Brentwood House 169 King's Road
Amstrad plc, the consumer-electronics and computers manufacturer, has, since 1980, achieved a name for turning electronic products--television, video cassette recorders, word processors, personal computers, camcorders, and satellite dishes--into affordable goods found in homes and businesses throughout Europe, North America, and Australasia.
For many people, Amstrad is synonymous with Alan Sugar, the founder and marketing genius behind the company. In 1965, aged 17 years, Sugar began selling reconditioned television sets from his home in Hackney, north London. After working as a salesman for several local electrical shops, Sugar, the son of a London East End garment maker, started his own company in 1968. AMS Trading Company, later abbreviated to Amstrad, began business as a buyer and seller of electrical goods. Originally, these goods were not manufactured by Sugar's company. Its first products included cigarette lighters and home intercoms. In the next few years, Amstrad broadened its product range to include hi-fi amplifiers, tuners, car radios, aerials, and transistor radios.
In 1969, Sugar opened Global Audio, his first retail venture. By 1970 he already had tired of mere retailing, and sought a new avenue of expansion. He decided to manufacture plastic turntable covers at £2.95 each. He found a way to reduce radically the cost of production, as a result achieving high sales volumes and margins, along with low retail prices.
A year later, in 1971, Sugar expanded his manufacturing capacity by appointing four Far Eastern contractors for his electrical components. By 1974, most of Amstrad's products were being manufactured in the Far East.
As a measure of its early growth, Amstrad's sales reached a total of £207,534 in 1971 with profits of £24,242. In 1972, sales and profits tripled. By 1973, profits rose to £194,063 on sales of £1.32 million.
In 1978, Sugar declined Audiotronic Holdings's offer to purchase a 78% stake in Amstrad for £2 million. He chose instead to list his company on the stock market. By then, sales of his products were soaring. Volume sales of car radio-cassette players, for example, were 276,000 in 1976, rising to 418,000 a year later, and reaching 588,000 units in 1978.
Sales touched one million units in 1979. Finally in 1980, when a host of U.K. consumer-electronics manufacturers were going to the wall in the face of persistent competition from U.S. and Far Eastern manufacturers, Sugar brought Amstrad to the London Stock Exchange. At the time the company's 1980 turnover was £8.8 million, and profits stood at £1.4 million.
Amstrad's fortunes grew steadily during the early 1980s. Between 1980 and 1983, compound profit growth for the company averaged 56%. Hong Kong eventually became Amstrad's manufacturing base when a subsidiary, Amstrad International (Hong Kong), was established there in 1982. Sugar chose as a top executive in the Far East a Hong Kong woman, Callen So. She became marketing and sales director in 1982, having joined the group in 1971 as a secretary at the age of 19 years. So's appointment was evidence that Alan Sugar never insisted on formal qualifications when hiring his senior managerial staff.
Sugar was responsible for Amstrad's renowned agility in product development and marketing, allowing the company to jump in and out of markets at will. At the height of the 1982 recession, for example, Sugar took Amstrad out of the depressed car-radio cassette-player market. This move was not difficult to achieve because the manufacture of these products had always been placed with subcontractors in South Korea. Sugar had no directly employed workers to lay off as he left one market and leaped into another.
More importantly, Sugar displayed no emotional or technical commitment to retaining products whose markets have fallen away. In 1984, Amstrad dropped out of selling video cassette recorders not long after entering the market, again owing to a depression in that particular area. However, the company just as quickly returned to the same market a year later, having changed its supplier in Japan to help improve margins.
Amstrad doubled in size each year during the early 1980s. By 1983, Sugar had identified the potential for large profits to be made from the expanding personal computer (PC) market. In 1984, Amstrad launched a new home computer, the CPC464, known as Arnold. The 64k-memory personal computer was introduced as a direct competitor of the 64k computer put on the market by Commodore Computers. Having had the CPC464 assembled in South Korea, Amstrad used popular retail outlets such as Comet, Dixons, and Rumbelows to sell its units. The machines, operating on cassette programs, were aimed at the beginner computer market.
Also in 1984, Amstrad augmented its U.K. manufacturing capacity by building a new 160,000-square-foot factory at Shoeburyness, at a cost of £2.5 million. The new factory began manufacturing consumer products, such as medium-sized color television sets and VHS video recorders. It also produced audio equipment, including remote-control hi-fi units. Indeed, after Amstrad achieved in two years a 40% share of the U.K. audio market on the strength of its Tower music systems, Sugar, at the age of 37, won the Guardian Young Businessman of the Year Award in 1984.
Part of Sugar's success has come from Amstrad's no-frills policy in developing new product lines. Sugar believes strongly in giving customers what they want, and nothing more. As he told his 1985 annual general meeting: "We produce what the mass market customer wants and not a boffin's ego trip."
