Acer America President Aims To Work With Channel In Building Market Share

Arnold Schwarzenegger may be a big man among politicians, but his fellow countryman, Rudi Schmidleithner, is becoming a big man among solution providers as president of San Jose, Calif.-based Acer America. Schmidleithner, who's responsible for Acer's operations in North and South America, joined the company in 1997 with its acquisition of Texas Instruments' notebook business. In an interview with Senior Editor Joseph F. Kovar, Schmidleithner discusses Acer's moves to convince the channel that the company represents an alternative to vendors that compete with solution providers.

CRN: What have you done at Acer since 1997?

SCHMIDLEITHNER: At the new Acer in Europe, I was part of developing the new business model. I took care, in the later stage, of some other countries in Europe. I moved to Holland, was responsible for development in Benelux and in one of the biggest regions in Europe for the notebook business.

CRN: Was your move to Acer America something you had planned for a long time, or was it done on short notice?

SCHMIDLEITHNER: It was a short notice. At Acer, we are a small team of executives. When we see we have opportunities, challenges and problems, we solve them together. At the time when it was decided, it was already foreseeable that Acer would very soon become a market leader in North Europe. We have the leading position in monitors in Europe. But we had not implemented this business model in the United States. The U.S. is the biggest market. . . . To be the leader in Europe alone will not secure the long-term survival of the company. So we need to come here and finish developing [this market]. And who is next? Who is available? Hopefully, I'm capable of doing it.

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CRN: When you came to the U.S. early this year, what was the state of Acer?

SCHMIDLEITHNER: We were very professional but small. We tried to do everything even better than our big competitors in the U.S. at the time, but we did not develop our own way internally.

CRN: Can you give me an example?

SCHMIDLEITHNER: We tried to compete with our sales force, the same as the competition. But if you are much smaller, you don't have economies of scale. So you cannot win. . . . You can live only by trying harder instead of doing it smarter. That was internal. More important, what we realized externally was that resellers were heavily under attack from two sides: retail and direct vendors.

Retail is very different from Europe to here. It's very strange. The system we have here is mail-in rebates. Typically, [retailers] advertise product after mail-in rebate below the buyer's cost because they calculate on a certain percentage of [rebate] claims that come back. A normal reseller doing a professional business with his end users or enterprise customers cannot do this. So he seems not to be competitive in this field. On the other side, the direct vendors can easily keep [retail] channel integrity by not offering these special, good products to the reseller [and instead] go direct. This makes life very difficult for the resellers.

And on top of this, in Europe as in America, poor marketing intelligence and machinery in big companies like Intel and Microsoft make [retail] life relatively easy by supporting just very big retailers, just a very few direct vendors, which makes it very difficult for the reseller to compete. If [companies] want to have any visibility for their ideas, it's easier to go to three big retailers, giving them a lot of money and creating visibility. . . . And all these factors lead to a situation where the reseller volume and the distributor volume is shrinking and shrinking. This has happened in the last two years. And then you see also that Intel is growing and growing at the same time.

The answer is quite simple. For the business model we have in Europe, it's 100 percent channel integrity. We make sure that if a retailer sells a product, a reseller can sell the same product at the same price. We do not invent a slightly different product and ask the reseller to sell the product at $200 more, or we do not do retail business here in the U.S. where the retailer wants to undercut the VAR price by $200 mail-in rebates. This is something Acer is not doing.

CRN: How many resellers does Acer America have now?

SCHMIDLEITHNER: Our distribution partners last quarter distributed to between 2,000 and 5,000 resellers. We just started implementing our business model. Next year, we expect this to be doubling. This comes automatically. . . . There's nothing wrong with selling a good product at a very good price. And you do not [give resellers] a negative surprise that tomorrow, this product costs at any retailer $300 less.

CRN: So you have two different product lines, one for the retailer and one for the reseller?

SCHMIDLEITHNER: No, we do not have this. We have two different product lines: one for private users, one for professionals. But both have good quality. So there is no need to say one is a so-called consumer line, because if an enterprise needs a big quantity of this product, [then] we could not sell it. Every reseller has access to our whole product line. He can sell the consumer product as well as the professional. 'Consumer' does not mean we make it available only at selected retailers. We make sure the reseller has access to the best prices, even for the consumer products. This is important. [This industry] invented difficult systems to have excuses to give special offers only to retailers.

