Compaq Action Has Golden Systems Scrambling to Survive : Computers: Simi Valley firm struggles to mend its relationship with its No. 1 customer, which canceled $5 million in sales due to quality problems.
Less than two years ago, Jay Tandon watched his older brother’s personal-computer company, the once-giant Tandon Corp., crumble under industry price-cutting pressures and go bankrupt. Now Jay Tandon is struggling to avoid his brother’s fate.
Tandon is chief executive of Golden Systems Inc., a Simi Valley-based manufacturer of power-switching devices used to make personal computers. The company disclosed Dec. 2 that its biggest customer, personal-computer maker Compaq Computer Corp., found quality problems with Golden Systems power supply units and shipped back $5 million of the units that had been delivered over the past six months.
The canceled sales could represent a death blow to Golden Systems because Houston-based Compaq has accounted for 70% of Golden’s sales. And Golden Systems was already staggering after posting a $2.38-million loss on revenues of $6.95 million in the quarter that ended Sept. 30. Golden’s stock price, sagging because of unmet sales expectations, was trading at a meager $1.25 per share before the bad news from Compaq, and has plunged even further, closing Monday at 38 cents a share, down 6 cents per share.
Golden Systems said the quality problems have been fixed, and the company is scrambling to repair its relationship with Compaq. Compaq said it is willing to consider repurchasing the Golden Systems units if they are repaired and pass stringent quality tests, but there are no guarantees.
Meanwhile, Golden Systems has already violated covenants on its lines of bank credit because of the Compaq action. And Raymond Thomas, chief financial officer of Golden, said failed negotiations with Compaq “could place the continued existence of Golden Systems in serious doubt.”
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Analysts said Golden Systems might survive this scare, but could still suffer long-term consequences if current quality problems spook other potential customers. “Others may say this is a bad company to do business with because they screwed up their main customer,” according to Mohan Mankikar, president of Santa Rosa-based Micro-Tech Consultants. “That is the danger.”
Founded in 1991, Golden Systems began as a supplier of power-switching devices to the computer company owned by Jay Tandon’s brother, Jugi. Power-switching devices are crucial computer components that convert alternating electric current from wall outlets into direct current at voltage levels required to power computers.
Both Tandons built their companies by relying on cheap labor from their native India, where wages are still as low as 40 cents per day. With all of its manufacturing operations based in India, Golden Systems grew from a company with $4.5 million in sales in fiscal 1992 to $29.4 million in the fiscal year that ended March 31.
The manufacture of power supplies involves soldering electronic capacitors, resistors and other components into place on a small, flat surface called a printed circuit board. The process is relatively simple, Thomas said, but cracks had developed in some of the solder connections on units shipped by sea from India and trucked to Compaq’s Houston facilities. The cracks could have led to power failure in computers equipped with the damaged units.
Only power supply devices shipped to Compaq were affected, said Thomas. He added that Golden Systems believes the problem was not with how the devices were assembled, but arose because Golden Systems used faulty printed circuit boards purchased from a vendor in India during the summer. The problems weren’t detected in initial quality inspections, but showed up after the units had been shipped.
Golden Systems no longer uses the vendor that supplied the defective boards, Thomas said, and the company has stepped up its inspections to include vibration tests that duplicate the conditions units are exposed to when shipped great distances. Compaq has agreed to accept 2,000 new units for test and inspection, Thomas said, and Compaq engineers found no problems in an inspection of Golden’s facilities in India two weeks ago.
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“There’s a reasonable chance we can convince them” to accept repaired units, Thomas said. “But there’s no commitment on their part that they’ll do it.” He added that Compaq is expected to make its decision within a few weeks.
