Question Answered

 

 

 

Acer Inc. is a leading marketer of notebook and desktop PCs. The company, which posted sales of $21.3 billion in 2010, also produces other products such as the new Iconia tablet. As Taiwan gained a reputation as the "tech workshop of the world," Acer became Taiwan's number-one exporter. Stan Shih, the company's founder, built Acer into one of Taiwan's most successful companies.

 

 

 

Despite Acer's success, the company had trouble breaking into the American market. In the late 1990s, Shih noted, "In the United States and Europe, we are relatively weak. The local players there are very strong. The problem is that we don't have good experience in marketing in those regions. It's a people issue, not a product issue." Shih discovered that building enterprise brands is easier than building brands in the business-to-consumer market. "Business-to-consumer brands have more value but also face more challenges. People involved in business to- business are usually rational, but consumers in business-to-consumer are usually emotional in choosing their brands," he said.

 

 

 

In 2000, Shih refocused Acer's distribution and marketing on the vast, fast-growing China market. He envisioned establishing a solid market base in greater China (mainland China, Taiwan, and Hong Kong) and expanding from there to the rest of the world. "The market in China is very critical for Taiwanese companies to become global companies," Shih said. "Innovation is not necessarily related to whether you are smart or not. The reality is that if you don't have a big market it's not easy to innovate because the return on investment is too low. The potential of China is not just big markets and low-cost labor. Actually, it's also for highly educated engineers or professionals."

 

 

 

Shih understood the need for Acer to develop a strong brand image in China. "The challenge for this region is really the poor image that is often associated with products here," said Shih. Shih knew that a company should be stable and secure in the local market before pursuing regional, then global markets. He continued, "Another important feature is also the government and the general public. They have to understand the role of supporting activities for local brands. If they do not support or use the locally made products, there will be no improvement in this area."

 

 

 

Ronald Chwang, Acer's chief technology officer, anticipates that Acer's knowledge of China's market will help the company achieve its growth and market share objectives; as he puts it, "Now we have a market where we understand the culture and the people's needs. That should enable Acer to move a lot of hardware." As Acer Group CEO J. T. Wang noted recently, "China and Taiwan share not just the same language and culture, but a lot of our Taiwanese suppliers are already there. We can take our brand global by building a strong home market."

 

 

 

Still, Acer faces tough competition in China. Lenovo, a local mainland brand, dominates with about one-third of the market. Wang believes Acer is well positioned to overtake Lenovo and other local mainland firms to become the leader in PC sales in China. Shih believed Acer would have an advantage compared to local PC makers because Acer is "more global." At the same time, Shih was convinced his company could compete with better-known global companies that are entering China because Acer is more "local" than they are. Acer's international identity gives the company access to advanced business practices, technology, and economies of scale that companies like Lenovo do not have. "We have more technology. . . . We have more global exposure. . . . We have more international know-how," Shih said. Shih made a strategic bet that the company's notebook computers would help Acer establish a quality name and high-end image. Meanwhile, Lenovo acquired IBM's ThinkPad notebook business. Keenly aware of the importance of scale in the global computer market, Acer acquired U.S.-based Gateway in 2007.

 

 

 

In 2004, at the age of 60, Shih retired. "This way the company can have new blood," he said. "Acer is solid and stable, but a little bit old-fashioned. Sometimes we are not aggressive enough among the middle and high-level managers." The move paid off: Acer is currently the top notebook brand in Europe, and its low prices are a crucial selling point in key emerging markets such as India and Eastern Europe. Propelled by high demand for the low-cost Aspire One netbook and other products, Acer vaulted past Lenovo and Dell to become the world's second-largest PC marketer by computer shipments. Will the new leadership team headed by J. T. Wang be able to replicate Acer's European success in the United States and Asia?

 

 

 

Sources:Kathrin Hille and Robin Kwong, "Acer Sets Sights on a Decisive China Move," Financial Times(November 15, 2010), p. 24; Jason Dean and Christopher Lawton, "Acer Buys Gateway, Bulks Up for Global Fight," The Wall Street Journal(August 28, 2007), pp. B1, B4; Jason Dean and Jane Spencer, "Acer Seeks Happiness in Its 'Land of Sorrow,'" The Wall Street Journal(April 5, 2007), pp. B1, B6; Jane Spencer, "Taiwan's Acer May Take Bronze," The Wall Street Journal(November 16, 2006), p. B6; Jason Dean, "PC Underdog Raises Its Sights," The Wall Street Journal(September 20, 2005), p. C6; "Special ReportStars of AsiaManagers," BusinessWeek(July 12, 2004); Bruce Einhorn, Amy Reinhardt, and Maureen Kline, "Acer: How Far Can It Ride This Hot Streak?" BusinessWeek(May 17, 2004), p. 52.

