BenQ Mobile ‘s year-long struggle to break into the European handset market was doomed from the start. It will prove to be the last such attempt by any small player to challenge the status quo by an outsider device vendor.
It looked to have the best of chances. With its acquisition of Siemens ‘ debt-ridden old handset division a year ago, it was handed a leading brand name, well-worn routes to market and an entrenched manufacturing base. But it blew it to the tune of ¬840 million (£568m) for largely the same reasons that Siemens blew it in the first place.
The top five global handset manufacturers Nokia, Motorola, Samsung, Sony Ericsson and, belatedly, LG Mobile cannot be caught, the industry now seems to believe. BenQ Mobile ‘s failure to infiltrate that select group shows that the handset sector ‘s growth pains have passed, that it has finally grown up and filled out.
The top four handset manufacturers account for 75 per cent of the global market already, according to analyst house Nomura. By 2010, it predicts their share will reach 86 per cent. It reserves judgement on fifth-placed LG Mobile, the last parochial manufacturer to pitch to the world and succeed, until its game plan is better explained.
Says Nomura ‘s Richard Windsor: The top five, plus a few niche players, will survive, although I wouldn ‘t put LG in the sustainable category just yet because there remains a question mark over its medium-term strategy. It hasn ‘t defined it at all.
Tim Sagar, a veteran of NEC and a consultant to several handset manufacturers in the Far East, agrees: In any manufacturing industry you eventually get consolidation and inevitably you end up with five players. That ‘s the magic number. And it looks like that has now happened in mobile. LG hopped on board just in time, though it ‘s not home and dry yet.
The failure of BenQ Mobile is informative because, in microcosm, it illustrates
the insurmountable challenges faced by manufacturers in both the East and West of playing in the global mass-market today even, potentially, just surviving in their own backyards.
The venture, at its outset, was supposed to combine the industrial strength of the German operation with the Asian spice of the Taiwanese. Instead, it just brought together the difficulties faced by handset manufacturers in both regions the labour costs and inflexibility of those based in the West and the technological disadvantages of those rooted in Eastern markets.
The German influence
BenQ Mobile UK managing director Philip Rambech, in plain terms, puts the venture ‘s failure down to problems inherent in the German business. The lack of revenue and profit was a direct result of several key products being late to market, in combination with an insufficient cost-cutting exercise. That made it difficult, he says.
In the first instance, then, it is the same old story: labour costs and time to market, the factors that did for Siemens Mobile prior to its sale. BenQ could not cut enough fat from the cumbersome, unwieldy and expensive German business unit.
In Berlin, a worker earns approximately ¬1,600 (£1,082) a month. Across the former East German border, the hours are longer and the pay is 25 per cent less. In Poland, factory wages are approximately ¬400 (£270.5) a month. In China, they are just ¬160 (£108), a tenth of the German labour costs.
It needed to seriously reduce costs. It should have moved the factory base away from Germany to enable it to be cheaper, quicker, slicker and better-equipped to customise devices for the network customers, says LG Mobile UK marketing manager John Bernard.
Of course, timing is key. Under the terms of its original acquisition contract, BenQ guaranteed German workers ‘ contracts until the end of 2006 and was expected to transfer the production work to China thereafter. The administration of the European business unit last month has seen redundancy notices despatched to German staff early, with around 1,100 of 1,800 staff fired from the firm ‘s Kamp Lintfort plant in North Rhine-Westphalia and 850 of 1,300 in its Munich facility.
BenQ might have coped with European labour costs until the New Year, when it was expected to turn its back on Germany and move the operation to mainland China, if it had been able to deliver handsets to the networks and the distribution channel on time. But time-to-market, the old failing of Siemens Mobile, cost it again.
According to Windsor, BenQ ‘s original strategy was correct, but its execution was lousy. BenQ looked to break even by increasing the average sales price of its handsets to around ¬100 (£67.63), up from closer ¬70 (£47.33) during the bad old days before the sale, when Siemens Mobile had pursued market share at all costs.
It announced a lot of feature-packed handsets and it should have hit that average sales price. But it couldn ‘t pass the operator tests and it couldn ‘t get the handsets to market on time. Sales prices came down because of those latency issues, and it missed targets. It ‘s the fault of the German operation. BenQ couldn ‘t iron out the old German company ‘s problems. That ‘s what sunk the company, says Windsor.
The ܘkiller product ‘
Dan Bieler, an analyst at Ovum, says: It came up with the right products at the wrong time. Its latest handset range looked interesting but came too late and never included a killer product. By the time the handsets launched it had already decided that it couldn ‘t afford the negative cash flow.
The infrastructure of Siemens Mobile is considered cumbersome and its technological expertise considered long in the tooth. BenQ ‘s latest range was held up, time and again, because of customisation issues and for failing network tests. The networks lost patience and, first T-Mobile in Germany and then others, pulled their backing of it.
The point about killer products is
important too. And again timing is key. If it had a killer product on its road map, like Motorola did with the RAZR when it
was perceived to be at a crossroads in 2004, then the networks would have shown more loyalty in Europe.
One manufacturer source points to Sony Ericsson as a manufacturer that struggled to assert itself, but with either good luck or good timing has managed to cement its standing among the global top five.
Call it luck, or timing, or whatever you want to call it, but you just have to look at Sony Ericsson. Eighteen months ago, there was talk of it struggling to stay the pace. But, in terms of connectivity and the carrier push, the market has played into its hands, because it ‘s been able to leverage its heritage brands like Walkman and CyberShot. So the market conditions have to be right and it ‘s surged ahead, he says.
