Computer Chips Gray Marketeer Finds Hope in Court Decision
Like many high-tech firms, Cal-Abco has enjoyed explosive growth--from a two-man West Covina office in 1978 to a sprawling Warner Center building that today has 120 staffers. Sales top $100 million a year and the reserved executive parking spaces are home to a Ferrari and a Jaguar.
But few entrepreneurs know the terror that has kept Cal-Abco President Alex Sandel awake at night, the fear of losing everything because of a single court decision.
By most accounts, privately-held Cal-Abco, based in Woodland Hills, is the world’s largest “gray market” importer of computer chips. Under a cloak of secrecy, it buys integrated circuits from distributors in the Far East, then resells them here to computer makers at lower prices than authorized U.S. chip franchises can manage.
And so major international chip makers such as NEC Corp., one of Japan’s largest electronics firms, have been battling in court to put Cal-Abco out of business. In March, 1985, NEC filed a $50-million trademark infringement suit against Cal-Abco.
“It’s very scary, that the company can be killed just like that,” said Sandel, 44, with a snap of his fingers.
Lately, though, things have been going Sandel’s way. Last month, the U.S. 9th Circuit Court of Appeals in San Francisco lifted an injunction that barred Cal-Abco from selling parts from Tokyo-based NEC Corp. The three-judge panel rejected NEC’s suit, ruling that “trademark law does not offer a vehicle for establishing a discriminatory pricing scheme.”
But Sandel can expect more sleepless nights. NEC, like other Japanese chip makers, must keep chip prices up because of recent anti-dumping agreements reached with the U.S. government. Since importers such as Cal-Abco don’t have to abide by that agreement, it’s likely NEC will request a re-hearing in its case.
In fact, the gray market extends beyond just computer chips. Imports of everything from Nikons to BMWs make this a hotly debated issue. Cal-Abco’s case is just one of several, so far inconclusive, cases working their way through the courts. Several other cases, brought by Japanese camera makers including Vivitar and Olympus, have reached the federal appellate level and most judges have ruled in favor of the manufacturer, unlike the ruling in the Cal-Abco case.
There is, in short, no legal consensus on gray marketeers. But that is likely to change soon. The U.S. Supreme Court has agreed to hear a gray market case this year and lawyers expect it to establish the precedent. That case involves a suit brought by a manufacturers’ group, the Coalition to Preserve the Integrity of American Trademarks. Last May a federal appellate court struck down a Customs Service regulation sanctioning the gray market. But now the Supreme Court will have its say.
Another possibility is that Congress will decide the issue. Last June, Sen. John H. Chafee (R-R.I.), a member of the Finance Committee, introduced a pro-gray market bill. Time ran out in the 99th Congress before anything happened with the bill, but an aide said Chafee intends to reintroduce the bill soon.
In the meantime, the phones ring off the hook at Cal-Abco’s pastel offices. The three Israeli-born partners--Sandel, Chief Executive Benny Alagem, 34, and Chairman Jason Barzilay, 34--shout at each other in Hebrew, like traders hawking soybean futures.
They are bit less vocal when it comes to revealing who their suppliers and customers are. Japanese chip makers will cut off any Japanese distributor who supplies gray marketers. And with the legal issues so nebulous, most computer makers who buy from gray marketers aren’t eager to talk.
Even so, Harvey C. Jones, president of Daisy Systems, a Mountain View, Calif., maker of computer engineering work stations, says his company buys chips from as many as 20 chip distributors, including Cal-Abco.
“We constantly trade one against the other for the best price,” Jones said. “To be a low-cost manufacturer, we have to get our supplies as cheaply as we can.”
Neither Daisy Systems nor Cal-Abco will reveal exactly what that savings is.
But Sheridan Tatsuno, an analyst for Dataquest, a San Jose market research firm, estimated that Cal-Abco and others can buy a shipment of 10,000 D-RAMs (dynamic random-access memories) storage chips from independent Japanese distributors for as little as $1.78 a chip. They can then resell to computer makers here for $2, in the process undercutting an authorized supplier by as much as 35 cents a chip, and still turn a profit.
The chips, light and small, are easy to transport. Tatsuno said most chip gray-marketeers are businessmen who simply load their suitcases with as many as 5,000 chips, known as “the suitcase brigade,” and travel back to the United States and skirt customs.
Not Backed With Warranty
One drawback to buying gray-market products, such as with cars and cassette players, is that the U.S. distributor will not back them with a warranty. Cal-Abco says that is not a problem with its chips, which it says are usually reliable. In any case, if the inexpensive chips are defective, Cal-Abco promises to replace them. It also offers a full refund.
In the grander scheme of things, some argue that the gray market cuts profits for computer equipment makers, siphoning off money that might go to research and development. “Sure, the consumer benefits in the short run, with computer makers dropping prices as they get costs lower,” said George Haloulakos, a semiconductor analyst for Dain Bosworth, a Seattle, Wash. brokerage house. “But it eventually means stagnation in the business.”
Counters Sandel, “Restricting trade, frankly, is un-American.”
His own company certainly fits the 1980s American blueprint for success. Sandel was a technical strategist for Hambrecht & Quist of San Francisco, the celebrated venture capital firm, before quitting to start his own company in December, 1978, with Alagem.
Competition Increased
At first, they had little opposition. U.S. firms like Texas Instruments and Motorola dominated the chips market. But as the Japanese firms, including NEC, Hitachi, Toshiba and Fujitsu, began gaining on the Americans, Sandel merged with Barzilay’s California Circuit Co. of Van Nuys. Together, they rode the wave of cheap Japanese computer chips.
Like any commodities business, Cal-Abco has endured booms and busts. But it grew by stocking up product during gluts and raising prices during shortages. Today the firm has 45 sales offices in the United States and Canada, and employs about 300 worldwide. Cal-Abco says its customers are medium-sized firms that make everything from computer work stations to irrigation control devices.
Sandel says the firm is profitable “most of the time,” but takes some hard hits from currency fluctuations.
But those sleepless nights seem to have taught Sandel one lesson. As he waits for the Supreme Court to decide the gray-market issue, his company is now diversifying away from selling only gray-market goods. Cal-Abco now sells U.S.-made computer peripherals, such as disk drives, to domestic retailers. Why the change? “We have to protect ourselves,” Sandel says.
