Acer Incorporated - Early 1990s Setbacks

Early 1990s Setbacks

The late 1980s brought internal and external changes that had a devastating effect on Acer. The internal problems were completely unexpected. In 1989, Shih hired Leonard Liu away from a 20-year career with International Business Machines Corp. (IBM), making him president of the Acer group and chairman and chief executive officer of Acer America Corp. Described in an October 1995 Fortune article as "a cerebral Ph.D. in computer science from Princeton," Liu had previously been the "highest-ranking Chinese American executive" at IBM. Liu's managerial style reflected his experience at "Big Blue": in contrast with Shih's traditionally progressive corporate culture, Liu tried to centralize control of Acer. His offputting approach has been blamed for a management exodus in the early 1990s.

At the same time, the computer industry quickly matured, shifting from a high profit margin business to a low margin commodity practically overnight. Price wars pushed component prices down so rapidly, and a strong New Taiwan dollar made the country's goods so expensive, that it became difficult to make a profit on the finished product.

Acer's sales rose from $530.9 million in 1988 to $977 million by 1990, but its profits dropped from $26.5 million to $3.6 million during the same period. In 1991, Acer posted its first ever annual loss, $22.7 million. More than $20 million of that shortfall came from Acer America, which had struggled since its inception. Acer's stock dropped to 50 percent of its initial public offering price. Shih had to sell Acer's headquarters to make a profit in 1992.

These difficulties, however, did not deter Shih from making several expensive, and oft-criticized, expenditures during the late 1980s and early 1990s. In 1989, Acer invested $240 million in a joint venture with Texas Instruments and China Development Corporation, a Taiwanese development bank. The cooperative enterprise built Taiwan's first DRAM (dynamic random access memory) factory. Half of its output was sold to Acer, and the other half was sold on the world market. Some industry observers ballyhooed the project, noting a glut in the global DRAM market. Acer also expanded production capacity at its main plant, spent $36 million on a global marketing campaign, and made questionable acquisitions in the United States and Germany. Financial World's Jagannath Dubashi was skeptical that the company's investments would pay off, noting in her July 1991 coverage of the company that "this new aggressiveness seems both poorly timed and unrealistic." She even characterized the company's bold moves as "a desperate gamble."

At the time, Shih would have been the first to agree with such an assessment. In January 1992, he offered to resign from the company he had founded. Acer's board of directors turned down Shih's resignation, but accepted Leonard Liu's withdrawal three months later. By mid-year, Shih had resumed dayto-day administration of Acer and its American subsidiary.

Instead of being cowed by the setback, Shih was determined to cement Acer's future in the PC industry by transforming it from just another OEM into one of the world's leading computer brands. He would achieve this goal via several revolutionary strategies.