If the pieces really have now settled, it shows how recently the kaleidoscope was in flux.
And for BenQ ‘s ܘGerman issues ‘, read Sagem in France, which bears the same kinds of labour costs as Siemens Mobile did and is hotly tipped for takeover. Social charges in France (the money that goes to the French government to fund public health and services) are 40 per cent of workers ‘ salaries. So Sagem workers in France get private dental care and eye care but their jobs, in the eyes of some, are headed for the sick bay.
Says Sagar: Sagem will get swallowed, I ‘m sure of that. Its cost base in France is very high. It ‘s similar to Germany. Sagem has been acquired by different companies in France, at different times the latest
of which [Safran] can ‘t see a future and wants out.
Bieler sums up: Manufacturing, in general, has to be very high margin to remain in the US or Europe. Siemens is likely to go on manufacturing wind turbines in Germany because they are high margin, but there ‘s not much else that is so clear cut.
But the BenQ-Siemens venture was probably doomed from the start anyway, argue industry pundits. BenQ Mobile would have been found out, had circumstances in Germany not already scuppered its efforts, by the technological disadvantages inherent in challenger companies based in Far Eastern markets.
Europe and the rest of the world
Market conditions are markedly different in Europe, compared with markets such as Taiwan, China, Korea and Japan, where technology is by and large bought in and repackaged. The European market is controlled by the network operators, which refuse to sell phones in their names unless they have been thoroughly tested first.
In Europe, the networks set the bar for technology high and, because of subsidies and the large sums they forked out for 3G licences, request highly specified devices in the hope that customers will utilise their services and increase revenues.
The operators in Europe want the latest technology so that they can market and sell content and services, even if there isn ‘t a market for them. End users will get those services even if they don ‘t want them. It doesn ‘t matter because the market is distorted by subsidies, says a source.
It means there is no such thing as value for money in terms of handsets because users get everything for free. It also means that if manufacturers don ‘t keep up with the technology race in Europe, then the operators aren ‘t interested.
In the Far East, the markets understand that the handset is king and manufacturers meet end-user demand, and no more. The networks are utilities, selling airtime, and don ‘t make the same demands on manufacturers. Selling Asian-made handsets to Europe is like Shanghai Automotive selling the Rover 75 back to the British, remarks Sagar.
BenQ ‘s phones are fine for the Asian market, but not for Europe, he says. Asian manufacturers are very good at cosmetic refurbishment, but it ‘s a little like Rover cars being made in China they ‘re good enough for the Chinese market, but I would be surprised if anyone in Europe would be interested in them.
Pantech ‘s lesson
If proof were needed, then one needs
look no further than Korean manufacturer Pantech, the world number seven, which confirmed its exit from Europe last week, less than a year after setting up offices next door to its main network benefactor O2 in Slough.
A source close to Pantech says: It got involved with O2 but couldn ‘t keep up. It couldn ‘t match the stringent requirements that operators insist upon over here. It thought that it would be much easier than it was to come into the European market. But it ‘s much tougher. It ‘s very, very different to the Asian markets, which are proper consumer markets.
A manufacturer source sums up: There ‘s a naivety among manufacturers in the Far East that they can launch a couple of good-looking phones and establish themselves as a major player in Europe. They don ‘t realise how hard it is. They have to back the products up with marketing and relationship building.
And so then there were five, each with huge economies of scale, slick R&D, good operator relationships and sharp marketing.
A manufacturer source remarks: The whole market is shaking up. How many manufacturers will be around in 2008 is
anyone ‘s guess. It ‘s survival of the fittest,
and the leanest. BenQ got its fingers burnt.
It is very difficult to see now how anyone else will break into that top rank of
Philip Rambech, in his own words
In terms of the overall company-wide situation, the lack of revenue and profit was a direct result of several key products being late to market in combination with an insufficient cost-cutting exercise. That made it very difficult.
But, as far as the UK business goes, I don ‘t think that much went wrong. The drive was there and the customer relationships were in place with excellent plans for the Christmas quarter.
We launched 10 products to the UK market in total. Some of those were launched without a big marketing hoo-ha, and some were launched with a proper brand campaign around them. But, at the same time, we said from day one that we didn ‘t have the marketing budget of the biggest spenders.
We pursued a very targeted marketing of products, as we did with the CL75 ܘPoppy ‘ phone. So we communicated with very specific market segments through very targeted marketing material. And these are things that the UK team is taking away as very positive. That marketing worked very well in the UK, and it is something that has been adopted in the wider context of BenQ Mobile.
We got a good bang for our buck in terms of marketing activity with a measurable increase in brand awareness among new buyers.
In the end, the dilemma was that when the funding from Taiwan into Germany stopped, we immediately started evaluating the feasibility of taking the UK business forward with legal and financial advisors.
But the headquarters are in Germany, as is a significant chunk of the R&D and the distribution centre for all of Europe, which takes care of all the duties and customs clearances into the EU arena. And although we successfully set up a direct shipment into the UK from Taiwan, it wasnt enough of a basis to continue.
And when the customer services business Inservio went into administration, on the back of the German units administration, then it really marked the end of the road.
But we are still here in a reduced headcount format working with the administrators to ensure the softest possible landing for all UK parties.