Disk-Drive Maker Hopes to Reverse Fortunes : Tandon Pulls Switch to Personal Computer Field
Something must be up with Jugi Tandon. He hasn’t bought a car in three months.
For a man who collects automobiles like some people collect stamps, that’s a good indication that lately his mind has been on much more than his cars, of which he has about a dozen.
Tandon has been preoccupied with transforming the beleaguered Chatsworth company that bears his name from one of the world’s leading makers of disk drives, the devices that store and retrieve data in personal computers, into what he envisions as a leading maker of IBM-compatible personal computers.
The metamorphosis comes at a time when a severe industry slump has forced many of the industry’s brightest stars out of business. Undaunted, Tandon has spent a fortune hiring some of the key executives who launched IBM’s immensely successful personal computer in 1981, offering them fat salaries and enough stock options to make them as rich as a California Lottery winner if they succeed.
Tandon’s friends, such as disk-drive entrepreneur Al Shugart, call the move courageous. Others in the business, however, wonder why the world needs yet another personal computer maker and question whether Tandon has the resources to keep up with low-cost competitors in the Far East and the big, established U. S. computer makers such as IBM and Compaq Computer.
‘Not Worrying About Tandon’
“I’m not spending a lot of time worrying about Tandon,” said Michael S. Swavely, vice president of marketing for Houston-based Compaq. “I’ll spend my time worrying about IBM, AT&T; and Apple.”
Yet even the skeptics find that what Tandon is doing is fascinating and bold, characteristic of the kind of risks the flamboyant, 44-year-old native of India has taken since he started his firm in a garage just over 10 years ago.
“Jugi’s always been running a marathon on the edge of a cliff,” said James Porter, editor of Disk / Trend Report, which tracks the disk-drive industry. “But I’d never want to bet against him. He’s one of those guys who I wouldn’t say has a magic wand, but he’s always more likely to be a survivor than a loser.”
Tandon, whose full name is Sirjang Lal Tandon, says he can build inexpensive, quality personal computers that will compete successfully. His computers, Tandon says, will provide attractive profit margins to computer dealers such as ComputerLand, to makers of office automation equipment such as Xerox and to makers of large computer systems such as Digital Equipment.
Wants to Keep Disk Drives
Although he wants to remain a leading supplier of disk drives, Tandon predicts that personal computers will make up 80% of his company’s sales by 1987, when he expects revenues to cross the $1 billion-a-year mark. He acknowledges that that is an ambitious projection, considering that the company’s sales were only $268.8 million in the fiscal year ended last Sept. 27, when it lost $135.4 million, primarily because of the industry downturn, foreign competition and decreased business from IBM.
To make his plans work, Tandon looked to people who proved themselves at IBM. His company now has seven former IBM employees in its top ranks, including Tandon himself, who worked for IBM as an engineer in the early 1970s.
Two former IBM executives were hired in the last five months to play key roles at Tandon. Dan H. Wilkie, Tandon’s president and chief executive, was an 18-year IBM veteran who ran the company’s personal computer operations in Boca Raton, Fla. Tandon’s senior vice president of sales and marketing, H. L. (Sparky) Sparks, worked at IBM for 20 years and launched the distribution and marketing system for the IBM-PC, later doing the same thing for Compaq.
Other Ex-IBM Employees
Tandon also recently hired William Sydnes, who helped design the IBM-PC, as vice president of engineering and development; Joseph Sarubbi, another key player in the making of IBM’s personal computer, as senior vice president of manufacturing operations, and consultant Chuck Peddle, a non-IBM industry whiz who designed Commodore International’s computers and founded Victor Technologies, a Scotts Valley, Calif., computer firm.
Buying top talent in the computer business is expensive. According to documents filed with the Securities and Exchange Commission, Wilkie received a $100,000 hiring bonus and a salary of $270,000 a year, only $5,000 less than what Tandon himself received in the last fiscal year. Sparks got a $120,000 bonus and is being paid $200,000 a year, the documents show.
But the main financial incentives for the two men are options for Tandon stock. Each will get options for 450,000 shares within four years at $2.75 per share. Sparks has been assured a minimum gain of $2.75 a share for each option, if he meets performance standards, meaning his 450,000 shares would be worth at least $1.2 million. If the stock’s price rises, as it has in the last six months, to more than $5 a share, both stand to make a whole lot more.
Jugi Tandon brushes aside suggestions that hiring such talent is too expensive for a company that has been plagued by big losses. “It’s cheap to get good people,” he said. “It’s very expensive to work with bad people.”
Will Forestall Problems
Tandon director Jean Deleage, a San Francisco venture capital executive, says hiring Wilkie and other of the former IBM executives will prevent the recurrence of some of Tandon’s past problems in manufacturing and operations, such as being burdened with huge amounts of outmoded inventory.
