STRATEGY

A New Kind of Middleman

For components broker Terry Noone, low prices are no longer enough. Today, it's all about service.
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In many ways, Terry Noone's world is a small one, revolving around a few square blocks on Chicago's North Side. Each morning, he walks from his home to his warehouse through a quiet world of tree-lined streets and low-slung commercial structures, evoking a time when business, and indeed life, were largely local pursuits.

But Noone's outlook couldn't be more global. He spends a typical weekend watching Chinese-language movies and listening to Chinese-language tapes. At least once a week he makes sure to eat with chopsticks. "You've got to show people you're interested in their culture," he says.

Noone is interested, all right. The 54-year-old entrepreneur is founder and CEO of Capacitor Industries, which imports low-cost electronic components from China and sells them to motor makers and other manufacturers in the U.S. and, increasingly, abroad. His stock-in-trade is capacitors: tiny devices that store charges, maintain electrical currents, keep motors running, and protect computers and communications equipment from surges. Every motor manufacturer needs a steady supply of them, which has helped send Noone's annual sales to $5 million.

Noone's basic business model -- buy cheap overseas, sell at a profit here -- was revolutionary in 1990 when he founded his company. And it served him fine for years. But these days, middlemen like him are a dime a dozen. So his business model has had to evolve. Increasingly, he has learned, every business is a service business.

In the early days of Capacitor Industries, for example, he simply connected U.S. buyers to Asian sellers, providing the cheapest price available. Now customers demand more. Sometimes they come to Noone with a design idea -- say, a capacitor casing that will eliminate a step in the motor-assembly process. Noone takes drawings and accompanying parts to his Chinese manufacturers, seeking one that can produce the reconfigured capacitor. Once the device is built, he personally shepherds it through approval by Underwriters Laboratories, a two- to six-month process. "We handle it all," Noone says. Almost a third of Noone's sales involve such custom work, which not only allows him to charge more, but also raises the bar for competitors who might try to swipe his customers. "It's total protection," he says.

Prices in the global capacitor market are falling about 5% to 8% a year, according to Reed Electronics Research in Oxford, England. So Noone keeps his business focused -- capacitors only. And he keeps overhead to a minimum, using outside sales representatives rather than staffers. He's raised inventory management to an art form, keeping in touch with suppliers and customers to avoid being stuck with stale parts. He also has moved into higher-margin items; recently he signed up a supplier in India to make more sophisticated capacitors that sell for $50 to $1,000 each to military contractors, labs, and communications concerns.

It's heady stuff for a college dropout and former construction worker whose father, an Irish immigrant elevator operator, advised his son to "never take chances." Instead, Noone wound up taking a big one, becoming an unlikely pioneer of globalization in the process.

He started down that path in the late 1980s, when he was working a $5-an- hour position at a small capacitor manufacturer. Later, he switched companies and jumped into sales. At the time, foreign competition was just a faint drumbeat. Quality concerns dogged most foreign components. And pre-Internet, it was almost impossible for all but the largest buyers and sellers to find one another across an ocean.

Then one day, the magazine Asian Sources landed on Noone's desk. "I pored over it," he says. He found page after page of advertisements for component makers looking to break into the U.S. market. Their prices were cheap. He asked the boss about becoming a distributor for Asian-made capacitors. When the boss declined, Noone quit. He faxed a letter to 40 Taiwanese capacitor makers. Would they like a U.S. sales agent? While plenty were interested, only one agreed to front Noone inventory. He soon had $40,000 worth of capacitors -- 45,000 to 50,000 pieces -- in his basement.

A motor-assembly plant can be shut down for want of 85-cent capacitors. Noone built his business by undercutting domestic suppliers on price by 25% to 30%. The timing was perfect. Coming out of the early 1990s recession, manufacturers were figuring out that they could either incorporate lower-cost foreign parts into their products or expect to be edged aside by their own foreign competitors. Within two years, Noone's sales hit $1.5 million.

In the late 1990s, he shifted to suppliers in mainland China. Quality was improving there, and factories increasingly employed at least one English speaker. But working with China meant changing the way he did business. Forced to carry a sizable inventory because of long shipment times from China -- roughly two months from order to delivery in the post-September 11 world -- he's become a scrappy cash manager. He asks for, and gets, 30 to 60 days of credit from his suppliers. And he dogs his own 200 customers for prompt payment. On both sides of the ocean, he has one- to four-year supply agreements, taking some of the uncertainty out of a middleman's life.

Noone's favorite time of day is early in the morning, when he phones Chinese suppliers, hearing the comfort in their voices as he trades greetings with them in Chinese. But China is just one part of his business. With new customers from as far away as Korea and Brazil, nearly 20% of his sales are overseas. Realizing foreign customers will be his growth market, Noone is in the process of upgrading his website to include pages in foreign languages. And he hopes to have two or three foreign sales reps by year's end. "I feel like we're really making connections," he says.

Sidebar: The Chinese are Coming

They've gobbled up tens of thousands of jobs. Now Chinese investors are coming after U.S. companies.

Taking advantage of the weak dollar, Chinese companies acquired some 649 U.S. companies in 2004, according to MergerStat, an M&A research firm in Santa Monica, Calif. Like Japanese investors in the 1980s, Chinese companies are flush with cash and are looking to spend it, says Tom Taulli, founder of CurrentOfferings, a financial research firm in Newport Beach, Calif. But unlike the Japanese, who made high-profile acquisitions in film studios and real estate, the Chinese are flying under the radar -- buying textile, appliance, electronics, and auto parts manufacturers, and Taulli expects the trend to continue as Chinese manufacturers look to expand globally. The good news for company owners: "It means you'll have another buyer at your doorstep," he says.

-- Darren Dahl

Last updated: Jul 1, 2005




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