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September 21, 2006 6:17 pm

BenQ faces cost cuts as buyers continue to choose rival products

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BenQ is causing unease among investors by what analysts call erratic and panicky attempts to stop mounting losses as the Taiwanese electronics company struggles to turn round the Siemens handset division it took over last year.

Eric Yu, chief financial officer, told the FT that the company was seeking to reduce substantial overcapacity. “To achieve that goal, we do not exclude any option.”

The remarks came after BenQ last month said it planned to spin off its contract manufacturing operations next year.

The announcement followed shortly after the company reported the third consecutive quarterly loss for the three months to June 30.

“They are now talking to everyone and considering everything just because they are so desperate to cut losses,” said Vincent Chen, an analyst at CLSA in Taipei.

Mr Yu said BenQ was planning to concentrate global handset production in a new plant in Shanghai, which would be finished next year. Production in China is now inefficiently split between a facility owned by a Siemens joint venture in Shanghai and production lines in BenQ’s manufacturing complex in Suzhou.

Handset production in Taiwan and Mexico will be closed down. However, analysts have cautioned that this falls far short of the capacity reduction the company needs to achieve, and warn that BenQ’s key problems lie in its failure to expand or even retain global market share.

Mr Chen estimates that BenQ has up to 50 per cent more handset manufacturing capacity than needed for the estimated 30m units it is expected to ship this year.

Sources close to the company said that one of the options being considered would be to sell used manufacturing equipment from BenQ’s idle handset production lines. This would bring in limited funds, but lay-offs from the discontinued production would bring further cost savings.

A bolder scenario would include selling BenQ’s entire Suzhou manufacturing base, at which the company also makes other electronic devices such as flat-screen monitors.

Some observers believe that Hon Hai, the world’s largest contract manufacturer, could be considered a potential buyer.

“As declining margins make the handset industry look increasingly like the PC industry, leaving manufacturing to those who are best at it might be an option,” said Dominic Grant, an analyst at Macquarie in Taipei.

One option would be a sale of the Suzhou manufacturing facility, which employs more than 10,000 workers, to AU Optronics, Taiwan’s largest liquid crystal display panel maker.

AUO has cross-shareholdings with BenQ, and Lee Kun-yao chairs the board of both companies.

“Although this would cause an outcry among AUO investors, such a transaction could be justified, given that AUO is a contract manufacturer, and much of the Suzhou capacity is for display products,” said one
analyst who asked not to be named.

However, analysts say none of these options addresses BenQ’s core challenge of making handsets operators and consumers want to buy. In less than a year, the company has seen its market share drop to just 3.2 per cent from almost 10 per cent for the two brands combined before the acquisition.

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