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Germany is under shock as BenQ Mobile goes bankrupt

Week 40, 2006

According to the initial deal, Siemens offered 600 patents, branding rights as BenQ-Siemens for the mobile devices, and EUR 350 million to BenQ for taking care of its handset division, which was already in difficulties. Today, BenQ mobile files for bankruptcy. So what went wrong?

Since this acquisition, BenQ Mobile has gone through three quarters of losses, reaching a total of EUR 840 million of losses, but, at the same time, it became the #6 manufacturer of mobile handsets and launched more than 20 new models. Last Friday, BenQ Mobile filed for insolvency protection, laying off more than 3,000 workers in Germany. According to BenQ management, the loss was unbearable for the company, which has a registered capital of TWD 26.2 billion (EUR 622 million). Earlier this year, BenQ Mobile negotiated a work time increase with German labor unions at its plants in Germany and considered subcontracting production to Foxconn International (Hong Kong) and Jabil Circuit (USA).

A variety of reasons are given about the events that led to this situation. According to Rick Lei, BenQ's chief strategy officer, the cause is to be found in poor project management at BenQ Siemens in Germany. He said: "For each product it launched, it was usually three months before the product hit the market, so there was no profit at all". Rick Lei said customization and modification involved in selling custom made phones for operators consumed more time and resources than anticipated. He also blamed market response, saying that BenQ really wanted to develop its mobile phone business when it acquired Siemens unit, but things did not turn out according to plans. Difficulties in communication between Munich and Taipei are also quoted as a cause of the disaster. According to Rick Lei, BenQ tried everything to solve the situation, but now, it would need to inject another EUR 800 million in BenQ Mobile to save the business. Eric Lei, chief business strategy officer at BenQ, said Siemens still owes BenQ more than EUR 150 million as a part of the original deal.

BenQ acquired last May the right to use Siemens brand name for five years. Now, some commentators wonder if the main goal in the acquisition of the handset division was to acquire Siemens brand name. Now, Siemens management is considering seeking a court order to prohibit BenQ from using its brand name.

Lei said BenQ hoped to maintain a good partnership with Siemens.

Now, everyone is flying to help BenQ Mobile. German Chancellor Angela Merkel got personally involved, when taking about this issue in her reunification day speech. She also called Siemens CEO Klaus Kleinfeld telling him that Siemens should show responsibility on this issue. Erwin Huber, the Bavarian economics minister, proposed to work with Siemens to find a new investor for the handset division. Mr. Huber also considered legal action from the state of Bavaria against BenQ over brand name and patents issues.

At the end of September, Siemens planned a 30% pay rise for its 12 top-executives, which was heavily criticized because it came at the same time as a collective negotiation with Siemens workers in Germany, 5,400 of whom had been fired recently. A labor union representative commented: "Siemens wants management salaries like in the US, corporate taxes like in Cyprus, and employee salaries like in China". The news of BenQ Siemens bankrupt and the 3,000 lay-offs as a consequence came on top of it. Subsequently, Siemens management had to cancel its top execs rise plan and to create a EUR 35 million fund to support BenQ Mobile employees. At the same time BenQ Taiwanese headquarters said they believed Germany has workers' insurance plans protecting BenQ Mobile's 3,000 employees, and they had no intention to put money into any worker fund.

This story can be seen from several different viewpoints. Some will focus on it as an epitome of globalization, some others will see it as the effect of a general East – West business culture clash. Or it can be seen as business as usual as companies live and die. Many analysts consider the handset business is on the verge of a major restructuring; what happens now is definitely a step into this direction.

Thierry SpanjaardChief EditorSmart Insights