport network and power availability. Acer’s core competence i.e. knowledge of efficient manufacturing and documentation systems would be most successful only when these basic facilities are in place.

Other important factors are local tax incentives given by government, existence of local competition and long term policy of ACER as well as future developmental schemes of government of China.

4.Analyze the political, economic, social and technological environment in China in the context of Acer’s proposed manufacturing activities.

Solution:

Political Environment:

Taiwan government’s business ideology and culture more closely resembled western principles than those of traditional Chinese origin.

*Beijing asserted that Taiwan was a province of China and were supported by many other nations and world governing bodies as China was an economically mighty country and Chinese market held immense opportunities.

*In Taiwan Economic Affairs Ministry advocated a slow and patient policy toward economic ties with China

*Direct investment in China was restricted, and high profile investment by Taiwanese businesses was discouraged

*There were also restrictions on transport links across the East China Sea with regard to Taiwanese goods.

*There was some optimism on the part of Acer and other Taiwanese companies that the restrictions would be eased in the coming years

Economic Environment

*Large markets in China would support volume production and therefore reduce operating costs

*Acer went for the “GO” strategy whereby a firm’s footing in a niche market was considered invaluable in gaining a footing in large markets

*Acer had a developed understanding about Chinese market but was concerned about investing relating to history of strained political relations

*Though Acer had well developed long term vendor relations who were ready to partner them anywhere I the world, they were nit sure the same would apply to China as well

Social Environment

*Although China was a major source of human workforce but there was a vast cultural difference between China and Taiwan

*The communist doctrine and the environment of the state owned enterprises (SOE) had a strong influence on the attitudes of Chinese workers which had inherently discouraged creativity and initiative and encouraged resentment and hostility among the workers.

*Though Lin expected that he would attract best Chinese workers with Acer’s favorable reputation but training the workers to standard efficiency level and in a timely manner was a challenge in itself

*It was difficult to manage transportation logistics in an environment of uncertainty that was prevailing in China

*Acer’s critical success factors were its highly skilled managerial and technical Taiwanese expatriates, who were hesitant to relocate themselves and their families to China. Repatriated managers were often recruited by competing companies which led to a loss for the company

*Many amenities freely available in Taiwan were scarce in China which meant an adjustment to a lower standard of living for the employees and their families

*Most importantly, security of the Taiwanese was not fully guaranteed in China due to political, regional, and social unrest.

Technological Environment

*A manufacturing operation could be a platform for Acer to expand its presence in Chinese market for a new or existing product line

*Acer would come into contact with the new technologies developed in the Chinese mainland.

*The fragmented nature of the Chinese market would enable the company to test its new technology and test its feasibility without hampering the margins much if the new technology fails.