Built on Speed
Kingston Technology shot up to $230 million in sales and the top spot on the 500 with no debt and no outside equity. How? By getting ideas into production and getting product out the door faster than anyone else.
David Sun is a hard man to track down. One moment he is at his desk in the midst of a room of salespeople. The next he is striding through the shipping department, before heading upstairs for a brief but intent conversation with an engineer. The best place to stake him out is in the cafeteria, where sooner or later he is sure to show up for a smoke and some banter with whoever happens to be around. Equal parts ebullience and energy, Sun creates the impression of speed in his daily hands-on whirl around Kingston Technology Corp., located in Fountain Valley, Calif.
That is apt. Kingston is built on speed, and it is that characteristic that has helped the company break well out of the pack and taken it to the top of this year's Inc. 500. Kingston designs and manufactures memory, processor, and storage upgrades for personal computers, laptops, laser printers, and workstations. In that cutthroat world, manufacturers crank out stripped-down, underpowered, low-cost machines that produce profits as marginal as the machines' performance. The real money is made on product upgrades, much the way car manufacturers cash in on the plethora of options that inevitably add the shock to the sticker price.
Enter Kingston. As brand-name machines roll out the door at the likes of IBM, Compaq, and AST, little-known Kingston sprints to design the upgrades that will turbocharge those stock machines with added memory and processing power so they can handle the latest hot and powerful piece of software hitting the market. Kingston moves with such speed that it can often design and produce the upgrade for a product before that product is even in the hands of the end-user. (Kingston's customers are distributors and resellers of computer equipment. For the most part, it does not sell direct to end-users.)
Kingston was founded in 1987, the result of creative engineering's meeting the fast-changing needs of an explosive market. That year there occurred a shortage of a certain type of chip used in memory-upgrade modules. Sun and his cofounder, John Tu, realized they could alter another chip in ample supply to produce a similar product. Suddenly, memory-starved distributors were beating a path to Kingston's door. "This was like gold at the time," recalls Tu. "People were offering to pay us in cash." But Tu figured it wouldn't be long before competitors caught on to what he and Sun had done and simply copied their feat. He bet Sun a Jaguar that Kingston would be out of business within the year.
Sun won a new set of wheels, and in 1988 Kingston's sales leapt to more than $12 million. By then the PC market was bursting with manufacturers starting to produce computers that ran on their own proprietary systems. Thus, each required its own unique memory upgrade, and Kingston's market expanded exponentially. Then in 1990 Microsoft introduced its wildly popular Windows 3.0, a program requiring more memory than was then available with off-the-shelf PCs. Kingston stepped in to provide the necessary additional memory. In recent years the same thing has happened in the memory-intensive workstation market. A year ago the company created a division to address that market. It already accounts for 10% of sales.
Last year sales rocketed to $141 million, and this year Kingston, with just 130 employees, is on track to reach $230 million in revenues. That works out to almost $1.8 million per employee. The company has no debt, no venture capital, and no plans to go public. And still it keeps piling up cash in quantities that verge on the embarrassing. It distributes 5% of pretax profits quarterly as a bonus to full-time employees, which came to $400,000 in the latest quarter. It also matches employee contributions to the 401(k) plan dollar for dollar up to a combined total of $6,000 a year. Today Kingston, which competes with about 15 other companies, commands a 45% share of the memory-upgrade market, and it shows no signs of slowing down.
So how exactly does Kingston do it?
Kingston has institutionalized speed at every level. David Sun, 41, and John Tu, 51, are quick, intuitive thinkers who've been known to decide to build a product on the 30-second walk between the parking lot and Kingston's front door. Their hit rate -- the ratio of successful products to product introductions -- is 90%, a phenomenally high number given the fast-changing world of personal computing.
Sun, a 10-year veteran of the PC industry, thrives on vibes. His desk sits out in a bull pen in the center of the sales department. Kingston's distributors call in daily from all over the world, placing orders, asking when the latest product will be out. (International sales account for 39% of revenues.) When the salespeople start hearing often enough that distributors are looking for a certain upgrade on a certain machine, and Kingston doesn't have it, that is often signal enough for Sun to decide to build that product. From there, it can take as little as one week before the product is ready to ship.
Kingston fills all purchase orders the day it receives them. That is unheard of in the high-volume, thin-margin, commodity-oriented world of PC manufacturing, where typically PC producers stockpile orders, shop around for dirt-cheap inventory, and then ship a ton of products every four to six weeks.
