The Acer Groups China Decision
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In this paper we will analyze Acer Group's situation in 1998 as it considered entering China. We compare China to India, another emerging country using various criteria such as labor and cultural differences, and determine that entering China is a sound decision and the timing is good as well. We then evaluate China's 5 Special Economic Zones, to recommend a location for Acer's new manufacturing facilities. After comparing different SEZ, taking in account labor, GDP as a measure of living conditions, and other factors such as distance to Hong Kong, we determined that the city of Shenzhen would be the most attractive location.
Founded in 1976, the Acer Group is a Taiwan-based multinational company that produces PCs, laptops, and computer components around the world. Initially, it did not sell any of the products it is currently famous for. It was merely a distributor of electronic parts, but over time emerged as a global PC manufacturer. Under the guidance of Chairman and CEO Stan Shih (retired in 2004), Acer reached great success in terms of both global market dominance and profit: Acer was the market leader in 13 countries around the world, and was ranked in the top five in more than 30 nations globally.
Today, Acer is the second largest PC manufacturer in the global PC market after Hewlett-Packard (See Figure 1). In the fourth quarter of 2009, Acer ranked second for total PC and notebook shipments of over 12 million units. According to iSuppli, a market research and consulting firm specialized in the electronics value chain, Acer's worldwide success can be attributed to its continued aggressive pricing strategy, strong notebook shipments, and robust regional performances in both the European and U.S. markets.
Under the global mission statement, "fresh (meaning innovative in Acer-speak) technology enjoyed by everyone, everywhere," Founder and Chairman (until 2004) Stan Shih had an ambitious vision to transform Acer into a global company with a "local touch." The way to achieve "local touch" was through product adaptation to suit local market needs and international expansion of its manufacturing operations to be flexible enough to quickly respond to changes in market conditions.
In addition to expanding manufacturing plants to other parts of the world, Acer's global manufacturing strategy involved shifting the assembly of computers from Taiwanese plants to other areas where the computers would be distributed. Acer named this distribution concept as "fast food" which would ensure reduced inventory as well as a faster reach and more agile response to the local market.
The main targets of Acer were third world countries as it believed that having a strong presence in niche markets was invaluable in securing a firm footing in large markets. This strategy was called "GO" game strategy which concept was extracted from the popular Chinese board game "GO." As in the board game where players would attempt to win large cities by overtaking surrounding cities, Acer would win large markets such as the United States and Japan by dominating in numerous small markets such as the third world countries. "GO" game strategy included the big decision on whether or not to enter the mainland Chinese market.
In 1998, Acer's Vice-President M.Y. Lin was seriously considering entering China as part of the company's global manufacturing strategy. The major reason for choosing China as the location to establish a manufacturing plant was its familiarity with the Chinese culture and market. Acer saw the China market as an opportunity to expand its presence in the PC industry with either existing or new product lines. However, there were largely four main issues for Acer to deal with before making final decisions on entering China:
Whether executing the plan of entering China would bring most benefits over choosing other third world countries in which Acer might find more lucrative market opportunities.
Whether the time was most suitable to initiate full-scale manufacturing operations in China in terms of political and economic stability to do business.
How it can successfully solve human resource management issues regarding developing an effective local workforce and transferring existing Taiwanese managers and their families to China.
Where to locate its manufacturing facilities.
We will therefore proceed to answer these questions one by one.
Major Issue Analysis
1)Analysis of Country Potential
We will compare different criteria The PC market sizes of two emerging countries, China and India. We will then determine which country has the highest potential for PC sales. The reason for choosing India is that the country has an expanding electronics industry, is ideally located to serve neighboring Asian countries, and is developing rapidly.
First, we shall look at market size. In late 1990s, China was a booming economy (see Figure 2), experiencing a large amount of investment from foreign countries. This also had an impact on the Chinese PC market as a many SMEs suddenly needed PCs to run their businesses. 2.1 million PCs were sold in 1996, with a total value of $3 billion (24.6 billion yuan), which is an increase of 47% from 1995.
In contrast, The PC market in India did not show market potential as strong as the Chinese market: in 1999, 844,000 PCs were sold in India for a total value of $954 million, which is less than half of China's figures. The Chinese market is therefore more attractive.
