By Martin Hutchinson
Director of Global Investing Research
Gateway Inc. (NYSE: GTW), the PC retailer, was worth $27 billion in 1999. Now Taiwan PC-maker Acer Inc. is buying it for $710 million. That shows that even in the consumer-oriented PC business, U.S. distribution capabilities are trumped by Asian manufacturing skills and high-tech know-how. It’s a lesson likely to be repeated elsewhere.
The worldwide PC market is highly competitive and hasn’t been particularly profitable for its participants. It is dominated by two manufacturers, Hewlett-Packard Co. (NYSE: HPQ) and Dell Inc. (Nasdaq: DELL), which between them have 52% of the U.S. market, while even the third place entrant, China’s Lenovo Group Ltd. (OTC: LNVGY), formerly the IBM Corp. (NYSE: IBM) PC division, has struggled. Gateway, which subcontracted manufacturing elsewhere, and in the industry in recent years. PC sales margins have been slashed as Internet sales have come to be more important in the PC market, so it’s not surprising that Gateway is worth only 3% of its 1999 value.
Acer, on the other hand, is a success story that is rapidly gaining importance in the world PC market. It was the fourth-largest PC manufacturer worldwide; but with the Gateway acquisition, it will move past Lenovo to become the clear No. 3. Its sales volume in 2006 was $7 billion, six times its sales volume five years earlier, while operating profit was $200 million, eight times its level five years earlier. The shares are trading in Taipei at about 15 times earnings. As well as buying Gateway, Acer intends to exercise the option that Gateway holds to buy Packard-Bell, which will give it additional market share in both the European and U.S. markets.
Regrettably, Acer does not offer American Depositary Receipts, so is not quoted in New York, and is difficult for U.S. retail investors to buy. It is quoted on the Frankfurt exchange, and is available to British investors through the London Stock Exchange’s International Order Book, which consolidates demand worldwide for international companies. Acer may well have avoided New York because of the costs of Sarbanes-Oxley compliance; if so it represents another example of how the SEC thwarts U.S. retail investors rather than protecting them.
Acer is typical of the little-known Asian companies that are making their presence increasingly felt worldwide. If manufacturing for the PC business is going to happen in China, and research and design development work will be done in Taiwan, the market position of U.S. sellers who subcontract manufacturing to third parties will increasingly be threatened. With command over the technology, Asian manufacturers will find it relatively simple to integrate forward towards the market. In particular, companies in the high-wage market-oriented economies of Taiwan, South Korea and Japan are likely to benefit since they will have the best control over technological development. [.]
This is the trend of the future. While the United States is mired in difficulties from subprime mortgages, or inventing new ways to lose money through hedge funds, Asian manufacturers are acquiring dominant positions in many of the core technologies that make our world work.
This was once the U.S. strategy, as well as its strength. But no longer. And as these other nations get richer, their home markets increasingly become important elements of the global economy. Indeed, these markets will one day be highly coveted places to do business.
While it’s admittedly disheartening at times for American consumers to sit back and watch this unfold. But it doesn’t have to be that way. If these “consumers” are willing to make the transition to “investors,” they can profit from these trends just like anyone else. And that will leave them feeling secure again. And if enough folks take this admittedly challenging path, the payoff will be huge, both for the consumer class, and even for the U.S. economy
For investors seeking to start right now, reasonably priced shares of Asian companies at the cutting edge of the world market are a good place to begin. And they’re also the future.
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