That kind of pace conflicts with the needs of end-users, who always want their upgrades yesterday. As a result, many original equipment manufacturers, unable to meet the needs of their customers in a timely way, simply refer people to Kingston, which can.
Although speed is a strong, definable attribute at Kingston, it is not to be confused with the company's core values. A suggestion of those can be found on a small plaque inside the front door in the lobby, which reads, "Courtesy . . . Compassion . . . Modesty . . . Honesty."
The embodiment of those values is John Tu, Sun's partner. The two have worked together since 1983, when they started a company, later sold to AST, to provide memory upgrades for Digital products. Tu, amiable and soft-spoken, focuses on sales and marketing, while Sun worries about engineering. But ask Tu what preys on his mind most, and he'll tell you it's a sense of obligation to his employees. "Suppose the company stops growing tomorrow," he muses. "We want to make sure our employees will not be hurt." Sun adds that Kingston is managed so conservatively that should it go out of business tomorrow, it wants to have enough money to distribute a year's salary to every employee to give each time to find another job.
The atmosphere at Kingston implies fluidity. No doors, no ties, no titles, no secretaries. No memos, no supervisors. No quality standards, points out David Sun, because quality comes built in. The company tests 100% of its parts before they ship, whereas the industry standard is 5%. "There are times when I've been over there, and I've seen David sweeping the floor," notes Al Soni, who represents Samsung, a major Kingston vendor. "He relates to his employees at their level -- always."
Janet Ruprecht, who works in marketing, describes Kingston employees as "people you would not expect taking responsibility for things you'd think they wouldn't notice." They range from engineers breaking from their mind work and wandering down to shipping to pack boxes for a while to shippers walking into the sales department, after talking to people in accounting, to report that certain distributors have fallen behind in their payments.
Ruprecht's sister Carol, who works in sales, recently got a call from a customer in Belgium who wanted to know if Kingston could produce a special modification of one of its products. Ruprecht hung up and called engineering. Engineering said OK, provided production could handle the alteration. Production assented, and 10 minutes later Ruprecht called back the customer to say Kingston could produce the part. She also recalls a rare slow day when production employees with nothing better to do decided to dismantle one of Kingston's fax machines to see if maybe they should be thinking about building add-on memory for it.
Kingston pays its employees salaries that are 20% to 30% above industry norms. It pays no commissions to its salespeople, believing that their success would not be possible without the group's efforts. Its bonuses are paid out in equal shares, not pegged to salary level, because Sun reasons that the bonus is a reflection of "how the company is doing," whereas salary "is what you know."
Kingston invests in engineering talent. Orange County brims with a surplus of free-lance engineers, yet the company assiduously has built an engineering staff, largely through Sun's and Tu's contacts in the industry. Both have a decided bias against credentials, and as a result, Kingston's two best "engineers" lack degrees but have a wealth of experience as technicians.
Paul Popadak is one of them. Recently, he spent six months designing a complex upgrade that allowed Kingston to become the only aftermarket company to reverse-engineer a board with an application-specific integrated circuit (an ASIC is a custom chip designed to take the place of many smaller and less complex chips).
Kingston's inventory takes up four rows of shelves, each running about 20 feet deep, creating the impression that David Sun and John Tu run a midsize auto-parts store, not a $141-million company that ships computer add-on components around the world. That inventory amounts to four days' worth of parts.
Such a lean inventory in the volatile computer aftermarket leaves little room for error. Memory chips, the heart and soul of Kingston products, are notoriously commodity-like in nature. Prices soar and collapse with little notice. If there is a hallmark to the industry, it is that the prime loyalty is to price and today's deal. Manufacturers persistently shop around among vendors. They cancel purchase orders when the market suddenly shifts. They drag their heels on paying bills.
Kingston's lean inventory thus appears against the backdrop of a chaotic market as a high-tech, high-wire act. But Sun and Tu have a safety net beneath them, woven taut and true by their vendors. In their hierarchy of important people, Sun and Tu place employees first, followed closely by vendors. They believe that if you treat those two groups well, then they in turn will see to the care and feeding of the third vital group -- customers.
"Integrity. That's how I'd sum up Kingston in a word," says Ken Hurley of Hitachi America, one of Kingston's key vendors. "We have a strong partnership with Kingston. We don't share that with a lot of its competitors."
"If David gives me his word, I can take it to the bank," echoes Mike Burns at Motorola, who labels Kingston "my top account" -- in terms not only of volume but also of psychic ease. Burns makes no commission on the commodity chips he sells to Kingston but says, "I spend 40% of my time supporting this account, because it's so pleasurable to do business with them. I've been doing this for 15 years, and I have yet to meet a company that's more fun to work with."
