Kingston Technology Corporation

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Kingston Technology Corporation

17600 Newhope Street
Fountain Valley, California 92708
U.S.A.
(714) 435-2600
Fax: (714) 438-2720
Web site: http://www.kingston.com

Private Subsidiary
Founded: 1987
Employees: 450
Sales: $1.3 billion (1996)
SICs: 3572 Computer Storage Devices

Acknowledged as the world’s leading provider of computer memory products, Kingston Technology Corporation also designs and manufactures portable products, processor upgrades, storage subsystems, and networking products for personal computers, workstations, and laser printers. With over 1,900 products and customers in over 60 countries, the company is the world’s largest provider of enhancement products for PCs, laptops, notebooks, servers, workstations and printers. Domestic distribution channels include distributors, major reseller chains, and aggregators. This distribution, added to an international network, makes up 3,000 reseller locations across the world.

Kingston Technology Corporation was founded in 1987 by John Tu (originally from Shanghai) and David Sun (originally from Taiwan). Tu and Sun had met in 1982 and started Camintonn Corporation, a manufacturer of enhancement products for DEC systems. This fly-by-night company began in Tu’s garage, with the two businessmen carrying computer memory chips in the back seats of their cars. By 1986, business took off with sales of $9 million. That year, they sold the company to AST Research for $6 million, investing their gains in the stock market.

When the stock market crashed in 1987, Tu and Sun lost almost everything. Then they saw an opportunity to recoup their losses. At that time, the computer industry was suffering from a shortage of memory modules for personal computers. Tu and Sun seized a simple solution to the problem, designing an industry standard Single In-Line Memory Module (SIMM) with an alternative chip that was readily available. This product and a mere $4,000 launched Kingston’s operations, and the company soon began developing memory products for PCs.

A skeptical businessman, Tu found it difficult to believe that the simple solution the two had found to the memory crisis would result in a lasting company. He bet Sun a Jaguar that Kingston would not live past its first year. The PC market was beginning to produce computers that ran on separate proprietary systems, leaving the door open for Kingston to design and produce several unique memory upgrade devices for each individual market. In its first year, the company achieved $12.8 million in sales. Tu lost his bet, and Sun later bestowed the Jaguar upon an employee who had long dreamed of owning one.

By 1989, just two years after Kingston’s emergence, the marketplace had changed. Chips were in ready supply once again, and as a result so were memory enhancement products. However, Kingston remained the clear leader in the memory market, and in 1989 the company earned $36.5 million in sales.

One of the ways in which Kingston quickly differentiated itself from its competition was the high level of customer services, including 100 percent testing of its products, comprehensive 5-year warranties, domestic 24-hour shipping, and free technical support. The company promised to immediately replace defective parts with no questions asked. Beyond customer service, Kingston established a holistic way of operating a family-style company. The company’s philosophy places the customer third, after employees and suppliers. According to Kingston, if the company takes care of its employees and suppliers, the customers will be taken care of as well. Kingston employees are among the highest paid in the industry (as much as 30 percent above average), and an egalitarian work environment is demonstrated by the fact that Tu and Sun’s working suites are cubicles among their staff family. Showing a generosity that is rare in corporate America, Kingston distributed 5 percent of pretax quarterly profits to employees as a bonus and matched employee contributions to 401(k) plans dollar for dollar. Further, managing the company conservatively, Tu and Sun ensured employees that should the company go out of business at any time, employees would be granted a full year’s salary in order to find a suitable position elsewhere. Appreciative of such unusual treatment, Kingston employees tended to stay, with less than 2 percent annual attrition as of 1994.

Given such perquisites, one would imagine that job seekers clamor to work at Kingston. However, securing a position with the company is no easy task. Tu and Sun value experience over credentials, and seek employees who would be good members of the family. About 80 percent of new hires are the result of internal referrals. By hiring slowly, the company succeeds in implanting its family culture in each employee gradually. One of the most multicultural companies in the industry, Kingston employs a mix of whites, blacks, Chinese, Vietnamese, and Hispanic workers, with two-thirds of its workers in 1995 representing ethnic minorities.

