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Ed Zschau

"I had an awful lot to learn about business . . . I had the conglomerate mentality -- the view that, if you just build one product for one market, you weren't going to be too successful. After I got into five different businesses and almost went bankrupt several times, I learned that you have to focus on something."

Eventually Ed Zschau wants to run a diner in some college town, where he can serve up greasy hamburgers and talk philosophy with hirsute students. What is more likely, however, is that he will own the diner, maybe a whole chain of them, or that he will be teaching philosophy at the college, probably as head of the department. Zschau is a person -- we all know one or two of them -- whose biggest problem seems to be coping with an excess of success.

It is, in fact, a problem that has dogged him since his college days at Princeton University, where he managed to earn a degree with not one, but three undergraduate majors -- math, physics, and philosophy. He went to Stanford University to study business and got not only an MBA, but also a PhD. When he taught, it was at the graduate business schools at both Harvard University and Stanford. And, when he started his owr business, System Industries Inc., it soon became America's largest independent supplier of minicomputer memory systems. Last year, he won a California congressional seat in his first run for political office. He is young (43) and good-looking.

If he weren't so pleasant, Ed Zschau would be easy to dislike. Instead, he seems to win new admirers wherever he goes. According to Rep. James Leach of Iowa -- a fellow Republican and Princeton alumnus -- Ed Zschau is "the star of our freshman class." His constituents, too, give his sometimes maverick views a respect seldom accorded neophyte politicians.

"I'm one who's trying to throw cold water on the idea that high technology is the answer to all the country's problems," he tells a group of Silicon Valley executives, who nod their agreement.

"Of course government has a role to play in business," he tells some hard-nosed businessmen, who show no sign of wanting to argue.

The 1981 personal income tax cuts were a "big mistake," and Social Security payments should not be fully indexed to inflation, he says one evening before a town meeting of district voters prosperous enough to be paying income taxes and old enough to be drawing Social Security checks. None of them flinches.

Zschau may not be the only business-person, or even the only entrepreneur, in the U.S. House of Representatives, but he is hardly typical in a body dominated by lawyers and former state legislators. The founder and former chief executive officer of a highly successful high-tech company, he represents a congressional district -- California's 12th, which includes Santa Clara Valley -- with more technology-based companies and entrepreneurs than any other district in the country. To breast-beating, free-market Republicans and to Democrats who would turn the country's economic future over to a government planning board alike, he can say that he has lived in that part of the real world and that it doesn't work the way either one of them wishes it did.

Oddly enough, Zschau had no intention of becoming either a businessman or a politician when he started out. A Nebraskan by birth and a scholar by training, he appeared destined for a career in academe. After earning his PhD in business from Stanford in 1967, he taught for a year at Harvard Business School, then returned to Palo Alto, fully expecting to continue his studies. "Another professor and I were asked to head up the business-policy program at Stanford," he recalls, "which deals with strategic planning and how to be a CEO. We got started and, frankly, I guess I felt a need to get into business myself, to see whether I could run a business and how it all worked.

"The particular business that I decided to start was sort of an accident. I ran into a friend who had recently started a company in the scientific instrument business, and his firm needed a computer system to automate the instrument. So that was the first product that my company developed. It wasn't a very successful product, but successful enough to get us going.

"I had an awful lot to learn. For example, I learned about focus. When I was studying for my MBA and PhD, a lot of business professors and business leaders were enamored of the concept of conglomerates. I had a lot of that mentality -- the view that, if you just build one product for one market, you weren't going to be too successful. After I got into five different businesses and almost went bankrupt several times, I learned that you have to focus on something -- a product or a product line and a market -- and devote all of your attention to that. One by one, we began to sell [product lines] off, and the one business that a lot of people thought would never survive -- the storage systems business -- is now running at a $100 million [annual sales] rate."

As an entrepreneur, Zschau gave little thought to politics, but in 1977 he agreed to head a task force of the American Electronics Association that was seeking a reduction in the maximum capital-gains tax rate from 50% to 28%. Working with other organizations, he lobbied the legislation through Congress over the strong opposition of then-President Jimmy Carter, who wanted the tax rate increased.