From the start, Sun and Tu set out to establish long-term relationships with vendors, believing that is the best way to impart ballast to a business in a tempestuous industry. "We will deal with a vendor only as a long-term partner," says Sun. Kingston has never canceled a purchase order. It always works with vendors to schedule the manufacture and delivery of chips and has never backed off that schedule. It does not grind suppliers down on price, preferring to get a consistent supply and quality. In the case of smaller, undercapitalized suppliers, Kingston often prepays.
Sun says, "People in this industry tend to be greedy because the money turns so fast." He adds that not paying bills on time in order to earn a little extra interest at the expense of a creditor makes no sense whatsoever. "For a fraction of a percent you suddenly become an unethical person."
"Other customers play games and delay payments," says Al Soni of Samsung. "Because of Kingston's relationships, it's able to get hard-to-get parts before everyone else does." In turn, strong relationships with vendors allow Kingston to focus on things that really matter. "A lot of their competitors shop around all over the world. They spend all their energy on price," continues Soni. "Sun and Tu get a good price from us, good support, and consistent supply. As a result, they're able to spend more time on things that make a difference, like developing their sales and marketing channels."
Soni says Kingston has "established a new trend" for its industry by booking an order, building the product, and shipping it the same day. It is a process competitors will be forced to follow, and it is one that pays customers a considerable dividend: they don't have to carry any inventory.
One Kingston customer, Ingram Micro, based in nearby Santa Ana, sells more than $1.5 billion worth of computer equipment annually. It receives two shipments a day from Kingston. Another customer, Gates F/A, based in Greenville, S.C., places orders with Kingston nightly -- and has the product in its Ohio warehouse the next day. Jerry Lumpkin at Gates F/A says Kingston's name is synonymous with both product quality and being first to market. If Kingston can't produce it, then likely no one else can. "Sometimes we hear from other vendors, 'Even Kingston doesn't have it.' Kingston provides a benchmark for other companies to measure themselves against."
Kingston supports its distributors by drop-shipping direct to end-users when necessary. It immediately replaces defective products, no questions asked, without waiting for returns. Similarly, Kingston pours a lot of resources into technical support, knowing it will be called on to answer questions about other manufacturers' equipment that has been integrated with its own.
John Tu sums up Kingston's strategy simply: "We want to make it so the customer can't afford not to do business with us." David Sun echoes the sentiment, arguing that Kingston's just-in-time bend-over-backwards way of doing business does more than create goodwill. It makes good sense. "If we ship the same day, then there are no back orders. They create extra work. We say instead, 'We'll support you. We'll ship to you every day.' The distributor is not forced to take a lot of product all at one time." As a result, Sun emphasizes, should the market suddenly fall apart, the distributor is not put in the position of having to take delivery on thousands of units previously committed to and no longer wanted. That reduces the risk of weakening the relationship between Kingston and its customers.
Kingston and its vendors in effect hold the customers' inventory. "We are sitting here as a broker of services from our employees and vendors to our customers," says Sun. Kingston not only eliminates the cost and hassle of inventory for its customers but offers a wide array of products. Moreover, because of its favored status with strong vendors, it is virtually assured of having new products first. To Kingston customers, that translates into relative scarcity of those products -- and, accordingly, higher margins before the market becomes flooded.
In the meantime, Kingston's founders act as though the company could end tomorrow -- and even take great pains to talk down its success. Tu has been a persistent worrier since day one, figuring the company would be out of business within six months of start-up, as soon as competitors caught on to it. Sitting in his office one recent day, Tu held the simple memory chip upon which Kingston built its early success. "This is like making chocolate-chip cookies. This is really stupid," he said, shaking his head and noting there was nothing revolutionary at all about the device. "I never imagined we would get this far."
Mike Burns of Motorola predicts Kingston will hardly be a flash in the pan. Not only has the company redefined the way its industry does business, it's also pushing into new niches with entrepreneurial flair. Not only has Kingston gotten into building upgrade products for workstations, it has also delved into processor, graphics, and network cards, and recently invested in a nearby company that manufactures laser printers. It has also embarked on a joint venture to market its products through a chain of superstores, believing that type of outlet to be the wave of the future.
Kingston has always been quick to spot a trend in the computer marketplace and jump on it. With PC manufacturers at war with one another, introducing better and cheaper products at a faster and faster rate, it appears that -- despite Tu's worries -- Kingston's market is not about to dry up anytime soon.