Guitar Firm May Play Swan Song : Fate of CBS’ Famed Fender Instruments Unit in Doubt

When CBS said recently that it was putting Fender Musical Instruments up for sale, the music industry shuddered to think what might become of the company whose electric guitars, amplifiers and pianos have helped shape the sound of contemporary popular music.

Many professional and amateur musicians have a sentimental feeling for the Fullerton-based company, founded by Leo Fender, the Henry Ford of the electric guitar. Fender instruments have been touted by some of the most popular rock ‘n’ roll and country-western stars, from Jimi Hendrix to Les Paul, and strummed by generations of neighborhood teen-age bands.

CBS’ decision to sell Fender, along with the rest of its unprofitable musical instruments division, shows that America has slipped from dominance in yet another manufacturing sector, yielding to an onslaught of Japanese competition.

While the competition generally has improved the quality and lowered the price of guitars, it has forced many American guitar companies to shut down or contract with factories in Japan, Taiwan and South Korea, which have the advantage of lower labor costs and more highly automated assembly lines.

“Eighty percent of the manufacturers have resorted to going to Japan for a cheaper line of guitars,” said Bernie Rico, a guitar manufacturer in South El Monte. But in many cases, he added, American guitar manufacturers continue to build their top-of-the-line models in the United States.

Fender is no exception. Not only have Fender’s sales suffered from Japanese competition, but the company has also arranged to have most of its guitars manufactured in Japan. Some Fender amplifiers and keyboards are also crafted there, while Fender drums are imported from Taiwan

Future Is Unknown

Fender President Bill Schultz said the Fender name and business will be sold separately from the 250,000-square-foot manufacturing and headquarters plant that CBS built in Fullerton in the company’s boom days. Such a large facility no longer is needed to house Fender’s work force, which has shrunk to 275 from 700 over the last three years.

The company’s last home-based guitar manufacturing unit, employing 60 of the most senior craftsmen who build top-of-the-line instruments favored by professional musicians, is scheduled to shut down by Feb. 1, according to company officials. They said tentative plans call for electric-piano manufacturing to continue at Fender’s Fullerton plant until the end of February.

Fender’s future is unknown. Whoever buys the firm will decide which Fender product lines will survive and whether any will be manufactured in the United States.

“There are a lot of broken hearts around Fullerton,” said John McLaren, former CBS musical instruments division president, who, along with Schultz, led an all-out campaign from 1981 to 1983 to revive Fender’s sagging sales.

CBS officials have said the entertainment conglomerate intends to sell off its entire musical instruments division, which, in addition to Fender, includes Steinway & Sons pianos, Gulbransen organs, Rodgers organs, Gemeinhardt flutes and piccolos and Lyon & Healy harps. The Fender organization also manufactures products under the trade names of Rogers drums, Rhodes electric pianos and Squier guitar strings.

“The Japanese beat us in price. That’s what hurt us,” said Harold Rhodes, 74, inventor of the Rhodes electric piano that Fender manufactures. He estimated that in the last three years sales of Fender-manufactured guitars and pianos have been cut in half. (The company does not provide such figures.)

Ironically, Rhodes said, many of the Japanese synthesizers now on the market offer what they call a “Rhodes sound,” and some Japanese-brand guitars “look for all the world like Fenders.”

Japanese competition is just one of several factors contributing to Fender’s woes.

Fender, founded in 1946, gained prominence with its combo instruments in the 1950s and ‘60s. But since then, the baby-boom generation has passed its prime for buying musical instruments. Fewer of today’s teen-agers seem interested in learning a musical instrument as video games and computers vie for their attention.

The recent recession and rising consumer financing rates also took a toll on the sale of musical instruments. And the increasing value of the dollar has made it more difficult for American instruments to compete in price with comparable foreign-made models.

The wholesale value of musical instruments sold in the United States slipped from $2.353 billion in 1979 to $2.334 billion in 1983, according to American Music Conference statistics. At the same time, the wholesale value of instruments imported to the United States rose by 38% (to $263 million from $190 million), and the wholesale value of exports dropped by 35% (to $126 million from $195 million).

Few Are Exported

Only 5% of American-manufactured instruments are marketed overseas, compared to 20% a few years ago, according to Charles Suber, former president of the now-defunct Chicago-based Music Industry Manufacturers Assn.

Music dealers and manufacturers are faulted by some in the industry for not acting prudently to cultivate future musicians in the golden years of the ‘60s and ‘70s. During that period, many dealers closed the music schools in their shops that once had fostered sales.

“They were so busy selling seven or eight years ago that all their teachers became salesmen, and the (music teaching) studios became warehouses to store inventory,” chided a guitar marketing director.

Blame for the decline of the American musical instrument industry also is leveled at the conglomerates that bought some of the country’s finest entrepreneurial manufacturing firms in the 1960s with the hope of profiting from young people’s love affair with rock ‘n’ roll, whipped to a crescendo by Elvis Presley and the Beatles.

The financial resources of major public corporations were expected to strengthen the marketing clout of the smaller firms they acquired. But, in hindsight, critics say the corporations were ill-suited to stewarding businesses whose success depends on craftsmanship, sensitivity to the tastes of artists and personal service to dealers.