Later that year, Amstrad eclipsed its early success in the personal computer market when it introduced the PCW8256 word processor, pitched at those looking for a sophisticated typewriter and incorporating the latest in word-processing software. The PCW8256 was typical of Amstrad products in that its market included people who had never yet bought a word processing unit because of the high price. By paying close attention to component costs, quality control, and packaging, Amstrad succeeded with the PCW8256, as with its other products, in delivering a particular product to a particular market at just the price the mass-market customer could afford.
The one problem with the PCW8256 was its incompatibility with IBM software. Amstrad remedied this difficulty in 1986 by introducing its new PC1512 computer line. The IBM-compatible personal computer took on IBM on the U.S. computer giant's home ground. Here was a personal computer with word-processing software, complete with a monitor, disc drive, and printer, that was both relatively inexpensive and simple to use.
Amstrad's expansionist phase included paying $7.7 million, in 1986, for the name and right to market the products of Sinclair Research Ltd., the troubled computer company founded by U.K. inventor Sir Clive Sinclair. Backed by Malcolm Miller, Amstrad's marketing and sales director, the Sinclair acquisition gave the company access to a significant slice of the leisure end of the U.K. computer market.
Continuing from strength to strength, in 1987 Amstrad was listed on the FTSE-100 in London, the market index of the United Kingdom's top 100 companies, a mere seven years after the company first came onto the market. Building on the success of the PC1512 computer line, Amstrad brought to the market its upgraded PC1640 model. The PC1512, with its powerful color system, appeared a perfect fit for the home-computer market. The PC1640, on the other hand, with its enhanced graphics facility, was ideal for the expanding business-computer market.
By now, Sugar and his marketing team had perfected their product-development formula: catch sight of a rising product, study it, copy it, amend it to include a few user-friendly gadgets, and then farm out its production to a Far Eastern or Scottish manufacturer. Then, after fixing a retail price with two nines in it and lower than anyone else's, Amstrad would introduce the consumer product to those who previously had been unable to afford such an item. Finally, Amstrad would bombard its market with blanket advertising.
In late 1987, Amstrad launched the successor to its successful PCW8256 word processor, the PCW9512. The enhanced word processor, fitted with a letter-quality, daisy-wheel printer, put yet another nail in the coffin of the office and home typewriter, much as Alan Sugar had intended.
As a measure of Sugar's success, his own share stake in Amstrad grew in value at one point in 1988 to £590 million. However, problems began for the company in 1988. In that year, Funai-Amstrad, of which Amstrad was a 49% stake holder and a top customer, began production of video cassette recorders (VCRs) in the United Kingdom. Shifting the VCR manufacturing base from the Far East to the United Kingdom was intended to help Amstrad escape the effect of a rising yen and anticipated sanctions from the European Commission on electronic goods manufactured overseas.
As Amstrad grew, flexibility suffered as Sugar struggled to maintain direct control of his company. In 1988, he spent much of the year establishing further subsidiaries in Italy, West Germany, the Netherlands, and Belgium. The company work force doubled to 1,600 people. Sugar reacted to this expansion by delegating more and more responsibility to his lieutenants in the field, while previously he had been able to bark orders across his headquarters' open-plan offices, so near was his senior management team.
After 20 years of solid growth, Amstrad revealed a profit slump from £160 million a year earlier to £76 million in 1989, on static turnover. City analysts were both stunned and satisfied that the skepticism many had long exhibited towards the company had proved warranted. With his customary candor, Sugar acknowledged that 1989 had been a disastrous year for Amstrad.
The consensus is that during the late 1980s Sugar's management team had extended itself too far as the company grew too rapidly. Sugar had not been able to keep his eye on his company when it mattered most. As one rival told a national newspaper in 1989, "Amstrad has always been a company that Alan could put his arms round. And now it's growing too big for that." Technical and managerial difficulties at Amstrad appeared to be the causes of Sugar's troubles in 1989. When he ought to have supported his management team, Sugar did not. Instead, he displayed his long-standing distaste for bureaucracy. Amstrad has never had more than four layers of management, and Sugar could always reach any one layer with speed.
A management stretched to the limit of its capabilities was going to make mistakes, and Amstrad's did. In 1988, a sophisticated component used in the new PC2000 computer was found to be faulty, delaying the launch of the line. The fault was not detected at an early stage, but was found after the computers had been manufactured and distributed, requiring them to be recalled. The screening and repair of other products in Amstrad's PC2000 line, including the PC2286 and PC2386, forced a slow-down in supply to the company's distributors. A £325 million build-up in inventory followed, which Sugar swore at the time would not be cleared by resort to fire sales. Instead, he promised an orderly reduction in inventory through an aggressive marketing campaign.