Wilkie, Sparks and the others say they are sold on Tandon’s plan, noting that they would not have left their comfortable jobs if they didn’t believe they could reverse Tandon’s fortunes.
The key selling point to Tandon’s argument, they say, is the company’s “vertical integration,” the fact that it can make nearly every part that goes into the personal computer at its low-cost plants in Singapore and India. Most important, they believe, is that the company makes its own disk drives, the single most expensive component in a personal computer and one that nearly all Tandon’s competitors must buy from suppliers.
Those factors, Tandon executives argue, will provide the flexibility the company needs to pass on a higher profit margin to dealers, who have seen their profits erode in the last two years because of intense price wars.
Looks to Private Labels
Tandon plans to use the good relations Sparks built with dealers while he was with IBM and Compaq to tap into the so-called private-label market, in which a company such as ComputerLand might take a Tandon personal computer and sell it under its own name.
The idea of private-label computers is controversial among retailers. Some are convinced that launching their own brands could alienate suppliers such as IBM and Compaq. Furthermore, industry executives say, starting a brand name would cost a retailer millions of dollars in advertising.
“First and foremost these dealers are businessmen, so the deal has to make good financial sense. They simply aren’t going to let that issue go away simply because it’s Sparky who is talking to them,” Compaq’s Swavely said.
But ComputerLand, the largest franchiser of computer stores, is interested in a private label computer. Michael A. McConnell, ComputerLand’s senior vice president in charge of products, said the company will decide within a month whether it will launch a ComputerLand-label personal computer. McConnell said Tandon is one of the top contenders to get the contract if ComputerLand markets the product.
Original Equipment Options
The other key part of Tandon’s strategy is selling to OEMs, or original equipment manufacturers such as mini-computer makers and office automation firms. Tandon executives say they have signed three contracts with OEMs and are about to sign a fourth. They refuse to release names, but industry analysts say three of them are Xerox, Tandem and Prime Computer.
Tandon is already making one personal computer for Tandy, sold in Radio Shack stores, that is compatible with the IBM-XT. The Tandon computer, which Tandy has been retailing for $1,800 to $2,000, cost about 30% less than the comparable IBM model until IBM’s price cuts last week.
Jugi Tandon predicts that the OEM market will unfold because companies that sell mini-computers and office automation systems to businesses will want to supplement their product lines with personal computers. Those firms, he says, will find it easier and cheaper to buy those computers from a company like Tandon than to design and make the computers themselves.
But Daniel R. Carter, president of Cordata, a Thousand Oaks personal computer maker, predicted that only a limited number of such manufacturers will buy personal computers under contract from other firms. “A lot of those guys are big players who will eventually do their own development work,” Carter said.
Search for New Plant Site
Tandon now assembles about 4,000 personal computers a month at its Voyager division in Thousand Oaks, but hopes to increase its monthly output to 30,000 by later this year. The company is looking at buildings in the area where it can put another plant.
The company’s ambitious plans will take considerable money. Wilkie’s task is to crank up production with limited resources, meeting customer demand while keeping a tight watch on quality control, which he feels will be critical to Tandon’s success. It’s quite a bit different from his job at IBM, he said, where his resources were virtually unlimited.
Several fund-raising methods are being explored, including a stock offering and borrowing money, something the company has resisted in the past, when it could finance its operations from a steady cash flow.
Jugi Tandon has historically run his business in much the same way he runs his life, paying cash for almost everything. That goes for the new cars he buys, which in the last three years have included a Mercedes-Benz, Rolls-Royce, Lamborghini and his current favorite, a Chevy Suburban.
Attempt to Regain Glory
Tandon’s latest moves are an attempt to regain the glory for himself and his company that evaporated last year almost as quickly as it had risen.
The son of a lawyer, Tandon moved to the United States with $3,000 in 1960, earning a master’s degree in mechanical engineering at Kansas State University and a master’s degree in business administration at the University of Santa Clara. He left a job with Pertec in Chatsworth in late 1975 to start Tandon with a $7,000 investment.
By 1982, Tandon was at the top of the disk-drive industry, and his company was named Forbes magazine’s “Up and Comer of the Year.” The $150-million value of his stock placed him, at age 41, on the the Forbes list of the 400 richest Americans, and he built a 30-room home on 20 acres in Chatsworth.
In the wake of last year’s losses, Tandon’s current stake of 4.76 million shares, or 9.3%, is worth about $24 million.
But, despite his company’s problems and the riskiness of the latest venture, few in the industry are willing to bet on Tandon’s failure.
“If the people he has hired are effective and, if they have good luck, it can work,” said Porter, the Disk/Trend editor. “But quite a lot of luck will be required.”