PROFILE AST RESEARCH : Gutsy Computer Maker Scores a Turnaround

U.S. companies have been about as successful selling personal computers in Tokyo as the Japanese were at selling Hondas in Detroit 20 years ago. Even deep-pocketed Apple Computer has had little success selling a Japanese-language version of its Macintosh machine in Japan.

So when AST Research announced April 10 that it would become the first U.S. company to sell a clone of NEC Corp.’s popular PC in Japan, many on Wall Street expressed skepticism about the risky venture.

But others say the surprise move exhibits the kind of boldness that may set Irvine-based AST apart from the pack of upstarts chasing the PC industry’s “Big Three”--International Business Machines, Compaq Computer and Apple.

“This is a gutsy move to take on NEC,” said Bruce Stephen, an industry analyst with International Data Corp. in Framingham, Mass. “But clearly with a U.S. market that is maturing, you have to move international to break away from other computer makers.”

Safi Qureshey and Tom Yuen, two immigrant engineers who have helped build AST into America’s ninth-largest computer maker, say they’re determined to break into a market dominated by NEC and seize a chunk of the fast-growing, $5.6-billion personal computer market in Japan. And they note, with just a bit of cockiness, that the skeptics on Wall Street have been dead wrong about the company before.

Fifteen months ago, analysts and investors had pretty much written off the small Irvine PC maker after it suffered a series of setbacks:

* The abrupt resignation of co-founder Albert Wong, AST’s chief technology officer, in November, 1988.

* A slowdown in AST’s sales as it and other PC makers were hit by an industry-wide slowdown.

* The announcement in January, 1989, of the company’s first-ever quarterly loss, a whopping $8.9-million deficit.

* The layoff of 6% of AST’s work force, the firm’s first job cuts.

But 18 months after Wong resigned, AST has executed an impressive turnaround that has the investment community singing its praises again. Its stock price has surged from about $6 a share in January, 1989, to more than $23 this week. And while industry titans such as Compaq are reporting haphazard quarterly results, AST last week reported its highest quarterly sales and earnings ever, outperforming analysts’ expectations for the fifth quarter in a row.

“When Albert left, it provided us with a golden moment to re-examine ourselves and why we went through a slump,” said Yuen, chief operating officer and one of the company’s founders. “I suppose that 1 1/2 years has been a good test of the departure.”

AST’s recovery is attributed to a number of moves that have slashed corporate overhead and cleaned up the firm’s balance sheet. The company has sold off two product lines, pushed new products out the door faster and placed its computers in the hands of more retailers.

Qureshey and Yuen say these efforts are part of their goal to join the industry’s top ranks upgrade the computer, the circuit board can be quickly replaced without redesigning the entire machine.

Since customers can upgrade their computers quickly and inexpensively, they need not worry about obsolescence, Qureshey says. To further emphasize speed, AST built a new manufacturing plant in Fountain Valley that can be set up to handle new products within 90 days.

The shift to high-performance machines is also based on a strategic vision. Qureshey sees opportunity to make inroads into the weakening $30-billion minicomputer industry, which is being squeezed between supercomputers and ever-faster PCs. Minicomputer customers who need to replace their equipment are ripe for the picking, he says.

With 25% market saturation, the PC market is becoming a replacement market, with users seeking to inexpensively upgrade to better models, said Stephen Smith, analyst at PaineWebber in New York.

AST hasn’t always been the fastest to market. It has been slow to break into the rapidly growing portable laptop market, now dominated by Toshiba Corp. and Zenith Data Systems. AST says it is developing a laptop model and hopes to bring it to market within the next year.

AST hopes to move faster in building its name overseas.

The Irvine-based firm is building a computer factory in Europe in preparation for the liberalization of Western European trade in 1992. And company officials have been crisscrossing the globe to develop markets in the Far East, Eastern Europe, the Soviet Union, Pakistan, India and Mexico.

Qureshey journeyed to the Soviet Union in February as part of an exhibition of U.S. computer systems. The marketing effort was a shotgun approach to getting new business, but Qureshey said the trip “planted some seeds” in a market with huge potential.

While domestic PC sales are expected to grow 13% this year, international sales will grow faster. International sales accounted for 38% of AST’s revenue last year, and Qureshey would like to see that figure pass 50% within a year.

AST is not the only firm to pursue overseas sales. Most computer firms are diversifying into international markets and companies such as Compaq already derive half their revenue from abroad.

Given the past acceptance of U.S. products in Japan and the falling yen, which makes U.S. products more expensive overseas, AST’s venture in Japan is risky, said JoeAnn Stahel, president of Storeboard/Computer Intelligence, a Dallas market research firm.

But Qureshey and Yuen are proud to be carrying the flag of American computer manufacturing to Japanese soil, noting how U.S. trade officials have described the venture as a test of Japan’s willingness to accept competitive imports.

Many business users are replacing older PCs with more powerful ones. AST could benefit if those users preferred inexpensive upgrades, said Stephen Smith, analyst at PaineWebber in New York.

AST, which spent two years and millions of dollars researching the project, isn’t betting the company on the success of the Japanese venture. With $77 million in cash on its books, AST can wait for long-term results.

Closer to home, AST has always struggled to get its product on retailers’ shelves, where space is scarce and where IBM, Apple and Compaq are dominant. AST has been part of the pack of companies competing to be the “alternative” brand.

In the past years, however, AST has signed up such major retailers as Computerland, Micro Age and Sears Business Systems Centers to carry its products. Its sales through computer stores have doubled in the past year, Stahel said.

“The company is no longer sales-driven,” said Wong, who earlier this year started a small computer company in Irvine. “They look at the bottom line a lot more, and that’s a credit to Tom and Safi. The loss in 1988 forced them to look at the financial side.”

Much of the recent cost savings has been invested in new capacity. Besides building the Fountain Valley plant, AST moved into a new $30-million headquarters complex in the Irvine Spectrum Business Park.

AST’s plants make computers for Tandem Computer and Texas Instruments, which then sell the machines under their own brand names and will likely add another agreement in the near future. Qureshey said such agreements further distinguish AST in the marketplace.

Qureshey likens AST’s strategy in the PC market to the one that Honda pursued in automobiles. By selling high-quality, moderately priced products, AST hopes that customers will return to buy its higher-priced models.