CRN: What are Acer America's key product lines, and what is Acer doing to increase the channel presence for those products?

SCHMIDLEITHNER: Our most important product is notebooks. We have the best product range in the industry. It's also our fastest-growing product. Our resellers can make some money on notebooks. The [desktop] PC industry is more difficult to earn money in than notebooks.

We see faster growth today--and an easier product for resellers to sell--in LCD monitors. It's very little risk for a reseller to try an Acer product. It only costs a few hundred dollars, and nothing can be wrong with buying a nice LCD at a good price. With notebooks, if someone doesn't know the company very well, they might hesitate a little bit. So we grow a little slower in notebooks, but faster in LCDs.

It's very difficult for the reseller to earn money in PCs. And for Acer overall, it's very, very difficult. Also, the market is not growing. The server is a very nice product, but it's a long-term strategy. If you want to get the trust of the market, [customers and resellers] need to know you quite well before they do big business with you. The market does not know us well today.

CRN: How is the entry-level server business for Acer?

SCHMIDLEITHNER: We will not focus on this before the end of next year. We have some good customers and business partners who do business here with us in the U.S. and in other regions of the world, so we can maintain the business. It's a project planned for the end of 2005, and in 2006 we will be more heavily in that business.

CRN: How many LCD monitors and notebooks is Acer selling per year in the U.S.?

SCHMIDLEITHNER: The target for next year is close to a million units for LCD monitors, and 80 percent of this will go through the reseller channel. That's just one indication of how we move.

CRN: If you look at Acer's overall North American sales, what percentage goes through the reseller channel?

SCHMIDLEITHNER: We do roughly 20 percent by direct marketers and 75 percent by our resellers, only by distribution. And 5 percent is retail--maybe even a little less than 5 percent.

CRN: Are you looking to recruit new solution providers?

SCHMIDLEITHNER: In the last few months, we got several hundred new resellers who have never resold Acer before buying our products. They understand slowly that they are not undercut by us from anywhere. They still have a chance to sell the products. Also, we don't have the biggest direct marketers sell below their cost. Slowly but steadily, a lot of resellers realize this.

We also saw a lot of resellers give up hardware. They don't want to sell hardware anymore. We have a lot of discussions. They say, 'OK, I don't touch this business. I'll let the direct vendors do it, and I'll focus on service.' But it's easy. They can also do the hardware business. There's no reason not to sell hardware, at the right mix and with the right products. We think we are the only vendor that can offer this to the reseller again in the U.S., that you can sell monitors, notebooks, PCs, and earn money with it. And it's not embarrassing that tomorrow you see a similar product advertised by a retailer after a $200 mail-in rebate below the cost of what you just sold.

When we analyze the sales of our products, it is very funny to see that we do the most aggressive offer to the market in the entry-level price. The reseller really does not touch this product too often today. It's fast-growing. . . . The retailer takes the $699, $799, $899 notebook segment--these are the low-end specs, but the low price points in the market. But with a company like Acer with similar low price points in the market, we see the reseller hesitating to sell this product. Resellers are worried because it looks like a nice carrot, but they will get beaten by retail with this product. This is something that does not happen with Acer. And the resellers only slowly realize this, that you can sell a notebook from Acer that costs only $799, and you can do margins with it. And you don't have to fear that tomorrow other organizations will have this product $100 below. This does not happen. Of course, at the beginning, it's new to resellers. They're used to this conflict.

CRN: So basically what you're saying is, if someone wants to sell a $799 Acer notebook, they should do it and not be afraid?

SCHMIDLEITHNER: Correct. We even take care that nobody is selling below his cost.

CRN: Is Acer America a profitable company?

SCHMIDLEITHNER: For first half-year, no. But for the second half, it looks like we will do around break-even.

CRN: Do you expect to make a profit next year?

SCHMIDLEITHNER: No. But if it's any indication from our shareholders which direction we are going, I do not expect they expect us to profit. We are not going to lose money next year, but we are also not going to profit for now. We are going for developing the business and market share.