AST LAYOFFS: ANOTHER JOLT FOR O.C. : News Comes as Surprise--but It Shouldn’t Have : Downsizing: Computer maker’s founder dropped first hint in spring. Industry analysts say cuts alone won’t cure all its ills.
AST Research Inc.’s decision to lay off 10% of its workers and close its Fountain Valley manufacturing plant caught technology industry observers by surprise, but it shouldn’t have--the computer company’s top executive dropped the first hints last spring.
At a conference in March, when other executives were complaining about corporate changes, the bearded, soft-spoken Pakistani who co-founded AST took the floor to present a different view. “If I do not change,” AST Chairman Safi I. Qureshey said, “I cannot lead, because the company has to change.”
The magnitude of the changes announced Friday at AST may be even greater than Qureshey had anticipated six months ago, however, and will surely test the leadership of the company’s chairman and other executives. AST said it will post a loss of about $40 million for its current quarter and will cut 700 jobs from its payroll, including 440 in Fountain Valley.
Analysts said that AST’s troubles are not simply a result of industry competition: Though renowned for its successes, the 14-year-old company has been plagued by internal problems and is suffering losses while some of its competitors--notably Compaq Computer Corp. and IBM Corp.--are reporting profits and increased sales.
Still, the decisions to lay off so many people was a surprise, said Kimball Brown, a high-technology industry analyst with Dataquest Inc. in San Jose.
The company is reeling from the computer industry price wars but, more critically, from internal problems, including delays in new-product development and difficulties absorbing the huge Tandy Corp. manufacturing operations it acquired for $175 million last year, Brown said. “They are struggling to get the Tandy operation assimilated.”
AST President James T. Schraith said Friday that the layoffs are just part of the plan to jumnp-start the company. The number of computer models that AST offers will be trimmed, he said, as will the number of options--types of disk drives, monitors, graphics adapters and printers, for instance--that customers can order. That will enable AST to cut costs by stocking only the most popular configurations, he said.
In addition, AST will step up its North American marketing efforts while cutting back in areas such as Africa where its growth has been relatively slow, he said. The company also will institute a major internal cost-control effort. Instead of sending customers expensive printed manuals for the processing unit, monitor and other components of a system, AST may program the manuals directly into the memory of each machine it sells, Schraith said. While that would force the customer to print out the manuals, it would save AST a bundle on printing costs--at an average of six manuals per computer, the company printed and shipped nearly 9 million instruction books last year.
Fixing things won’t be easy, said Stephen Dube of Wasserstein Perella Securities in New York. “There is no quick management fix. It is a matter of keeping everything on track.”
That is “a complicated business,” he said. “But there is a reasonable chance they will pull it out.”
AST cannot make its problems disappear, though, simply by closing a plant and weathering a losing quarter, analysts said. And many expect the company to have at least six months of poor earnings before there are any signs of recovery.
“In this kind of market there are no real assurances,” said Kevin McCarthy, an analyst with NatWest Securities in New York.
In a conference call with analysts early Friday morning, AST officials discussed the company’s finances and production difficulties and said “this is the worst it will get--that it can only get better,” McCarthy said. “But they don’t completely have a handle on the situation, and that is the greatest concern.”
G. Richard Thoman, head of IBM’s personal computer operations after a shake-up there in May, said the essentials for survival in the PC industry are “quality, cost and speed.”
AST has lost the advantage of speed and is being hurt by having to sell an older generation of products at steeply discounted prices, analysts said, while competitors such as Compaq, Toshiba and IBM are hitting the mercurial PC market with a spate of machines using the newest chips--and are slashing prices while doing it.
Industry leader Compaq, with 13.6% of all PC sales in the United States, has slashed its prices almost 50% over the past several years--including across-the-board cuts of 11% to 22% less than two months ago. IBM followed suit a week later, and AST had to cut already reduced prices without anything new to offer customers.
“They were behind the curve,” analyst McCarthy said. “They are having to get out the old stuff (while) the competition was on time.”
Many of AST’s problems developed last year after the company bought Tandy’s Texas-based manufacturing operation. To take advantage of Tandy’s bigger facilities, AST relocated several hundred jobs from California to Texas and moved an assembly plant from Scotland to Ireland. A total of 1,000 jobs were eliminated, and 850 positions were created in the moves.
The shuffling slowed both production and product development efforts, which have been further hampered by shortages of components manufactured by outside vendors. The company consequently announced last month that its newest notebook computers and CD-ROM-equipped personal computers would be delayed.
Dube said the company “will not recover until it gets a great line out and beats the competition. Right now they are getting slaughtered by Compaq and IBM.”
A recent report by Dataquick shows that AST lost almost a fourth of its share of the PC market last year, falling to a 2.8% share from 3.6% in 1992.
But AST can get back on track, said Albert Wong, who with Qureshey and Thomas Yuen co-founded the company in 1980. “They are doing what they have to do,” said Wong, an engineering and manufacturing processes specialist who left the company in 1989 to strike out on his own.
AST, with almost $2.4 billion in annual sales, “is a substantial company,” Wong said. “And they will change their product line and their business (strategy) to meet what the market demands.”
The key, though, analysts said, is whether the company can make the changes fast enough.
“If you miss a month or two, it takes a long time to get back on track,” Dube said. “The question is whether they can regain the market share they have lost.”