In addition to the market size of each candidate country, other factors such as the degree of familiarity with the local culture and labor cost should be considered when deciding where to build manufacturing facilities.
One of the primary considerations for Acer to enter China was that Acer had a more advanced understanding of the Chinese culture and market compared to other emerging countries. Having a close understanding of the local culture would bring many benefits such as ease business processes and reducing operational difficulties. Conducting manufacturing businesses in areas with which Acer was not familiar such as India would likely result in decreased potential of success or at least slower to reach success.
China also has another advantage, which is offering tax cuts for manufacturing companies in the electronics industry, with low tax rate of 15%. It also gives full tax exemption for the first two years of operation, followed by a 50% reduction for the following 3 years. India has similar taxation benefits, but only when developing in Special Economic Zones (SEZ). These zones however are relatively new and may lack infrastructure. China has set up SEZs in the 1980s, and are therefore mature, which further makes China a more attractive location to set up shop.
And finally, another criteria to look as is labor cost. China's wages were a mere one-tenth of Taiwan's. India is comparable, at roughly one-tenth of Taiwan's as well. China is therefore the more attractive option, thanks to the larger market size, better understanding of local culture, and tax benefits.
A major obstacle Acer had to consider when establishing a manufacturing base in China was the country's political situation and unstable relationship with Taiwan. Due to the persistent conflict between China and Taiwan, as China insisted that Taiwan was part of their country but Taiwan denied the claim, the Taiwanese government prohibited domestic firms from directly investing in the mainland. Additionally, direct transport of goods from Taiwan to China was not possible. Even though investing in China would greatly benefit the company in terms of transportation and market reach, Acer had to analyze whether the political situation in China would improve in the near future or stay unchanged. In other words, if any changes in political statements or business policies were expected, Acer should wait to take full advantage of investing in China. If no changes were anticipated, it was more beneficial to start earlier so that Acer could capture a share of the booming China PC market.
At that time, Lee Teng-hui, President of Taiwan, demanded an independent relationship with China and desired a close relationship with the U.S. Indeed, the U.S government which had a big influence on the relationship of the two countries showed an increasing support for Taiwan independence. This worsened the tension between China and Taiwan. The movement for Taiwan independence has persisted since mid 1980s, and the support base for the movement was increasing in Taiwan. Around mid 1990s, matters become worse and China threatened Taiwan to take hostile measures if it did not refrain from declaring independence, deviating from the "one China" policy. As a result of this sense of crisis between Taiwan and China, any move to develop a favorable policy or create a welcoming business environment could not be expected of China in the foreseeable future regardless of Taiwanese firms' demand for economic benefits in investing in the mainland.
To conclude, considering the political situation, it looked better for Acer not to delay the investment but enter China now as delaying the initiative would not give the company a more favorable business environment at least in the near future. In addition, by entering China swiftly, Acer could enjoy the advantages of being a first mover.
3) Solving Human Resource Issues
A critical success factor for the China manufacturing plant would be Acer's ability to solve human resource issues which could be divided into two main parts. First, Acer had to create a highly disciplined and effective workforce in China as this was crucial for success like it would be in any other manufacturing locations. Second, Acer had to persuade Taiwanese managers and their families to relocate to China for at least five years. This was a hard challenge as many were reluctant to move themselves and their families to China where standards of living were lower than in Taiwan.
3.1) Creating a productive workforce
The characteristics of Chinese workers differed significantly from Taiwanese workers as they were less motivated and less willing to contribute extra hours at times of high production demand. This was mainly the result of the communist doctrine and environment of the state-owned enterprise (SOE) in China. Acer could use the following three measures to solve this problem.
First, rule enforcement: having undergone governance of communism, Chinese have a fear of punishment. This makes the people have an extremely high level of uncertainty avoidance, which results in lack of creativity. However, the reverse side of the coin is the workers' incentive to find ways around any tightly enforced regulations in state enterprises in order to make their lives easier.
Another mechanism Acer can use is external rewards: In terms of reward systems there is evidence that money is important in China as a motivator for employees. Chinese workers would rather function in a system where pay is based on individual performance. However, there has been a tendency towards low differentiation of pay in an egalitarian reward system, reflecting a need to minimize competition and foster harmony in the workplace. Also, within Chinese Society, there is an expectation that the enterprise will take care of employees through housing and other social benefits, which must have a strong loyalty effect.
