Former RCA executives make it big in PCs

CARDINAL VIRTUES OF BREAKING AWAY

December 16, 1991|By Valerie Reitman | Valerie Reitman,Knight-Ridder News Service

LANCASTER, Pa. -- Just four years ago, seven former RCA Corp. executives did the unthinkable.

They bet their life savings that they could build from scratch a formidable competitor in one of the world's most ferocious markets, personal computers.

It's a field where technological wizardry multiplies at lightning speed, only to have prices continually tumble.

But that was not challenge enough. Their company would compete by manufacturing and assembling these low-priced computer peripherals right here in the United States.

So far, their gamble seems to be paying off, despite the cut-throat competition served up by literally hundreds of rivals around the globe.

"We Americans have talked ourselves into believing so many things that are totally inaccurate, including that we can't compete," said Harold Krall, president of the company christened Cardinal Technologies Inc.

"We had a deep belief that manufacturing was an important strategy in 1987. Most thought [the strategy] was unbelievable. Now, they come to visit."

The company stays nimble with its lean management, high-tech machinery that holds labor costs to just 5 percent of expenses, and its automated design process that gives birth to new products -- from conception to consummation -- in just eight to 10 weeks.

By comparison, it took RCA at least two years to develop a new product.

Today, boxes of components from Korea, China and Taiwan arrive on the company's loading docks to be transformed into computer modems, graphics adapters, keyboards, circuit boards, monitors and personal computers themselves, all made in Lancaster and sent to vendors across the nation and Canada. Soon, they will go to Europe and Japan as well.

Cardinal's products win shelf space and buyers mostly by virtue of their bargain prices. That's part of the company's Toyota-like strategy of reinvesting profits from the lower-end items into building an increasingly sophisticated product line.

Many of Cardinal's competitors follow the California strategy of starting with technologically advanced products and slashing prices over time, Mr. Krall said.

"Ours," Mr. Krall said, "is a bottom-up strategy."

Cardinal is anything but the typical U.S. entrepreneurial company.

It opened for business in 1987 like a jet taking off with no passengers, the partners say, outfitted with a 60,000-square-foot manufacturing plant, a fleet of bosses and machinery, but no products.

It was born of a bargain-basement transaction struck in the wake of General Electric Co.'s 1986 acquisition of RCA Corp.

The seven partners now at Cardinal's helm were executives in RCA's new products division in Lancaster, which served as an idea hatchery for RCA's consumer electronic line. GE had a similar facility in Portsmouth, Va.

Once it bought RCA, General Electric abandoned the consumer electronics business, giving it to Thomson S.A., a French manufacturer, in exchange for Thomson's medical equipment division.

The seven executives -- some of whom had worked together 20 years -- put together a $4 million buyout of the GE/RCA division. The bulk of the purchase price wasn't cash, but the assumption of GE's liabilities.

The executives came up with about $800,000 of their own, by forking over their severance pay from RCA, taking out second mortgages and sending spouses to work, Mr. Krall said. In addition, they took pay cuts of one-half to two-thirds what they earned at RCA.

"It meant pledging all our life's assets," Mr. Krall said. "We put everything we had in life at risk. It was a deep commitment. If it didn't work, it would have meant a lifetime of substantially suppressed lifestyle."

The two dozen other former RCA employees who joined Cardinal kicked in about $10,000 to $15,000 each in return for shares in the company.

Cardinal picked up all of GE's sophisticated manufacturing equipment from the Portsmouth plant as part of the $4 million deal.

"It was a bargain transaction," Mr. Krall said. "Without a bargain transaction, we could still have made it, but we couldn't have found outside investors."

Even so, finding such financial angels was no easy task. Cardinal was spurned by venture-capital companies, but eventually raised about $24 million from a network of private investors who gambled on the risky venture.

While five of Cardinal's seven principals were engineers or scientists, neither GE nor RCA had been in the computer business. Nevertheless, they saw vast opportunity.

"Our goal was always to be a PC [personal computer] systems company," Mr. Krall said. And the executives brought a wealth of experience that wasn't listed on their balance sheet.

Cardinal waded into its new business by first making modems, the devices that enable personal computers to send and receive information over the telephone lines.

While it took months for Cardinal to hit its stride, two years later Cardinal emerged as one of the larger makers of modems, a marketplace crowded with 135 vendors, according to Datapro Research Group Inc. in Delran, N.J.

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