BenQ Mobile needs a ‘hit’ to become profitable

After a bruising financial performance in 2005, Taiwanese electronics maker BenQ hopes to see its money-losing mobile phone division return to profitability later this year. But that may not happen unless the company can turn out hit products in the coming months, the company’s top executive said in an interview Tuesday night.

“The key is how many hit products we can bring to the table, that is critical,” says K.Y. Lee, BenQ’s chairman.

Lee’s comments underscore how high the stakes are for the company’s mobile division. When BenQ acquired the mobile division of Siemens AG last year and announced plans to merge the division with its own, both operations were losing money. Since the combined division entered operation on Oct. 1, 2004, BenQ has made some progress in cutting costs, but a long, uncertain road lies ahead.

“The challenge for us is how fast we can turn around BenQ Mobile’s operations,” Lee says, confirming that BenQ’s goal is to see the business financially stable by year-end.

BenQ’s financial difficulties in 2005 stemmed largely from its decision to focus on sales of its own branded phones, which offer better margins than those made under contract. That led phone makers that contracted with BenQ to end their manufacturing relationship and seek other suppliers. “Last year was the first annual decline [in revenue] since I came on board in 1991,” Lee says.

BenQ has not yet released its financial results for 2005.

Meanwhile, Siemens’ mobile division had its own problems. The company had a reputation for introducing products too late and its management took too long to make crucial product decisions, Lee said, noting the division didn’t have a single 3G handset under development when it was acquired by BenQ. “I don’t think that was due to the technology,” he says.

A single winning design can dramatically change a mobile phone vendor’s fortunes for the better, as Motorola’s popular RAZR model and Sony Ericsson Mobile Communications AB’s T610 handset have proved in recent years. Lee says BenQ isn’t hoping for a hit along these lines, but a couple of more modest successes would be enough to put the mobile division back into the black.

BenQ Mobile GmbH & Co. OHG is trying. The subsidiary, which is headed by former Siemens AG executive Clemens Joos, plans to introduce more than 30 handsets this year, one-third of which will be designed for 3G networks. “Maybe some of them will be a big hit in the market and become a very big success,” Lee says.

BenQ has a lot riding on its ability to turn the mobile division around. Lee sees mobile phones as the company’s flagship product, in terms of both revenue and shipment volumes. In addition, BenQ is counting on these devices, which are intimately bound with users’ daily lives, to help drive sales of its other products, such as LCD televisions, by virtue of the brand image they convey, he said.

The first three handsets to bear the new BenQ-Siemens logo were unveiled Tuesday, including two models — the EF81 and S88 — that offer high-end features. The third model, the S68, offers more basic features and appears aimed at the midrange of the market.

Among these three handsets, the EF81 is clearly intended to be the star. The slim clam-shell handset offers support for Wideband Code Division Multiple Access 3G mobile networks, a 2-megapixel digital camera, Bluetooth, and a media player capable of handling video and audio files.

Looking back on the financial difficulties of last year and the challenges that lie ahead, Lee says he has no regrets about the decision to focus on the branded phone business. That decision was a strategic one, taken to end the focus on contract manufacturing and the increasingly slim profit margins associated with that business.

“This is kind of like a poison. If we keep taking the poison there is no way for us break out of this vicious cycle,” he says.