And finally, internalized motivation: Chinese have the willingness to change, so Acer can take advantage of this situation giving them chance to learn and supporting them.
Acer may base their reward and incentive system around these three principles, which should make training its new local labor force easier, and improve efficiency.
3.2) Relocating expatriate managers and their families
Vice-President Lin had to find a location for its to-be-built factory in China where safety, education, and relatively high standards of living could be guaranteed for expatriate managers and their families. This meant that Lin had to come up with a location that can best satisfy its expatriate managers and their families' needs as well as meet other criteria such as the distance from the Acer headquarters in Taiwan.
Urban areas in China are growing quickly (see Figure 3). In 1998, the per capita income in urban areas is about $5,500. In comparison, the per capita income in Taiwan is relatively stable, at $10,300 in 1995 and 10,800 in 2001. A fast-growing per capita income can be an indication of high standard of living in near future. Therefore, locating Acer's facilities in an urban area should provide expatriates and their family with an acceptable standard of living.
Expatriates will always face trade-offs when leaving for another country with a lower level of development. This can be smoothed out by making sure that expatriate children have a renowned international school to go to, that housing is provided, adequate compensation for the spouse is given (in case the spouse is employed in Taiwan), and bonuses for the country risk. Acer has experience in this matter, as it already has many expatriates in several emerging countries. This should consequently not be a big issue.
Safety is the only factor that cannot be controlled by Acer. Expat training programs should be made to teach expats how to avoid any incidents in China, and safety should be ensured for housing and commuting, through, for example, company shuttles and company-provided housing in expat-friendly areas.
4. )Location Selection
Now that China has been selected as the best option for setting up Acer's manufacturing facilities, and we have given some general recommendations on how to solve the main issues Acer will face in China, we shall look into where exactly to locate the facilities. We recommend implantation in a SEZ. China boasts several specially-designated Special Economic Zones and Economic and Technical Development Zones (See Figure 4) of which infrastructure meets international standards and is ideal for the manufacturing industry.
There are a total of 5 SEZ which are close to large cities and are also close to Hong Kong, which can be an advantage in transporting goods from Taiwan. As mentioned previously, goods may not be brought directly to China due to restrictions in place. Excluding the island of Hainan for its lack of direct access to the mainland, we have evaluated the 4 remaining SEZ locations, namely Shenzhen, Zhuhai, Shantou and Xiamen. See Figure 5.
We will assume that some high-tech components will have to be shipped regularly from Taiwan due to lack of availability locally. Therefore, being located near Hong Kong is crucial. We will also assume that all labor will be sourced locally, therefore the larger the population, the better. Another assumption will be that these different SEZ are similar when it comes to infrastructure, and the only differences will be environmental. GDP is used here as a rough measure of living conditions. And finally, a city without any international school will be excluded as expatriates need to be able to send their children to good private schools that will not affect their children's eventual reintegration in the Taiwanese school system.
Zhuhai and Shantou do not have any international schools. Therefore, the only remaining attractive cities are Shenzhen and Xiamen. They are roughly similar population-wise; however GDP per capita is higher in Shenzhen. Additionally, Shenzhen is closer to Hong Kong. This makes it the most attractive location for setting up shop. Expatriates from Taiwan will also be able to send their children to one of the 5 available international schools.
There are additional benefits to being close to Hong Kong. One is access to its labor: seeing how close both cities are, it is reasonable to think that Hong Kong residents will accept commute daily to Shenzhen for work. Another one is access to the large Hong Kong market in addition to Mainland China, as well as access to the Hong Kong port.
We have given many recommendations on how Acer should proceed. China is currently more attractive than other emerging countries, and Acer's decision to enter China is a sound one. We have discussed many issues, such as convincing expats to go to China, motivating local labor which can be relatively easily solved. The timing is right, the market is growing, and therefore Acer should enter China as soon as possible. We recommended Shenzhen as the ideal location, as it is located advantageously and has all the amenities necessary for Acer and its employees' needs. In a few years, this venture will reach CEO Stan Sih's goals, and dominate the Chinese and surrounding markets.
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