The Dangers Of Leaping Before You Look

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If one looked for an example of what not to do when setting up an overseas subsidiary, Data Terminal Systems Inc. might, by its own admission, fill the bill perfectly. "DTS made about as many mistakes as anyone could make in developing their game plan to go off-shore," says Joseph J. Giordano, who recently joined DTS as senior vice-president for finance and administration.

Flushed with youth and rapid growth (sales shot from $20.4 million to $120 million from 1977 to 1982), the manufacturer of electronic cash registers and point-of-sale equipment, based in Maynard, Mass., set out to conquer new worlds before it was ready. As a result, it miscalculated everything from potential market to labor costs.

"DTS wanted to get started yesterday and begin to capture the tax savings and benefits that you get by manufacturing in Ireland," Giordano explains. But the move was premature. "In 1978 when they decided to go abroad, foreign sales were less than $10 million, which is really a borderline situation."

DTS moved into a leased facility, and, a year later, built a new, $2 million, 40,000-square-foot factory; after only one year of operation, the subsidiary -- Data Terminal Systems Netherlands Ltd. -- was profitable, but, when demand slackened instead of increasing, the mistakes the company had made began to exact a heavy toll.

"The company hadn't taken the time to find the best spot in Ireland," says Giordano, who had set up a successful plant in the north of Ireland for Bose Corp., a Framingham, Mass., high-fidelity speaker manufacturer. Instead of looking around, they picked Dublin." The results: DTS got a 35% capital grant, as opposed to the maximum 60% it might have won elsewhere. And it wound up with "onerous" labor relations, "such as," Giordano notes, " a quarterly indexing of wages, which means that you get a four-times multiplier in a given year on inflation."

Labor wasn't only more costly in Dublin; it was also less productive and loyal than in high-unemployment areas. "At the Bose plant, near the northern border, people were anxious to have a job," Giordano recalls. But in Dublin, DTS found itself in a no-win situation, "and I know that, in Ireland, you can operate competitively." Sales climbed each year, to a high of $15.3 million in 1981, but, after the third year, sales fell and profits disappeared.

"They weren't ready, they moved too fast, and they never really developed a market," Giordano admits.

The drain helped drag the parent corporation into a loss position, from which it has only recently recovered DTS reported its first profit in two years (5 cents a share) for the quarter ended October 31, 1982. The solutions were straightforward: a management reorganization, which ousted the chairman, and the closing of the Irish facility.

"Closedown costs were roughly $3 million," Giordano explains, "and the total loss was about $5 million." Included were partial repayment of the government grant and sizable severance pay for most of the plant's 200 workers.

"It was a good experience and a bad experience," Giordano says -- good in that DTS eventually learned a lot, bad in that it cost a company. On St. Patrick's Day, 1982, Data Terminal Systems Netherlands Ltd. closed its doors.