Worse was to follow. A decision by Amstrad to take personal responsibility for the PC2000's distribution in West Germany led its former distributor, the Schneider Company, to depress demand for the new products by dumping its existing stock at bargain prices. Elsewhere, a labor shortage in Taiwan led one audio subcontractor to delay delivery of its order. In the United Kingdom Funai-Amstrad failed to meet VCR production targets. This delay led to lower than anticipated VCR sales in the United Kingdom during the Christmas season in late 1988.
Then a global shortage of computer microchips led to soaring prices for the components and higher production costs for the PC2000 line. To secure a steady supply of microchips, Amstrad bought into, but lost out on, a stake in a U.S. microchip supplier, Micron Technology. The value of the holding fell from £45 million to £30 million before the supply of memory chips improved, and was reflected in Amstrad's poor 1989 profits.
The launch of the television satellite Sky heralded a major new market for Amstrad, the supply of Astra satellite dishes and receiving equipment. In the financial year ended June 30, Amstrad sold £107 million worth of Sky equipment in the United Kingdom, the Netherlands, and Germany, and now sees satellite as being an important part of the group's product range. The subsequent merger between Sky and BSB (British Satellite Broadcasting), resulting in Astra's becoming the preferred system, further enhances Amstrad's already dominant position in this market.
In 1989, Sugar brought Callen So from Hong Kong to his Brentwood headquarters to play a role in components sourcing. From her new base she supported efforts to relocate Amstrad's manufacturing base in Europe, in part because the cost advantage of using Far East suppliers had been reduced, but also to avoid anti-dumping measures against Amstrad threatened by the European Commission in Brussels after 1992. Sugar also recruited a team of managerial experts. Prominent among the new recruits was Peter Thoms from Gillette, who became the new finance director, freeing Ken Ashcroft to deal with inventory control and City relationships, and John Benjamin from Mars Inc., who became the new manufacturing director.
During a troubled 1989, Sugar saw his personal stake in Amstrad fall sharply by £1 million a day to settle, at one point, at £118 million. This still left Alan Sugar the 70th-wealthiest man in the United Kingdom, according to the Sunday Times. During this period, Amstrad fell to third place in the league table of U.K. business microcomputer suppliers, behind Compaq with a 13.3% market share, and IBM, leading with a 26.1% share. Amstrad's own 11.3% share kept it ahead of Apple, the U.S. computer maker, which trailed with a 5.8% share.
In late 1989, Sugar announced that his company was abandoning the audio and music-systems market. Long adept at pinpointing the needs of the audio market, Amstrad had decided that the margins available from the market no longer warranted the effort. As Sugar told Financial Weekly on November 10, 1989, "Our success is at the bottom and calls for a disproportionate amount of management effort when compared with sales and net margins generated."
The abandonment of the audio market was significant because it signaled a marked change in the company's strategy. Until 1989, Sugar had maintained that he was interested in products that sold a minimum 100,000 units a year, but now the criterion for participation was colored by talk of profit contribution rather than volume.
Sugar was suggesting unwittingly that Amstrad was reaching maturity. He continued: "Until recently, most of our products have been relatively low-ticket items, requiring mass sales to provide budgeted profits." As products increased in price, particularly for the business market, the profit margin had allowed Amstrad to sell fewer units while maintaining the company's overall targets. In other words, volume was no longer to be considered the sole source of the company's profits.
In 1990, Alan Sugar insisted that Amstrad's problems of recent years were behind it. The company's share price began to climb from a five-year low reached in 1989, after Sugar threatened to privatize Amstrad once again if City investors did not look upon it more favorably.
Defying its critics, who insisted that Amstrad's problems would prove fatal, in April 1990 the company unveiled plans for a combined telephone, facsimile, and answering machine in a bid to return to financial health. Sugar announced at the time that his company would introduce one product every month. Reporting the year's results in October 1990, Sugar was able to confirm that inventory had been reduced from a peak of £325 million to a manageable £180 million, and that the company was once again cash-positive.
Recognizing the potential for growth in laptop computers, Amstrad launched its new and highly regarded ALT range in early 1990, followed by a totally redesigned range of desk to PCs, the Generation-3 range.
Alan Sugar faces a test of his management skills in future years. The question is whether he can allow Amstrad to grow still further, and continue to prosper. He will have to relinquish direct control and give more power to his lieutenants to allow Amstrad to reach its full potential. Four appointments of 1990 key managers as main board directors-designate suggest that he can.
Principal Subsidiaries: Amstrad International(France); Amstrad Inc. (U.S.A.); Amstrad Espana (Spain); Amstrad GmbH (Germany); Amstrad BV (Netherlands); Amstrad NV (Belgium); Amstrad Pty Ltd. (Australia); Amstrad Italia (Italy); Amstrad Benelux BV (Netherlands).
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