Subscribe to Inc. magazine

Move Over, Sony

Just when everyone has written off consumer electronics, a few firms are bucking the trend. Can America make computers if it can't make TVs?
Advertisement

To some, Bob Carver's operation near Seattle might seem like an act of rebellion, or sheer lunacy. At a time when most everyone from Wall Street to Silicon Valley has conceded the multibillion-dollar consumer-electronics industry to the Japanese and other Asians, Carver is trying to make a big score in stereo tuners and amplifiers. The thing of it is, he just might succeed.

Carver's products are based on technologies that he has developed and patented since turning from antiwar activism to invention in the 1970s. Using this technology as a starting point, he has been able to produce audio products with significant qualitative advantages over those turned out by much larger competitors. "The products of the Matsushitas, Pioneers, and Yamahas are so similar that you can put black tape over the labels and you couldn't tell the difference," says Carver Corp. marketing vice-president Milt McNally. "We do things that are not 'me-too,' where the Japanese can't wipe us out with their economies of scale and pricing."

For Carver, however, this "hit them where they ain't" philosophy has built-in limitations. Over the past three years, the company's sales have grown at a compound annual rate of 53%, and profits have nearly quadrupled. But the consumer market for $1,000 amplifiers and stereo televisions is limited -- maybe 10% or 15% of the total. Carver estimates that the esoteric high-end market will be saturated within five years.

To expand into new products, Carver has invested $6 million to improve the efficiency of his manufacturing operation, to make it competitive in the larger, mass-oriented market. "It might be easier to go to Japan with everything we design and say, 'You build it," Carver says. "But I don't see that as a way of building value for this company." Starting next year, the first American-made compact disk players will be made from his plant in Lynnwood, Wash.

Carver is certainly fighting against the current of conventional thought. "Leadership in consumer electronics [manufacturing] has passed to Japan, and it isn't coming back," declares William Relyea, a leading industry analyst at New York City's Eberstadt Fleming Inc. And the latest figures certainly help confirm this negative view. Once the dominant player in the industry, the United States in 1984 suffered a $9.6-billion trade deficit in consumer electronics, up 44% from the previous year. Estimates for 1985 show the deficit reaching $11 billion.

Nicholas P. Heymann, an analyst at Drexel Burnham Lambert, in New York City, expects the trend to accelerate over the next few years as the remaining consumer-electronics giants, particularly the new General Electric/RCA combine, shift from less profitable products, such as televisions, where the margins can be as low as 2%, to telecommunications and military hardware. "I don't see any future in consumer electronics in America," says Heymann, a former strategist for General Electric Co. "It's all going to go offshore. In a few years, there won't be a significant American stereo- or TV-manufacturing industry."

Rob Reis has heard the nay-saying countless times. Reis is president of Finial Technology Inc., whose turntable uses laser technology to allow the playing of ordinary vinyl records without wear. Although a sizable audiophile and professional market for the product exists, Reis had to spend over two years trying to find somebody to finance his startup." The attitude was that consumer was a market they didn't have time to learn about," he recalls.

Reis eventually got started without the support of Sand Hill Road, the Rodeo Drive of California venture capital. "We had always stayed away from the consumer field, like everyone else, but we were attracted to a differentiated technology," explains Carl Hutman, whose New York City venture capital fund provided Finial's first financial support. "It seemed a lot better than financing another diskdrive firm."

Reis now has some $2.3 million in capital, and expects to be turning out turntables by the end of the year from Finial's plant in Sunnyvale, Calif. But now there is another hitch. The American retreat from consumer electronics has meant that there are no domestic suppliers for many of the crucial, albeit mundane, components of his turntable. As a result, he'll be buying them from Japan.

Up in Lynnwood, Bob Carver's experience is quite similar. A Carver preamplifier, for instance, requires more than 400 resistors.Once commonly available in the United States, they can now be purchased for $1 or more only from companies supplying the aerospace industry. The same part can be purchased in Japan for less than one-quarter of a cent.