Suppliers, the company’s number two priority, are also treated well. The company never turns away shipments from chip vendors, nor does it renegotiate when market chip prices fall below contractual agreement levels. Kingston seeks to establish long-term relationships with vendors, working with them as partners over many years. Long-term relationships are also key management of currency risk, and Kingston has cultivated strong relationships with its foreign distributors based on mutual favors and support. When sterling fell against the dollar, for example, Kingston’s U.K. vendor could not meet the cost of a more expensive dollar. At the expense of its profit margins, Kingston lowered its prices. However, the company, in such a situation, expects the vendor to return the favor when sterling’s value again increases.

Kingston’s early success was also due to the cutthroat computer market, where manufacturers customarily produced low-quality hardware products and made money on upgrades. With Kingston’s upgrade products, these machines could handle the demands of word-processing and Internet software. Kingston soon became known for the speed with which it designed and delivered upgrades, sometimes producing the upgrade for a product before that product was even released to the consumer. Whereas most PC producers allow orders to pile up while they shop for the best bargains, shipping bulk orders every month or so, Kingston fills all purchase orders daily. The company places the quality of its relationship with suppliers and customers above any savings associated with waiting to fill orders. The result is that Kingston is the fastest company to meet its customers orders. Its reputation for speedy response is so strong that original equipment manufacturers have been known to refer their own customers to Kingston when they cannot meet customer needs in a timely way. Filling orders quickly has another advantage: Kingston carries no inventory.

All of these qualities set Kingston apart from its first few years in business. In 1989, Kingston extended beyond memory products, entering the storage upgrade market. The next year, the company began offering processor upgrades, the company’s first non-memory product line. The introduction of Windows 3.0 in 1990 gave sales a boost, as computers required more memory than what was contained within PCs. Revenues almost tripled in 1990, reaching $87.8 million, and in 1991 sales again surged to $140.7 million. The demand for memory was spurred in 1991 by the rise of the memory-intensive workstation market, and Kingston created a special department to serve this market in 1991. By this time, the company employed 110 people.

In 1992, Kingston was ranked the fastest-growing private company in America by Inc. Magazine. With no debt and no venture capital, revenues surged to $251 million (with about one-third coming from international markets) and the company grew to employ 175 people. Since 1987, sales had increased 368 percent compounded annually. Competing with about 15 companies, Kingston held a 45 percent share of the computer memory market in 1992. That year, the company continued to diversify its offerings, adding a line of Ethernet and Token Ring networking products. In 1993, new networking and storage product lines were introduced. That year, it became apparent that the company’s innovative vendor relationships were working; demand for semiconductors exceeded supply, with suppliers shipping to Kingston when orders from other buyers were delayed. Sales for 1993 were $433 million, and the number of employees grew to 255.

By 1994, Kingston had developed nine separate processor upgrade products and a full line of portable products. The company entered the portable market with its introduction of DataTraveler, a portable hard disk drive, and DataPak, a portable PCMCIA hard disk drive. When ISO 9000 (International Organization for Standardization) became the worldwide quality standard, Kingston immediately passed the test, attaining certification in September 1994 and successfully completing its first audit. The billion-dollar mark began to feel reachable, as 1994 revenues climbed to $800 million due to the efforts of 310 employees. Kingston’s competition had increased, with 70 companies in the $7.2 billion dynamic random-access memory (DRAM) module market, but Kingston was still number one. The company’s growth was physically evident; the workstation memory group was moved to a different building, and Kingston purchased blue Huffy bikes to shuttle employees between the two worksites.

Yet, growth began to present questions for the company. In 1994, Kingston hired its first chief financial officer, a former Wall Street investment banker named Henry Tchen, and issued security badges to employees. Outsiders wondered if the company’s family environment would be tossed aside when revenues reached the billion dollar mark.

