1991 Orange County. The Year in Review : High-Tech Firms Face a New Year of Loss, Layoffs : Technology: Economic forecasters say the recession will continue to shrink the computer and electronics industries.


As 1992 approaches, few of Orange County’s computer companies can claim to be “recession-proof.”

Stung by losses and layoffs this year, their weaknesses exposed quarter by quarter, the view from both high and low now looks bleak for local computer firms.

“I’d say we’ll see another 18 months of shake-out in our industry, with more layoffs, more acquisitions, more liquidations before we see an improvement,” said B.J. Rone, chief financial officer of Archive Corp. in Costa Mesa. “Anybody that has a good job now, they better hang onto it for a couple of years.”

Robert Hines, a 55-year-old Cypress computer analyst who has been out of work since being laid off from a Santa Ana company in August, shares that grim view.


“High-tech in the past was so new and fast-moving that it wasn’t particularly hurt, but now it feels like it’s getting hurt the most,” Hines said.

A few indicators support the two men’s opinions. Orange County’s largest computer companies laid off more than 2,500 people in the county during the year. Technology firms with fewer than 1,000 employees also shed an average of 3.8% of their employees in Orange County in 1991, according to CorpTech, a market research firm in Woburn, Mass. A year earlier, employment grew an average of 2%.

Chapman University economists forecast that another 1,800 technology jobs in the county will be lost in 1992 and that an estimated 6,979 technology jobs will disappear by 1996. Some of those losses will likely be in the defense sector, while others can be attributed to manufacturers leaving the county.

During the third quarter, the 10 biggest public companies in Orange County’s computer sector reported a combined net loss of $28.3 million. A year earlier, the same companies recorded a net profit of $12.4 million. Some firms are flirting with bankruptcy.


“Companies that had new products at the leading edge continued to grow profitably,” said Ian Gilson, an analyst at L.H. Friend & Co. in Irvine. “Those at the trailing edge with high debt came rolling down like snowballs in hell.”

A look at a few of the county’s biggest computer companies provides a picture of the kind of problems, ranging from mistakes in execution to intensified competition, that have compelled the technology sector to share in the misery of the worst of times.

Western Digital

Western Digital Corp., Orange County’s biggest technology company, has had more than its share of problems in the past year. There was the heavy debt burden from acquisitions and capital investments, the recession that cooled computer sales, fierce price competition and delays in bringing new products to market.


The computer components maker lost $172 million during the past 15 months, slashed more than 1,500 jobs, sold some businesses to raise cash and renegotiated its bank debt to

reduce its payments. Although some analysts speculate that the company may be forced into bankruptcy if its business doesn’t improve soon, the company says it is not contemplating such a move.

Gilson, the L.H. Friend analyst, traces Western Digital’s problems back to its decision in 1988 to purchase the ailing disk drive business of Moorpark-based Tandon Corp. for $80 million. The acquisition, he said, saddled Western Digital with debt at a time when the industry was about to become horrendously competitive.

But Roger W. Johnson, chairman and chief executive, said the company had few alternatives at the time. Western Digital’s mainstay business, making the devices that controlled access and retrieval of data from a computer disk drive, was disappearing. Technology had advanced to the point that disk drive makers were building the storage controller, formerly a separate circuit board, into the disk drive itself. That meant they no longer had to buy the part separately from Western Digital.


To find another major revenue source, Johnson chose to buy the Tandon disk drive business to keep at the forefront of storage technology. But profit margins were historically thin in the competitive disk drive business, and they got a lot worse in 1991 when market leader Seagate Technology launched a devastating price war in the $9.5-billion industry.

Had Western Digital chosen instead to invest in a different technology, such as the microprocessors that serve as a computer’s brain, Johnson thinks that the company would have perished in competition with another market giant, Intel Corp.

Looking back, Johnson said he regrets not having raised additional capital to help the company weather its financial problems a little better. “In the last six months, I wouldn’t have changed anything we’ve done,” he said. “But in hindsight, we should have been smarter” about anticipating the need for capital.

AST Research


By comparison, Western Digital would be ecstatic to have the problems of Irvine-based AST Research Inc., which recorded a $16.4-million profit for its quarter ended Sept. 30. By the end of its fiscal year next June 30, the computer maker will probably overtake Western Digital as the county’s biggest computer company in terms of sales.

But AST stock has taken a recent beating. Investors are wary of competition from Compaq Computer Corp., which has cut prices of its PCs and broadened its distribution to include channels traditionally dominated by such suppliers as AST. The impact of those changes won’t be evident until early next year, said Benny Lorenzo, an analyst at the New York investment bank Dillon Read & Co.

“At this point the strategies have not caused any great degree of change for our momentum,” said Thomas Yuen, co-chairman of AST. “We have not seen all of their tricks.”

AST also lost a bid for a $1-billion contract to provide computers to the Department of Defense. The company had set up a new division in part to capture the contract, but it went to two smaller firms instead.