Even high-tech parts, such as laser-tracking mechanisms and VCR recording heads, are not available domestically, and Carver and his engineers spend hours trying to order them from catalogs printed in Japanese. This supply situation -- not the supposed superiority of Japanese manufacturing -- is largely responsible for driving Carver to contract with a company in Osaka to manufacture VCRs and other products in his line.

There are dangers, of course, in making such arrangements. Overseas firms with manufacturing contracts from American companies have used their newfound profits and experience to become fierce competitors of their onetime American customers. Think of RCA and its onetime VCR supplier, Matsushita Electric Industrial Co., whose Panasonic line now competes head-to-head with RCA. Leading American audio firms suc as Sherwood and Fisher Corp. gave so much ground to offshore suppliers that they have now become little more than wholly owned marketing subsidiaries of Asian firms.

The demise of consumer-electronics manufacturing was probably never as inevitable as Wall Street and corporate America now maintain. Or so says Sidney Harman. For three decades, his Harman International Industries Inc. has been a successful manufacturer of large audio equipment, with 1985 sales in excess of $200 million. Its various lines of American-made speakers have gained a leading share in the high- and mid-range market, and the company's Northridge, Calif., factory is among the largest such facilities in the world. Harman claims his direct-labor costs there are the same as his Japanese competitors ($13,000 average annual wage), and his productivity is slightly higher. As a result, he ships as much as a third of his total output overseas, much of it to Japan.

Harman, the former undersecretary of commerce in the Carter Administration, warns against the temptation to manufacture overseas. "When you forfeit manufacturing, you usually end up losing it all," he says. "It's not like riding a bike. Once you fall off, you can't get back on."

Source Technology Corp., in Los Gatos, Calif., hopes to avoid such a fall. Its innovative flat-panel CRT technology can shrink the size of today's bulky television and cathode ray tubes to as little as one inch in thickness, even while improving picture quality. But with slender financial resources and little manufacturing capability, Source is seeking out an American corporate partner with the experience and muscle to exploit its technology in the consumer-electronics market. "We don't want to fall into the trap that the Japanese set for us," explains Charles Antony, Source's president. "Our dream is to find a strong American partner that can take our TV and CRT and beat the Japanese with it."

But like Diogenes looking for an honest man, Antony is having a tough time finding a Fortune 500 partner. While visiting Japanese and Korean executives are eager to strike a deal, American executives seem interested in utilizing Antony's technology only for low-volume, high-margin applications, such as scientific instrumentation and defense contracts. "The American managers don't want to risk anything," he complains. "They just want the safe little markets."

Yet if anything can be learned from the past, it is that there is precious little that is "safe." Companies that master the production and design of low-tech or mid-tech products have an uncanny knack of showing up later on the higher end of the electronics scale. "The skills involved . . . can be transferred from one product to another," explains Kiyoshi Suzaki, a former Toshiba Corp. engineer who now consults with Arthur Young & Co. "You simply go up the learning curve."

No company has climbed the learning curb more successfuly than Zenith Electronics Corp., the one big American company that seems committed to manufacturing consumer electronics in this country. Zenith has used its manufacturing and marketing expertise, developed in making radios and television sets, to become a major force in the personal-computer field. "We see it as a question of converging technologies. It's a misnomer to call a TV a low-tech item," "explains John Taylor, a Zenith spokesman. "There are more commonalities than differences between various parts of the electronics business. You're always building on the technology. It's a full circle." Recently, Zenith won the largest microcomputer contract ever awarded by the U.S. government -- this one from the Pentagon. And Zenith soon will be supplying $27 million in lap-top computers to the Internal Revenue Service; the losing bid came from IBM Corp.

As the Zenith computer coup indicates, the cost of surrendering the consumer-electronics market cannot be measured merely in terms of lost sales and profits from televisions and stereo components. An electronics industry that gives up on production and loses touch with consumers will eventually sacrifice its technological advantage as well.

Last updated: Jun 1, 1986




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: