Gradco Systems Inc. of Santa Ana will join the growing ranks of high-technology companies taking advantage of lower labor costs and tax rates by expanding its manufacturing operations abroad.
The printing and copying-machine equipment manufacturer announced Monday that about half of its products will soon be made in South Korea, to cut costs and expand production capacity.
Although the move to offshore manufacturing will result in an immediate 25% production cut at Gradco's Santa Ana plant, company officials said the slowdown will be temporary, and will not require laying off any of the firm's 200 employees.
Keith Stewart, Gradco president and board chairman, acknowledged, however, that the change will result in a $1-million write-down on inventories and a potential operating loss for the quarter ended last Friday. One analyst estimated that the quarterly loss could reach $500,000 because the company has deliberately delayed production and delivery schedules until after manufacturing in Korea begins.
Despite some immediate setbacks, analysts uniformly applauded Gradco's announcement.
"It's the right decision and a gutsy move," said Richard Schwarz, of the E.F. Hutton Group in New York. "They get better prices on labor overseas and, in the long run, that will help earnings."
Stewart said any losses stemming from the change eventually will be more than offset by future savings. He estimated that the Korean venture will reduce the company's effective tax rate from more than 40% to about 35%, as well as cutting operating costs.
"The move to offshore manufacturing is expected to result in major operating cost reductions and substantially higher margins," Stewart said. "The company will forgo short-term performance in order to secure its long-term objectives."
According to American Electronics Assn., more than 40% of the employees of U.S. electronics companies were based outside the country in 1983, the last year for which figures are available. Among the reasons most often cited for the trend are cheaper labor and favorable income-tax treatment of profits generated by foreign-made and foreign-sold goods.
According to Stewart, Gradco's decision to take about half of its manufacturing to Korea followed a 50% increase in backlogged orders over the last six months. The backlog currently stands at $60 million.
"We could not handle that in our existing Santa Ana facility, and the choice was either to expand locally or to find another way to get the merchandise made," he explained.
Tax and labor advantages, Stewart said, prompted the company to sign production contracts with three Korean manufacturers. They will make Gradco products using their own employees and facilities; Gradco will not have offices in Korea.
Stewart said the Korean manufacturers will concentrate on high-volume production and products ordered by foreign customers. He said the Santa Ana plant will be used for smaller orders and higher-quality manufacturing.
Until the change is completed in about 90 days, Stewart said, Gradco will continue to curtail production at its Santa Ana plant. Once orders have been assigned to the proper manufacturing facility, however, production should begin at full capacity both in Korea and in Santa Ana, Stewart said.
In the first six months of fiscal 1985, Gradco had net income of $1,190,000 on revenues of $16,846,000.