And Safi U. Qureshey, co-chairman of AST, said sales of notebook computers, which accounted for 30% of sales last quarter, are slow in the current quarter. That reflects a general slowdown in orders for notebook computers throughout the industry, analysts say.

With more than 60 competitors shipping notebook computers now, reduced profit margins and an industry shake-out may be looming ahead.

AST’s growing dependence on a single product line--notebook computers--makes it more vulnerable to fluctuations in that market, analysts said. And the Irvine firm’s other strength, the upper end of the desktop computer market, where profit margins traditionally have been high, is facing increased competition from manufacturers of high-performance workstations.

Even so, analysts said the 50% drop in AST’s stock price in November was an overreaction to the uncertain outlook. And AST officials say they aren’t sitting still.


The company is making a bigger marketing push into corporate America and has reassigned engineers to work on specific products instead of a more centralized approach. Growth in desktop computer sales is brisk, and Qureshey says the company is also developing new products.

“We are going to continue to innovate,” he said.

Toshiba America

Toshiba Corp. once had the portable computer field virtually all to itself. But scores of competitors entered the field in the past year, and the company’s Irvine-based computer division felt the crunch.


Toshiba America Information Systems laid off about 225 employees--12% of its work force--in January and March. Then it fired its sole distributor, Merisel Inc., and the computer division’s top executive, Bill Johnson, resigned in April.

In the spring, the Toshiba subsidiary was late to market with a new generation of notebook computers based on the latest semiconductor technology. Competitors such as AST and Dell Computer Corp. in Austin used the opportunity to seize market share with faster, cheaper machines.

In the summer, Toshiba’s portable computer inventories swelled so much that it shut down its Irvine manufacturing line for two weeks. But the company is still betting that portable computers are the future.

Toshiba was showing signs of renewed vigor as 1991 drew to a close, said Bruce Stephen, an analyst with International Data Corp., a market research firm in Framingham, Mass. The company launched several new products and expanded its distribution to include computer super-stores, which have become an increasingly popular outlet for general consumer purchases.


In October, the company tapped former Xerox executive Michael Winkler to be general manager of the computer division. One of Winkler’s top goals: better communication between the Japanese parent company and the U.S. subsidiary--a problem in the past.

This month, the company cut 60 employees from its corporate payroll and reassigned Kiichi Hataya, president of the Toshiba American Information Systems subsidiary, to devote most of his attention to helping Winkler turn around the computer division.


Too much debt led 10-year-old Archive Corp. in Costa Mesa to report its first annual loss ever.


In acquiring San Diego-based Cipher Data Products in April, 1990, for $141.7 million, Archive became the biggest manufacturer of tape drives that back up computer data to prevent accidental loss.

But the deal has also burdened the company with heavy debt. The company reported a $45-million charge against earnings in its third fiscal quarter to write off the costs of employee layoffs, plant closings and corporate reorganizations.

Like Western Digital, the losses forced Archive to renegotiate a loan agreement with its major lender. The company has reduced its payroll from about 3,300 in mid-1990 to less than 2,400.

Although the acquisition ended costly patent litigation between Archive and Cipher, some analysts question whether the deal was worth it.


Twenty months later, Archive has slashed operations in its Cipher subsidiaries.

B.J. Rone, chief financial officer, said the company’s performance should improve in 1992 with the less burdensome debt repayment schedule and the unveiling of a new generation of products.

“The recession made a 12-month turnaround plan for the acquired companies into a 24-to-30-month turnaround,” Rone said. “Looking back over it, I’d do the acquisition again, but I would have tried to buy it for less money than we paid.”

Archive management’s efforts got a vote of confidence this month from some Wall Street analysts who upgraded their earnings projections for the company’s current year.


1991 Layoffs

O.C. makers of computers and related products employ about 15,000 people, but this year more than 2,500 were laid off.

Month Company Layoffs January MAI Systems 400 Toshiba America 100 February Western Digital 130 Alpha Microsystems 35 Distributed Logic 45 March Metropolitan Circuits 230 Toshiba 125 State of the Art 10 Siemens-Nixdorf * 30 April MAI Systems 400 May Emulex 60 June Archive 20 Silicon Systems 40 July Western Digital 110 August Interconnection Products 190 Calay Systems 20 September Archive 50 Emerson Computer Power 31 October Data-Design Laboratories 180 Emulex 150 November Odetics 14 December Toshiba 60 Western Digital ** 100 1991 Total 2,530

* Moved to Boca Raton, Fla. ** Layoffs scheduled for Feb., 1992


Source: Los Angeles Times files

High-Technology Empolyment Forecasts for employment in Orange County’s high-tech manufacturing sector predict a net loss of close to 20,000 jobs in the decade between 1987 and 1996. High-technology includes aerospace and defense, as well as computers, telecommunications gear and electronics. Source: Chapman University Center for Economic Research

Trouble for Tech Stocks Three of the county’s most widely known technology companies are among those who have seen a falloff in stock prices of 45% or more from their 1991 highs. AST Research Western Digital Archive Source: Dow Jones News Retrieval