"Having seen the impact that people who understood the issue could have on the legislative process," Zschau relates, "I got more interested in politics. When [Congressman] Pete McCloskey decided to run for the Senate, leaving his seat open, I thought about what I would do, and decided that I had a contribution to make. [The company] was reaching $70 million or $80 million in sales, about the right time to transfer to professional management from the raw entrepreneur. Everything just fell into place."

Zschau turned out to be a first-rate campaigner, and he still maintains a campaign pace when he is in his district. One day last August, for example, he managed a lunchtime address to the Electronics Association of California in Santa Clara, a field hearing of a House subcommittee in Berkeley, and a meeting with constituents in Menlo Park.

The electronics executives greeted him as one of their own, and Zschau spoke to them out of shared experience, telling stories about his own company. "The thing about my venture capitalists was that, although their pockets might have been deep, their arms were real short," he quipped. " . . . I used to have this professor who said that you couldn't know what it was to be in business until you'd met a payroll. I say you don't know what it's like to be in small business until you've missed one." One diner confided to his tablemate that Zschau is "somebody who understands business and can't be snowed."

Then again, he is wise enough to admit the limits of his knowledge. "I don't know," he said to a questioner at a meeting that same evening. "You may be right. I hadn't thought of it that way. Perhaps I should." He applies the same rule to politics that he learned in business: Concentrate in areas in which you have strength. "You earn [influence]," he says, "by developing a reputation for being thoughtful and well informed on certain issues and for speaking only when you have something to say."

Most of what Zschau has said since entering the House this year relates to the federal government's role in influencing -- for better or for worse -- industry's ability to compete in international markets and at home.His premise is simple: America's strong suit is innovation, the creation of new technologies, products, services, and companies. Consequently, the best thing government can do is to promote an environment that encourages innovation. Instead of picking industrial winners and losers and targeting them for special help (as many have suggested), the government must "target the innovation process" itself. What he means by this is that innovation -- whether in high technology or in basic industries -- occurs when certain conditions exist; namely, when there are educated people working with a sound research base in a healthy economy providing incentives to risk-takers. The federal government, he says, should work to foster these conditions He believes, for example, that government has primary responsibility for the funding of basic (as opposed to applied) research at universities. He also believes that industry would perform more of its own research if antitrust laws did not dampen enthusiasm for joint research efforts. In addition, the federal government can use tax incentives to encourage private-sector assistance in funding education that benefits specific industries.

Tax policy can likewise affect the willingness of individuals and companies to take risks, he says. "Democrats complain that rich people shouldn't get tax breaks. But when you eliminate tax breaks, you dry up risk capital. There should be a preception that the tax system is fair, but when someone who has nothing creates something, we shouldn't say that's wrong. They've created wealth, jobs. We ought to be telling these people, 'Good going. Attaboy."

On the other hand, Zschau has long opposed across-the-board individual income tax cuts, including those of 1981, which he predicted would be a factor in increasing the federal deficit, thereby making it harder to bring interest rates down and hindering investment. "I continue to believe that," he asserts. On the spending side, he argues for "a social compact, in which all the special interests agree that reducing the deficit will benefit them more than their special program."

All of which may sound a little too neat and tidy, but"I don't purport to have the whole answer," Zschau admits. "My industrial-policy suggestions so far have focused on maintaining our technological leadership and -- an extension of that -- [making] our tired industries more competitive through the application of technology- But I don't purport to have solutions to any transitional problems that may arise... I'm not sure I understand, or anyone understands, how severe they are or what their causes are.

"... I have a fairly narrow range of experience. I've been in the high-tech industry, and I think that, by and large, the business attitudes in that industry are unique. People there are rugged individualists, very much dedicated to free enterprise, free trade, risk-taking. It's a breed of businessman that is a fine example of capitalism at work. I've gotten a very positive view of the social responsibilities of business and where jobs are created and what kinds of [management] attitudes work. Had I been employed in some monolith headquartered in New York City, I may have gotten a somewhat different view of the way business works. Mine was sort of a small-company, entrepreneurial perspective."

Zschau insists that, as usual, he has given little thought to his future. "That's been my approach all along... As time goes on, other opportunities arise, and I find myself in the shower in the morning, thinking more about the new thing than the old thing. When that begins to occur more frequently, I tell myself it's time to make a change. I'm no longer 100% intrigued by what I'm doing. It would be better for someone else to do that job, and I'll move along to something that's really sparked my interest."

Last updated: Dec 1, 1983

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