The musical instrument companies that have best survived the foreign competition and shrinking consumer demand have tended to be those that remained in private ownership by craftsmen.

“All the firms with MBAs have been sold or gone under,” quipped Suber, noting that CBS is one of the last conglomerates to bail out of musical instruments.

Another musical instruments firm on the selling block is Nashville-based Gibson, which along with Fender and C. F. Martin Co. of Nazareth, Pa., just about monopolized guitar sales a decade ago.

Like Fender, Gibson’s financial losses in more recent years have made the company less attractive to its parent, Norlin Industries Inc., and the Rooney Pace Group, an investment banking and brokerage firm that now controls Norlin. “The new corporation is looking at the bottom line and wants to dump us,” said Randy Cullers, Gibson’s manager of advertising and artist relations.

Indicated Losses

CBS does not separately report financial statistics for its divisions. However, in reporting third-quarter earnings for 1984, the company blamed an operating loss of $8.3 million for its Columbia Group in part on “continued losses in the musical instruments business.”

Richard MacDonald, a broadcasting analyst with First Boston Corp. in New York, estimated that the CBS musical instruments division last year sustained operating losses of between $4 million and $5 million, almost doubling an estimated loss of $2.5 million in 1983.

MacDonald said that, although the musical division’s losses are almost insignificant for a huge corporation such as CBS, he believes that it is a good idea for CBS to sell Fender because it would reduce “the amount of time top management has to spend on matters that are inconsequential to the company’s overall direction and health.”

CBS’ future in musical instruments looked much brighter in 1965 when it spent $13 million for Fender Instruments, which was targeted as the first in a series of acquisitions that would create a new corporate division.

Fender Instruments had been built largely on the work and reputation of Leo Fender, who invented the Telecaster, the first commercially successful electric guitar, and the first electric precision bass that “changed the sound of popular music,” according to Guitar Player Editor Wheeler.

Musicians Complained

Soon after Fender sold his company to CBS, dealers and musicians began to complain that the quality of Fender instruments was slipping. They accused CBS of boosting production to satisfy buyer demand without enforcing adequate quality controls. “Pre-CBS Fender guitars” were advertised, and collectors paid a premium for them.

Also, critics say CBS alienated many of its dealers by over-saturating the market with its instruments, raising prices too high and requiring retailers to stock Fender’s less popular product lines for the chance to market Fender’s hotter selling items.

Hartley Peavey, proprietor of a highly successful guitar manufacturing company based in Meridian, Miss., accused CBS of “gross mismanagement” in its stewardship of Fender Instruments. He said Leo Fender “cared about his product, his employees and his dealers, and when he left, the company was still there but the catalyst who made it work was gone. . . . The corporate guys got it, and they ran it into the ground.”

In an attempt to revitalize the instrument division, CBS in 1981 lured away two top executives from one of Fender’s biggest Japanese competitors, Yamaha International, a subsidiary of Nippon Gakki Co., whose musical instruments division is based in Buena Park. Yamaha Executive Vice President John McLaren became president of CBS’ musical instrument group. In turn, McLaren tapped one of his former Yamaha colleagues, Bill Schultz, to head Fender.

Upgraded Products

The new management team moved quickly to upgrade the quality of Fender’s products. CBS “invested several million dollars in a lot of new sophisticated machinery to improve precision and productivity,” recalled McLaren, who resigned his position at CBS Musical Instruments a year ago and now publishes a music industry newsletter.

“CBS has been a responsible owner and tried every conceivable thing” to pull Fender out of red ink, McLaren insisted. Also, he said many Fender employees put in 60-to-70-hour weeks in their determination to turn the company around.

Schultz would rally workers by making impromptu speeches from atop packing crates at the factory. He stressed that the battle was between America and Japan. Large red, white and blue banners were hung from the factory ceiling, and brochures emblazoned with stars and stripes were sent out with employees’ paychecks.

But McLaren said economic factors beyond Fender’s control, particularly the dollar’s increasing strength against foreign currencies, forced the company to start manufacturing overseas.

Some people within the Fender organization contend that CBS decided to sell the company just as it was about to reap the benefits from the switch to foreign manufacturing and from the development of less expensive and improved product lines.

Can Regain Position

Rhodes, the inventor who works as a consultant to Fender, declared, “It is right now we have a chance to recapture our position.” He said the Fender manufacturing operation in Fullerton recently closed for almost a year while the manufacturing equipment was “retooled” to turn out lighter and sturdier pianos that will sell for about $300 less than previously.

Fender President Schultz, while acknowledging that the company has suffered losses for three years, said the firm could “turn around and start making a profit” in 1985. But he added that the kind of profit Fender could reap in today’s market would be “insignificant” for CBS.

Already, Fender has attracted “several” potential buyers, according to a CBS spokesman who refused to elaborate. However, Schultz acknowledged that he is one of the bidders and some Fender employees said they believe that he has the “inside track.”

Schultz said he believes that Fender would be more successful if it returned to being an “entrepreneurial” firm. “You have got to get back to an individual owning the business,” he said.