BenQ to spin off manufacturing operations

BenQ takes a page from Acer's book and plans reorg to help combat its decline in performance

BenQ announced plans Thursday to spin off its manufacturing operations into a separate company, after it failed to make good on a promise to turn around its performance in the second quarter.

BenQ, the Taiwanese company that took over Siemens' mobile phone division last year, originally said its second quarter would mark a significant turnaround on expected strong mobile phone and LCD monitor sales, but "we didn't meet our expectations," said Sheaffer Lee, president of BenQ. The company blamed delays in getting some new handsets to market, and said weakness in LCD panel prices hurt as well.

But the third quarter will be better for both product lines, followed by a much stronger fourth quarter, Lee said, at the company's second-quarter investors' conference in Taipei. The company expects third-quarter revenue to be flat with the second quarter, but September should show significant improvement. Holiday season sales should kick in later next month and, with the launch of a few new handset models, ensure a much better fourth quarter, executives said.

The company needs to see better times to keep its mobile phone aspirations alive. BenQ bought the loss-making handset division from Siemens last year, saying it had enough cash to finance operations for a year to enact a turnaround.

But so far the company has posted a string of losing quarters. BenQ lost NT$2.51 billion (US$76.6 million) during the three months ending June 30, compared to a net profit of NT$480 million during the same time last year. It was BenQ's third straight quarterly loss, coming after a NT$4.99 billion shortfall in the first quarter and an NT$6.02 billion loss in the fourth quarter of last year, when it acquired BenQ Mobile.

Its revenue has also remained on a downward slope. BenQ's second quarter revenue dropped to NT$54.85 billion from NT$57.94 billion in the first quarter and NT$66.30 billion during the fourth quarter of last year.

To help combat the decline, BenQ executives outlined a broad plan to separate its brand name business from its manufacturing division and spin off the production unit into a new company.

BenQ currently manufactures most of its own products, including laptop PCs, LCD TVs, and monitors, projectors and other gear. These operations will become a separate company, a blueprint that mirrors the reorganization by Acer a few years ago. In order to focus its operations and separate its contract manufacturing business, Acer opted to spin off BenQ as a separate company with most of its handset and optical drive business, and turned its contract manufacturing business into a third entity, Wistron.

The deal freed Acer from the headaches of dealing with its clients while marketing similar products as theirs, and allowed its contract manufacturing business to grow in new directions. Some companies had eschewed working with Acer's contract manufacturing unit because they didn't want to fund the expansion of a competitor.

BenQ's spin-off would result in a contract manufacturing company with about US$4 billion in yearly revenue and 9,000 employees. Around half of its current factory orders come from clients other than BenQ, said K.Y. Lee, BenQ's chairman and chief executive officer.

BenQ's branded division, including the mobile phone unit, takes in about a US$4.9 billion in revenue a year, with 9,500 workers. It would continue to produce its own mobile phones because of the degree of customization required by network operators, among other reasons, said Clemens Joos, CEO of BenQ Mobile.

The contract manufacturing business will be spun off next year, but executives declined to comment further on the plan.

The move is the latest attempt by BenQ to rationalize its operations after the mobile phone division takeover. In April, it sold its optical disk drive manufacturing unit to Lite-On Technology for NT$1.2 billion. The company has also announced plans to cut 277 jobs in Germany at BenQ Mobile.

BenQ also took on a NT$12 billion syndicated loan in July to finance operations.

Copyright © 2006 IDG Communications, Inc.

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