A Worthwhile Gamble : Kingston Technology Founders Find Success With PC Add-Ons
In October, 1987, David Sun made a bet with his partner, John Tu, that their start-up company would survive for a year. If he won the wager, Sun would get a Jaguar.
In October, 1990, Tu handed Sun the keys to a new car. Kingston Technology Corp. had made it without a penny of venture capital. Last year its sales of add-on components for personal computers exceeded $140 million.
“It was a foolish bet,” Tu, president, said recently. “I didn’t think we were going to last six months. But if I had won, we would have been broke, and I wouldn’t have gotten anything.”
Sun, vice president, rejoined with a bellow: “There was no way I could lose!”
The odds were intimidating. Tu and Sun were diving into the add-on computer components world, a business that their former employer, AST Research Inc. of Irvine, had decided to exit in 1986 in favor of manufacturing complete personal computer systems.
“We had no plan, just ideas for some products,” Tu said. “We were fortunate. It wasn’t until 1988 when we realized we had a long-term opportunity to supply upgrades for PCs.”
But Tu, 50, and Sun, 40, had played the game before. The pair of Taiwanese expatriate engineers met in Orange County in 1981. Two years later, they started their first company, Camintonn Corp., a maker of memory components.
The business, which had reached $10 million in annual sales, was acquired by AST in 1986 after AST launched a diversification drive. When AST shifted its focus to PCs, Sun and Tu set out on their own.
At the time they left, there was a shortage of a certain kind of memory chip used in upgrade modules. Sun and Tu designed a substitute product that used an alternative chip that was in adequate supply. They began assembling and selling the product themselves.
Sales grew quickly, exceeding $12 million in 1988, and Kingston began subcontracting the work to outside manufacturers. Sun and Tu do not disclose their net income but do say that operating profit has consistently averaged 30% of sales throughout the company’s history.
The two men keep a tight rein on decision-making. They hold costs down with a small management team that operates without secretaries. They work personally with both small and large customers, trying to set an example for each of their 120 employees.
“We didn’t have memos until six months ago,” said Sun, who frequently launches into impassioned speeches about serving customers and making employees happy.
“We basically shouted across the room to communicate with people,” he said. “You have to set an example. I finished designing two products yesterday. Once you act like an executive, you lose your company culture.”
With a small team of engineers, Sun and Tu design most of the company’s hundreds of products themselves. And they share 5% of profits with employees, awarding bonuses quarterly.
“Their management is unique,” said Rick Martin, an industry analyst at Chicago Corp., an investment bank in Chicago. “They are clearly in tune with what is going on in the industry.”
At the first quarter’s growth rate, Kingston could have $240 million in sales this year, although management conservatively projects a total of about $200 million, up 43% from $140 million last year, said Ron Seide, director of marketing.
The reason for Kingston’s success is that computer users almost always underestimate the amount of memory they need when they buy a PC, Martin said.
“Ask around, and the people that deliver the affordable upgrades for memory are at Kingston,” he said.
New software systems such as Microsoft Corp.’s Windows 3.1 and IBM’s OS/2 2.0 require more memory than manufacturers typically build into a PC. As a result, most computer buyers opt to enhance their computers with add-on modules or circuit boards.
And users are less likely to fork over a wad of money for a new machine during a recession when they can buy an upgrade instead. That means the market for modules that enhance a PC’s capabilities is alive and well, Sun said.
The company has more than 375 products for PCs, laser printers, workstations, storage units and graphics screens. Because it subcontracts manufacturing to local assembly shops, the company can shift gears quickly when it introduces products.
Another key to Kingston’s success is the company’s strategy of setting itself apart from its competitors by making custom designs for each brand of computer, such as IBM or Compaq, Martin said.
In 1990, Kingston began making modules that upgrade a PC from an Intel 286 microprocessor, or a computer’s main number-crunching engine, to a faster 386SX microprocessor, a brain transplant that is a prerequisite for running most new software. The processor upgrade modules have become the company’s most popular product line, accounting for about 10% of sales, Sun said.
And several months ago, Kingston began making upgrade components for computer workstations, a product line that also accounts for 10% of sales now. The company has expanded into Europe as well. International business accounts for about 43% of overall sales, Seide said.
If there is any risk at Kingston, it is the volatility of prices for memory chips, Martin said. To avoid getting blindsided, the company must stay on its toes by holding down inventory of expensive chips that might fall in price.
Sun and Tu said the company does not expect to go public, because it has been able to generate its own cash from the beginning. That does not mean the founders’ ambitions are limited, though.
“We want to keep growing, but the question we have is how to do that and still keep our employees happy,” Sun said. “How would you run a company and make 10,000 employees happy?”
The Kingston Story
Since its founding in October, 1987, Kingston Technology has grown rapidly:
In millions of dollars and percentage increase below year:
Sales
1989: 187%
1990: 141%
1991: 60%
Operating Profit
1989: 261%
1990: 112%
1991: 64%
Source: Kingston Technology Corp.
