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April 17, 2015

Xplore Technologies acquires Motion -- How it came about

Today I listened to the full Investor Call broadcast Xplore held on April 16 about its acquisition of Motion Computing, and a lot of things are clearer now (listen to it here).

Motion didn't exactly choose to be acquired, and this was not one of these situations where a big company comes along and makes a financial offer just too sweet to resist. What happened was that Motion found itself in a financial bind caused by third party issues over which Motion had little to no influence over. Specifically, the supplier of the displays used in their Motion C5 and F5 semi-rugged tablets shut down its plants in South Korea without any notice to speak of. This left Motion, which uses a built-to-order model, high and dry and unable to fill C5 and F5 tablet orders, with those two products combining to about half of Motion's sales. With half of its sales essentially on hold, Motion's financial situation quickly went from being quite stable to critical, until their main lender foreclosed.

This requires some background information. Motion, like most US electronics vendors relies on Asian OEMs (Original Equipment Manufacturers) and ODMs (Original Design Manufacturers) to make its products. There are various nuances to such agreements, but suffice it to say that those OEMs and ODMs likewise rely on their vendors to supply parts. One such part was screens from a company called Hydis. Unfortunately, Hydis' parent company, Taiwanese E Ink saw fit to close two of the Hydis LCD manufacturing plants in South Korea.

Now one might assume it should be easy to source replacement screens for tablet products that, while quite successful, were not produced in the millions or even hundreds of thousands. It obviously can be done, but it's not easy. There's locating a suitable replacement, there's business arrangements, there's adapting and configuring and testing, all of which takes time, time which isn't available to a company doing build-to-order. Components are changed and re-sourced all the time, but always with proper notice and proper lead time. Apparently, that wasn't the case with E Ink's shutdown of the Hydis plants.

A bit more about Hydis. They make screens that we here at RuggedPCReview have long considered the very best. Originally launched by Korean Hyundai as Hyundai Display Technology and then part of Hyundai's Hynis Semiconductor, Hydis started working on a wide-viewing angle technology called "fringe field switching" (FFS) in 1996. That came in response to Hitachi launching the IPS display technology, which also provides superior viewing angles. Hydis was so convinced of the merits of their FFS technology that they decided to pretty much bet the farm on FFS. That was understandable as FFS not only provided 180 degree viewing angles from all directions, but also offered terrific contrast ratio, none of the dreaded color shifts that lesser LCDs to this day display when viewed from certain angles, lower power consumption than IPS, and also no "pooling" upon touch.

Hydis was spun off from Hyundai completely in 2001, just when Microsoft's Tablet PC effort got underway, and Hydis saw a big opportunity to be the dominant player in tablets. I recall that at Pen Computing Magazine we were blown away when we saw Hydis FFS displays in Sharp's Actius TN10W and HP/Compaq's TC1100 notebook convertibles in 2003. The Hydis displays were so much better than anything else that there simply was no comparison.

Just when things appeared to look bright for Hydis, Hynis sold them off to Chinese LCD manufacturer BOE, and the company became BOE Hydis. Between the Tablet PC never living up to expectations and other issues, BOES Hydis didn't do well and was acquired by Taiwan's Prime View International (PVI) which eventually, in 2010, became E Ink, the folks who pretty much had cornered the market on those paper-like eBook reader displays used by the Kindle and also by Sony. PVI had actually managed to nurture Hydis back to financial health, but did so primarily by selling and licensing Hydis FFS patents. This led to Korean protests that after BEO, E Ink was also simply "asset-stripping" Hydis and thus Korean intellectual accomplishment. Add to that the fact that E Ink fell on hard times itself after the eBook market was severely impacted by the iPad and iPad-class tablets, and it's no surprise that they didn't have the resources to properly fund Hydis.

That said, and much to Hydis' credit, the company did not rest on its FFS laurels. First came an improved FFS, and then, in 2007, AFFS+, which perfected the technology in numerous respects, including even better outdoor viewability.

Motion, always on top of technological advances, was an early adopter of Hydis displays, giving them an edge over competition that used lesser LCDs not nearly as well suited for tablets where the ability to view the image on the display from any conceivable angle matters much more than in laptops. The superior quality of the Hydis AFFS+ displays used in Motion's C5 and F5 tablets contributed to their wide acceptance, and continued to do so even in the latest generation of the platform, launched in February 2015.

Unfortunately, February 2015 was also the month where E Ink suddenly shut two Hydis plants in South Korea. The stated reason were "chronic losses" and "high manufacturing costs." That didn't sit well with the Koreans who felt that E Ink had let the plants become obsolete, on top of simply mining Hydis for its patents. The bottomline for Motion was that they had a very promising new generation of their C5/F5 platform based on Intel's latest 5th generation "Broadwell" chips, and no screens.

No product, no sale, and the rest is history.

Enter Xplore. Located within ten miles from one another, the two companies knew each other well. Some of the workforce had worked in both companies, and both certainly also benefitted from the presence of Dell, which although not having any deep business relationships with either Motion or Xplore, made for the presence in Austin of a steady pool of highly qualified technologists.

But if Hydis displays were so good, and especially well suited for tablets, didn't Xplore use them as well? They did. Xplore, too, was an early Hydis adopter, and that move may well have been what helped Xplore survive and eventually thrive while some of its direct competition did not. Xplore's high-end, ultra-rugged iX104 XC6 tablet has a Hydis screen. So didn't the Hydis shutdown affect Xplore as well? It did, but Xplore had inventory and did not entirely rely on build-to-order. And while Hydis certainly has an impact on Xplore as well, their financial situation was different from Motion's and they were able to not only absorb the blow, but also turn it into an opportunity by taking over a very complementary Motion Computing.

If there's ever been a better example of making lemonade from lemons, there haven't been many. Had Xplore not been there just ten miles away and a perfectly logical rescuer, Motion would have been liquidated and most likely totally ceased to exist. That would have been a massive blow to Motion's customers and employees, and also to the rugged computing industry in general. As is, Xplore says that "the vast majority" of Motion employees have been extended employment offers.

So what can we expect from all this? As is, Xplore sales apparently peaked in 2012 with over $100 million, but still were in the 80 million range for 2014. Xplore is a roughly 40 million business. Xplore warns that this doesn't mean that they're suddenly a $140 million business, and that it'll take a year or two until everything has been integrated and ironed out. Xplore Chairman Philip Sassower likened the opportunity as being given the chance to pick up a mansion in distress in a $5 million neighborhood for three quarters of a million. It'll take work and perhaps half a million investment, but then it'll be a $5 million mansion again.

And then there are the numbers. VDC estimates the 2015 market for rugged tablets as being worth about $585 million. And the 2015 market for rugged laptops about $1.2 billion. And that's on top of a massive number of consumer tablets, a portion of which go into the enterprise that would just love to have some more durable gear. So there's plenty of upside. Xplore is already working on getting suitable replacements for the Hydis screens. And Sassower wants for Xplore to be the #1 in rugged tablets. -- Conrad H. Blickenstorfer, April 17, 2015

Posted by conradb212 at April 17, 2015 07:46 PM

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