Tandon Bets Heavily on New Line of Personal Computers
Something must be up with Jugi Tandon. He hasn’t bought a car in three months.
For a man who collects automobiles like some people collect stamps, that’s a good indication that lately his mind has been on much more than his cars, of which he has about a dozen.
Tandon has been preoccupied with transforming the beleaguered Chatsworth company that bears his name from one of the world’s leading makers of disk drives--the devices that store and retrieve data in personal computers--into what he envisions as a leading maker of IBM-compatible personal computers.
The metamorphosis comes at a time when a severe industry slump has forced many of the industry’s brightest stars out of business. Undaunted, Tandon has spent a fortune hiring some of the key executives who launched IBM’s immensely successful Personal Computer in 1981, offering them fat salaries and enough stock options to make them as rich as a California lottery winner if they succeed.
Tandon’s friends, such as disk-drive entrepreneur Al Shugart, call the move courageous. Others in the business, however, wonder why the world needs yet another personal computer maker and question whether Tandon has the resources to keep up with low-cost competitors in the Far East and the big, established U.S. computer makers such as IBM and Compaq.
“I’m not spending a lot of time worrying about Tandon,” said Michael S. Swavely, vice president of marketing for Houston-based Compaq. “I’ll spend my time worrying about IBM, AT&T; and Apple.”
Yet even the skeptics find that what Tandon is doing is fascinating and bold, characteristic of the kind of risks that the flamboyant, 44-year-old native of India has taken since he started his firm in a garage just over 10 years ago.
“Jugi’s always been running a marathon on the edge of a cliff,” said James Porter, editor of Disk/Trend Report, which tracks the disk-drive industry. “But I’d never want to bet against him. He’s one of those guys who I wouldn’t say has a magic wand, but he’s always more likely to be a survivor than a loser.”
Tandon, whose full name is Sirjang Lal Tandon (although everyone calls him Jugi), says he can build inexpensive, quality personal computers that can compete successfully. His computers, Tandon says, will provide attractive profit margins to computer dealers such as ComputerLand, to makers of office automation equipment such as Xerox and to makers of large computer systems such as Digital Equipment.
Although he wants to stay a leading supplier of disk drives, Tandon predicts that personal computers will make up 80% of his company’s sales by 1987, when he expects revenue to cross the $1-billion-a-year mark. He acknowledges that is an ambitious projection, considering that the company’s sales were only $268.8 million in the fiscal year ended last Sept. 27, when it lost $135.4 million--primarily because of the industry downturn, foreign competition and decreased business from IBM.
To make his plans work, Tandon looked to people who proved themselves at IBM. All told, his company now has seven former IBM employees in its top ranks, including Tandon himself, who worked for IBM as an engineer in the early 1970s.
Hired IBM Executives
Two former IBM executives were hired in the past five months to play key roles at Tandon. Dan H. Wilkie, Tandon’s president and chief executive, was an 18-year IBM veteran who ran the company’s personal computer operations in Boca Raton, Fla. Tandon’s senior vice president of sales and marketing, H. L. (Sparky) Sparks, worked at IBM for 20 years and launched the distribution and marketing system for IBM’s Personal Computer, later doing the same thing for Compaq.
Tandon also recently hired William Sydnes, who helped design the IBM Personal Computer, as vice president of engineering and development; Joseph Sarubbi, another key player in the making of IBM’s Personal Computer, as senior vice president of manufacturing operations, and consultant Chuck Peddle, a non-IBM industry whiz who designed Commodore International’s computers and founded Victor Technologies, a Scotts Valley, Calif., computer firm.
Buying top talent in the computer business is expensive. According to documents filed with the Securities and Exchange Commission, Wilkie received a $100,000 hiring bonus and a salary of $270,000 a year, only $5,000 less than what Tandon himself received in the last fiscal year. Sparks got a $120,000 bonus and is being paid $200,000 a year, the documents show.
But the main financial incentives for the two men are options for Tandon stock. Each man will get options for 450,000 shares within four years at $2.75 per share. Sparks has been assured a minimum gain of $2.75 a share for each option, if he meets performance standards, meaning his 450,000 shares would be worth at least $1.2 million. If the stock’s price rises, as it has in the last six months to more than $5 a share, both stand to make a whole lot more.
Jugi Tandon brushes aside suggestions that hiring such talent is too expensive for a company that has been plagued by big losses. “It’s cheap to get good people,” he said. “It’s very expensive to work with bad people.”
Tandon director Jean Deleage, a San Francisco venture capital executive, says that hiring Wilkie and other former IBM executives will prevent the recurrence of some of Tandon’s past problems in manufacturing and operations, such as being burdened with huge amounts of outmoded inventory.
Wilkie, Sparks and the others say they are sold on Tandon’s plan, noting that they wouldn’t have left the comfortable jobs they had if they didn’t believe they could pull it off.
The key selling point to Tandon’s argument, they say, is the company’s “vertical integration,” the fact that it can make nearly every part that goes into the personal computer at its low-cost plants in Singapore and India. Most important, they believe, is that the company makes its own disk drives, the single most expensive component in a personal computer and one that nearly all of Tandon’s competitors must buy from suppliers.
Those factors, Tandon executives argue, will provide the flexibility that the company needs to pass on a higher profit margin to dealers, who have seen their profits erode in the last two years due to intense price wars.
Controversial Idea
Tandon plans to use the good relations that Sparks built with dealers while he was with IBM and Compaq to tap into the so-called private label market, in which a company such as ComputerLand might take a Tandon personal computer and sell it under its own name.
The idea of private label computers is controversial among retailers. Some are convinced that launching their own brands could alienate suppliers such as IBM and Compaq. Furthermore, industry executives say, starting a brand name would cost a retailer millions of dollars in advertising.
“First and foremost these dealers are businessmen, so the deal has to make good financial sense. They simply aren’t going to let that issue go away simply because it’s Sparky who is talking to them,” Compaq’s Swavely said.
But ComputerLand, the largest franchiser of computer stores, is interested in a private label computer. Michael A. McConnell, ComputerLand’s senior vice president in charge of products, said the company will decide within a month whether it will launch a ComputerLand-label personal computer. McConnell said Tandon is one of the top contenders to get the contract if ComputerLand markets the product.
The other key part of Tandon’s strategy is selling to OEMs, or original equipment manufacturers such as minicomputer makers and office automation firms. Tandon executives say they have signed three contracts with OEMs and are about to sign a fourth. They refuse to release names, but industry analysts say two of them are Xerox and Tandem.
Less Than IBM Price
Tandon is already making one personal computer for Tandy, sold in Radio Shack stores, which is compatible with the IBM-XT. Tandy has been selling the Tandon computer for anywhere from $1,800 to $2,000, which, until IBM’s price cuts last week, was about 30% less than the comparable IBM model.
Jugi Tandon predicts that the OEM market will unfold because companies that sell minicomputers and office automation systems to businesses will want to supplement their product lines with personal computers. Those firms, he says, will find it easier and cheaper to buy those computers from a company like Tandon than to design and make the computers themselves.
But Daniel R. Carter, president of Cordata, a Thousand Oaks personal computer maker, predicted that only a limited number of such manufacturers will buy personal computers under contract from other firms. “A lot of those guys are big players who will eventually do their own development work.” Carter said.
Tandon now assembles about 4,000 personal computers a month at its Voyager division in Thousand Oaks, but it hopes to increase its monthly output to 30,000 by later this year. The company is currently looking at buildings in the area where it can locate another plant.