 

 

 

 

 

Discussion Questions

 

 

1. How does the "global markets/local markets" paradox figure into Stan Shih's strategy for China? (15 marks)

 

 

 

2. Acer is now the world's second-largest PC company, behind Hewlett-Packard. How can it sustain its growth? (15 marks)

 

 

 

3. Despite strong competition from Dell and Hewlett-Packard, Acer's U.S. market share increased from 1 percent in 2004 to 16 percent by the end of 2009. What are Acer's prospects for gaining further share in the United States? (20 marks)

 

 

 

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 Why do nations trade? Presumably, each trading partner has something to gain, such as access to more goods and services and lower prices. For example, the money that consumers save by buying low-cost food imports can be spent on other products, resulting in a higher standard of living. Open markets are one way that globalization has led to economic integration. 

 

 

In 2007, the United States and South Korea completed preliminary negotiations to establish the world's largest bilateral trade agreement. The proposed deal would reduce tariffs on about 90 percent of product categories; prior to the agreement, South Korea's tariffs on imported food averaged about 52 percent. Overall, its import tariffs averaged about 11.2 percent. By comparison, the United States has a 12 percent tariff on food and overall tariffs of about 3.7 percent.

 

 

 

Observers expected that a reduction in South Korea's tariffs would boost exports from the United States by $11 billion each year; exports totaled about $50 billion in 2008. General Motors, Ford, and Chrysler are some of the U.S. companies that stand to benefit from improved access to a market with 48 million people. Each year, only about 5,000 American cars are sold in South Korea, compared with 800,000 Korean cars sold in the United States. In fact, the trade gap in autos accounts for about 80 percent of South Korea's trade deficit with the United States, which stood at $13 billion in 2006. American farmers and ranchers also anticipate increased demand for beef and other agricultural exports as import tariffs of 40 percent are phased out over 15 years.

 

 

 

For its part, the United States agreed to reduce tariffs on automobile and electronics imports; this will be a boon for Hyundai, Samsung, LG, and other industry leaders in South Korea. On paper, it appears that both sides will benefit from KORUS, as the free trade agreement has been called. If that is true, why are some people and organizations adamantly opposed to the agreement? (See Exhibits 3-6 and 3-7.)

 

 

 

Trade deals require all parties to make concessions, and the negotiations between the United States and South Korea are a case in point. American beef exports plunged after an outbreak of BSE

 

 

Exhibit 3-6South Korean protesters march with a banner reading "Let's keep away the Korean-US FTA that threatens our life" during a rally against U.S. beef imports in central Seoul on June 8, 2008. South Korean street protests against U.S. beef imports showed no sign of abating despite former President George W. Bush's pledge to help ease food safety concerns here.

 

 

 

Source:Jung Yeon-Je/AFP/Newscom.

 

 

(mad-cow disease) in 2003. Before the mad cow scare, the Asian nation was the third-largest market for U.S. beef exports. In the spring of 2008, a few weeks after taking office, President Lee Myung-bak decided to lift a ban on U.S. beef; in return, the United States agreed to exclude South Korea's rice industry from the trade agreement.

 

 

 

Why? Rice represents about half of South Korea's agricultural output; a high import tariff means that local rice farmers can charge much higher prices for their crops than farmers in other rice-producing nations such as China. Even though they pay up to three times more for rice than consumers in other Asian countries, many Koreans sympathize with the farmers' concerns; domestic rice production is a source of pride and a symbol of self-sufficiency. As one activist noted, "It is a right for a country to feed its own people and a right for a country to produce its own food."

 

 

 

After President Lee's decision was made public, news reports suggested that mad cow disease could still be present in U.S. herds. Opposition politicians from the United Democratic Party, whose candidate was defeated in the most recent presidential election, took advantage of the negative publicity to suggest that Mr. Lee had caved in to demands by American trade negotiators. The rumors fueled a backlash that included rumors that American consumers don't eat the type of beef that is exported and that consumer products such as mascara contain beef by-products and could be tainted. In May 2008, thousands of people gathered in Seoul to protest. For U.S. President George W. Bush, the trade pact with South Korea was an important political victory. Suspicion and doubt about trade and globalization was growing among Congressional Democrats. Proposed trade pacts with Colombia and Panama had been given a cool reception. Although the accord with South Korea was concluded in April 2007, it still had to be ratified by lawmakers in both countries.

 

 

 

In 2009, a South Korean parliamentary committee approved the FTA; however, it was not presented to the General Assembly for a full vote. Meanwhile, amid ongoing concerns about remaining export barriers for beef and autos, the U.S. Congress did not ratify the agreement either. Ford, Chrysler, and the United Auto Workers union opposed the deal. Hyundai and Kia, the stars of Korea's auto industry, were enjoying great success in the United States despite the recession.

