High-Tech Boom Finds an Industry That’s Matured
Sales are going through the roof at Compaq Computer in Houston. At Sun Microsystems in the Silicon Valley, one of the more vexing problems is finding a room large enough to handle orientation meetings for new employees. And AST Research in Irvine can’t make its new line of computers fast enough to keep its customers happy.
In short, three years after weathering its worst-ever collapse, the nation’s computer industry is enjoying a wave of prosperity. Over the last year, sales and profits at computer-related companies have gathered momentum steadily and are up in many cases more than 25%.
But even as they luxuriate in the current boom, high-tech executives nationwide express concern that their high-flying ride could end abruptly, sending them into a free fall reminiscent of 1985. And pointing to the scars they bear from that plunge, wary executives say they are taking care not to repeat their past excesses: the $1-million Christmas parties, the bloated staffs, the fancy offices and the boundless ambitions.
“It’s a volatile business,” explained Frederick Van Veer, investor relations manager for Teradyne, a Boston maker of automated testing equipment. “It looks good to us now, but the odds are overwhelming that there will be another sharp falloff.”
Even conceding that the boom can bust is a major about-face for high-tech executives weaned on inflated dreams and grand expections. But it’s not the only way these executives have changed their approach to businesses.
Officials say they continue to shift manufacturing jobs to foreign plants staffed by low-paid workers. Many have instituted tight controls on inventory and spending. And even more say they are trying to carefully design their products for genuine customers instead of the frontiers of technology.
“We’re more mature,” said Del Yocum, executive vice president of Apple Computer, once again Silicon Valley’s darling. “We have as much energy as we did four years ago, but it’s more focused. . . . The go-go is different.”
Not everyone, however, is convinced that the industry has adopted a new gospel. The skeptics include James Tucker, vice president of the San Jose Chamber of Commerce.
“After every downturn, companies say they will be cautious. Then the orders back up, the costs start adding up and before you know it, they’re back to where they were,” Tucker said. “Now we’re still in the ‘cautious’ phase.”
But high-tech experts say things are different this time.
“They’ve all come to Jesus as far as cash management is concerned,” said William Hambrecht, president and chief executive of Hambrecht & Quist, a San Francisco brokerage firm specializing in high-tech companies, “And they’re keeping track of their receivables and inventories better.”
Order Backlogs
By contrast, in late 1984 and 1985, companies widely underestimated the amounts of unsold, finished goods in their distribution pipelines and made over-optimistic revenue projections on the basis of their past results.
Bruce Lupatkin, a computer analyst at Hambrecht & Quist, said inventory levels of production parts, a barometer he carefully watches, tell the story well.
“Four years ago, if a company thought it would sell 100 computers, it would buy supplies for 110. Now, if sales projections are for 100, they buy for 75.” he said.
That, he said, explains why there are so many backlogged orders for some kinds of high-tech equipment.
The conservative business practices take other forms as well. Jerry Saunders, the flamboyant and outspoken chairman of Advanced Micro Devices, a Sunnyvale semiconductor maker, said he no longer is interested in making chips in all their hundreds of shapes, sizes and strengths.
“We want to be making products in areas where we can be the leader, where we can have something special to contribute,” Sanders said. As a result, the company has dropped several product lines.
Ray McNulty, a spokesman for GenRad Inc., a maker of automated testing equipment in Concord, Mass., with annual sales of about $200 million, says the crash of 1985 forced drastic changes.
Streamlined Organizations
McNulty says that the company’s cash balance now totals about $26.5 million, compared to a “dangerously low” $578,000 in early 1986. Its current inventory of supplies is valued at $34.2 million, compared to $85 million in January, 1986. And the organization has been streamlined to eliminate three of the seven levels of management that once separated the factory worker from the chief executive.
“We built capacity and staff as though the boom would never end,” McNulty said of the company’s operations in the early 1980s. “We thought 30% and 40% growth was the norm. Now we expect 10% to 20%. We can make money at that growth rate . . . because we have cut the fat.”
Nationwide, the American Electronics Assn. estimates that about 100,000 jobs were lost during the painful two years after the industry hit its peak employment of nearly 2.6 million in 1984. Since early 1987, employment has slowly inched back.
In the factories, American workers increasingly have been replaced by either contract labor in the Far East or by automated robotic equipment. For example, Apple Computer, which builds all of its Macintosh personal computers for North America in its Silicon Valley factory, needs only five workers to assemble one of the machines. Assisted by a variety of automated gear, these workers take less than 90 minutes to get the job done.
“Four or five years ago, even small companies had their own manufacturing plants,” said Michael McQuade, a senior vice president with the American Electronic Assn. “The industry was in a frenzy to build plants.” Today, experts say, many of these plants are vacant because of domestic production cutbacks.
In offices, companies are increasingly turning to temporary clerical and professional workers, instead of hiring additional employees, when work begins to mount. That way, if the work load subsides, the temps can be let go and the companies avoid the costs of laying off regular employees.
Specifif Markets
In the R&D; labs, engineers have been ordered to concentrate their efforts on readily marketable products rather than going for broke on breaking down a technology frontier.
“Five years ago the industry said that if you could could make it, you probably should. It was a technology-driven mentality,” said Robert Brownstein, vice president of Regis McKenna, the Palo Alto marketing and public relations company whose clients include Apple Computer and other large high-tech firms.
“Now the companies want to see that there are specific markets and customers for the technology,” Brownstein added. “They’re not just throwing spaghetti against the wall and seeing which strands stick.”
Industry analysts attribute many of the changes to an increased maturity among high-tech executives, some of whom were burned by the last downturn. In other cases, the conservatism comes from the older, more seasoned executives who were brought in to manage high-tech companies once run by exuberant high-tech entrepreneurs.
“Our company has grown up a lot,” said Kenneth Roberts, the chief financial officer of Masscomp, a Boston-area computer manufacturer that has replaced most of its top executives in the last three years. Roberts, 55, was recruited from a nearby high-tech company to replace a chief financial officer in his early 30s who had been one of Masscomp’s original founders.
The result of the changes, Roberts said, is that Masscomp has focused its sales efforts on three basic markets and no longer thinks of itself as a “hot box” company that can be almost all things to all people. “We’re not a go-go company anymore,” he said.
Likewise, many computer industry executives known for their flamboyance, particularly in the Silicon Valley, have toned down their acts.
Although Mercedes Benz sales are booming again at the Smythe European dealership in San Jose and Jaguar sales have never been better at nearby S. J. British Motors, there are still signs aplenty of the new austerity.
The way AMD’s Saunders now dresses, for instance. Says Regis McKenna’s Brownstein: “He doesn’t walk around in fuchsia velvet jackets anymore.”