Company Perspectives:

The Kingston spirit reflects an individual commitment, based on teamwork and loyalty, to reach a standard of exceptional quality, reliability, and service in providing system enhancements to our customers worldwide. The company’s core values are respect, loyalty, flexibility and adaptability, investing in its employees, and having fun working in the company of friends.

When Microsoft introduced the Windows 95 operating system, in 1995, demand for Kingston’s memory upgrades skyrocketed. Windows required more memory than most consumers had in their existing hardware. The company surpassed a billion dollars in sales that year, earning $1.3 billion with 450 employees.

International development became a major focus around this time. Expanding its worldwide distribution network, Kingston opened a branch office in Munich, Germany, in 1995. The next year, a branch office was opened in Paris. Kingston worked with Legend Technology Limited to develop computers for the Chinese market in 1996. Also in 1996, the company introduced the TurboChip 133 processor upgrade, which gave a 486 computer the power of a 75 megahertz Pentium chip, and three new plug-and-play Ethernet adapters.

By this time, Tu and Sun had become two of America’s wealthiest entrepreneurs, occupying places on the Forbes list of America’s 400 richest people. Leading the company, Tu focused on sales and marketing while Sun oversaw engineering. As a team, Tu and Sun were noted for their quick decision-making. The pair often decided to launch new products while walking from their cars to the Kingston headquarters, and the success rate for new products was an unheard-of 90 percent in 1992. Kingston’s founders did not wish to take the company public, desiring to maintain the family environment they had built.

In 1996, the price of DRAM dropped dramatically, forcing upgrade vendors to boost sales volume and enter new markets. Kingston responded by pursuing the OEM market, courting companies such as Compaq Computer Corp., IBM Corp, and Sun Microsystems, Inc.

Taking analysts by surprise, in 1996 Kingston was acquired by Softbank Corporation, the world’s largest publisher of computer-related magazines and books and the world’s largest producer of technology-related trade shows and expositions. Softbank was also the largest distributor of computer software, peripherals and systems in Japan. Softbank purchased 80 percent of the company for $1.5 billion, and Kingston characteristically shared $100 million with its employees as a holiday bonus (doling out approximately $75,000 to each employee). Softbank’s revenues for fiscal year 1996 were $1.6 billion, and the company had 6,000 employees across the world. Under the terms of the acquisition, Tu and Sun remain in charge of the company’s operations. What was surprising about the acquisition was that Tu and Sun, who had been extremely financially conservative from the outset (never even agreeing to take out a bank loan), had agreed to be purchased by a company that was in the process of a takeover spending spree with high financing. Why would Kingston agree to such an alliance?

The answer was that Softbank’s strong distribution channels in Japan—where the company had virtually no presence— would be an asset to Kingston’s expansion plans. The company’s dominance of the distribution channels selling to America’s Fortune 1000 had made it the largest memory module manufacturer, but outside markets remained unconquered. With Softbank’s acquisition, the company began targeting international growth. In 1997, Kingston announced a $40 million expansion plan, involving the construction of production facilities in Europe and Asia and the expansion of its U.S. facility to include a new manufacturing center. The goal of the expansion was to achieve faster turnaround times and lower prices amid the plummeting price of memory, which had dropped 80 percent during 1996-97. Kingston opened a European Headquarters in the United Kingdom and announced plans to open a manufacturing site there as well.

In its first decade, Kingston has grown from a company that manufactured a single memory module to an international corporation with over a billion dollars in revenues. Astounding growth has been achieved through eschewing the cutthroat bargain-oriented mentality of the company’s competitors, instead valuing long-term relationships and employee satisfaction. With the company’s acquisition by Softbank and its expansion in Europe and Asia, a new phase of development has begun in the second decade. The lingering question about the company’s future remains: can the family-style management that has secured Kingston’s leadership place in the market continue to coexist with the demands of a billion dollar business?