 

 

 

Overall sales of both foreign and domestic cars were down by nearly 40 percent in the U.S. market. By contrast, sales for Hyundai and Kia were only down 3.6 percent. When U.S. President Barack Obama traveled to Toronto for the G-20 conference in 2010, he met with President Lee. The relationship between the two allies had taken on a new significance after North Korean forces allegedly attacked and sank a South Korean naval vessel. Forty-six sailors died in the attack. At the Toronto summit, President Obama expressed solidarity with South Korea and promised to urge the U.S. Congress to ratify the FTA. South Korea hosted a G-20 conference in November 2010, and it was widely expected that a final announcement would be made at that time. However, it was not to be: President Obama and President Lee came away from the summit empty-handed.

 

 

 

However, one month later, Washington and Seoul completed the negotiations and the agreement was signed. The break though came in part because the deal extended a 2.5 percent tariff on Korean cars and a 25 percent tariff on Korean SUVs for several years. An earlier version of the treaty would have lifted those tariffs immediately. For its part, Korea agreed to immediately drop its tariff on U.S. car imports from 8 percent to 4 percent. As a result of the changes, the United Auto Workers union threw its support behind the agreement. Calling it a "landmark trade deal," President Obama urged Congress to ratify the FTA before the August 2011 recess. The agreement was also subject to approval by South Korea's National Assembly. Meanwhile, South Korea finalized a trade agreement with the European Union. Implemented in 2011, it surpasses KORUS as the world's largest. Currently, two-way trade is worth about $100 billion each year; South Korea enjoys a trade surplus with the EU of nearly $20 billion. Agriculture was not a key issue in the negotiations; however, regulations that protect Korea's auto industry needed to be addressed. Because South Korea's automakers specialize in small cars, Seoul wants to phase out tariffs on small cars more gradually than tariffs on large vehicles. For its part, the EU wants more stringent rules of origin so that, for example, South Korean exports assembled from Chinese-made components would be excluded.

 

 

 

In 2011, voices on both sides of the issue continued to be heard. Among the supporters were two members of former President Bill Clinton's staff. Writing in The Wall Street Journal, Thomas McLarty III and Nelson Cunningham identified four conditions that would have to be met in order for the Korea pact to be ratified in Congress. First, passage would require strong presidential leadership, and President Obama must be fully committed. Second, the White House staff and cabinet would have to be unified in pulling for passage. Third, the effort must be truly bipartisan. Finally, McLarty and Cunningham urged President Obama to show that his commitment to free trade extends beyond the U.S.-Korea FTA and includes pending agreements with Colombia and Panama.

 

 

Sources:Thomas "Mack" McLarty III and Nelson W. Cunningham, "Obama's Free Trade Opportunity," The Wall Street Journal(January 24, 2011), p. A17; Max Baucus and John Kerry, "The Colombia Trade Deal: A Different Kind of Jobs Bill," The Wall Street Journal(April 4, 2011), p. A17; Steven Greenhouse, "U.S. Union Backing Boosts Korea Trade Pact," The New York Times(December 8 2010), p. B1; Evan Ramstad, "South Korea Defends Trade Pact," The Wall Street Journal(December 6, 2010), p. A8; Elizabeth Williamson, "U.S.-Korea Pact Hinges on Autos," The Wall Street Journal(December 3, 2010), p. A14; Bob Davis, "U.S. Hit by Trade Setback," The Wall Street Journal(November 12, 2010), p. A1; Elizabeth Williamson, "U.S. Vows New Push in Korean Trade Pact," The Wall Street Journal(June 28, 2010), pp. A1, A2; Chris Woodyard, "Cars Hold Up S. Korean Trade Deal," USA Today(May 13, 2009), p. 3B; Evan Ramstad and John W. Miller, "South Korea and EU Near Free-Trade Pact," The Wall Street Journal(March 25, 2009), p. A6; Alan Beattie, "Hard Bargains," Financial Times(June 17, 2008), p. 9; Evan Ramstad, "Korea's Beef with the U.S.," The Wall Street Journal(June 6, 2008), p. A11; Evan Ramstad and Julie Yang, "South Korea Answers Uproar on U.S. Beef," The Wall Street Journal(May 3/4, 2008), p. A8; Choe Sang-hun, "U.S. and South Korea Agree to Sweeping Trade Deal," The New York Times(April 3, 2007), pp. C1, C8; Evan Ramstad, "Korea Trade Focus: Cars," The Wall Street Journal(March 29, 2007), p. A8; Evan Ramstad, "South Korea Ready to Open Up," The Wall Street Journal(March 28, 2007), p. A6.

 

 

 

 

Discussion Questions

 

 

1. When a trade deal is passed, there are winners and losers. Who stands to win if Congress ratifies the U.S.-Korea free trade agreement? Who stands to lose? (15 marks)

 

 

 

2. In the United States, the United Auto Workers supported the Korea trade deal, but the machinists' union did not. How do you explain this split in the U.S. labor movement? (15 marks)

 

 

 

 

3. Why is the global automobile industry often at the center of disagreements over trade relations? (10 marks)

 

 

4. As this book went to press, the U.S. Congress had not ratified the FTA with Korea. What is the update? Has the deal been ratified or not? Which of the requirements identified in the final paragraph of the case study affected the outcome? (15 marks)