Lessons from a Tech Survivor

Lessons from a Tech Survivor

Companies by Jean Gruss | Editor/Lee-Collier

Fox Electronics' survival during the years that followed the tech bust offers lessons to other businesses facing declining sales.

Edward Fox Jr. says he feels for Southwest Florida homebuilders today.

That's because his company, Fort Myers-based Fox Electronics, weathered a similar sudden downturn when the technology bubble burst in 2000. How Fox survived the tech wreck provides insightful lessons for any business facing rapidly declining sales.

In fact, the resemblance between the start of the tech downturn in 2000 and the current homebuilding decline are eerily similar: Both industries saw double-digit percentage sales increases suddenly come to a stop. "It turned on a dime," says Fox, 44, president of the company founded by his father.

So the Fort Myers-based company, which makes frequency control products, laid off employees, slashed advertising, cut pay and even unscrewed light bulbs to lower expenses. But despite pressure from its lenders, Fox refused to cut research and development of new products.

"We wanted to design our way out of the downturn," Fox says. "It's the one thing we didn't cut dramatically."

That turned out to be the right move. The company is now better positioned to take advantage of the rebound and it is gaining market share on its competitors as it unveils better products and undercuts them on price. Sales are expected to be $27 million this year, up from a low of $16 million in 2002.

From darlings to misfits

Fox grew quickly during the go-go 1990s, supplying booming companies such as Hewlett-Packard, IBM and Apple as well as hundreds of smaller companies with crystals and oscillators. These are thumbnail-sized timing devices used in electronic circuits for computers, printers, MP3 players, cell phones and a myriad of other electronic devices.

By 2000, the company was growing at a 40% annual rate and it hit $46 million in sales. Fox could hardly keep up and its backlog of orders grew to 15 months' worth. "All our factories were running three shifts," Fox recalls.

Fox says the company was the darling of its lender, Bank of America. Any time top executives with the North Carolina-based bank visited Florida, they stopped to visit Fox, he says.

As everyone knows, the tech sector was about to crash. "I noticed bookings slowed in August 2000," Fox says. By March 2001, customers were calling to cancel orders and inventory swelled from $4 million to $12 million. The 15-month backlog turned into 30 days in just a few months.

For Fox, it was like trying to stop a cargo ship moving at full steam. "It took six months to stop the forward momentum," Fox says. Inventory was stacked to the ceiling in the company's shipping department near Interstate-75 and Luckett Road in Fort Myers.

Bank of America executives grew increasingly anxious. While Fox declines to go into details, he says Fox was no longer a favored client. "Our relationship changed. Now we can't even get a regional vice president here," Fox jokes.

As financial losses grew, Fox and Gene Trefethen, 57, the company's chief executive officer, decided to forego their paycheck for six months and all remaining employees took a 10% pay cut. They laid off about 40% of the 108-person staff.

Fox and Trefethen renegotiated lower prices with the company's suppliers and extended payment terms from 30 days to as long as 90 days. They persuaded the landlord to postpone paying rent for 18 months and slashed the annual advertising budget from $500,000 to $20,000. Trefethen even got rid of the paper shredder and ordered employees to unscrew every other light bulb in the building to save on electricity.

What made the cuts even more difficult was the fact Fort Myers wasn't home to many technology businesses and employees were forced to take pay cuts while their neighbors prospered. "That was very difficult because this town didn't feel it," Fox says.

Still, Fox and Trefethen made extra efforts to communicate the dire conditions to employees. As part of that, they set up an intranet site where employees could track monthly sales.

Looking back, Fox says the company should have seen it coming because 40% annual growth isn't sustainable over the long run. "What happens when you grow 40% is it's a mania," Fox says. "We knew this is a cyclical business and we forgot that."

Preparing for a rebound

While Fox was scrambling to cut costs and clear its inventory during the downturn, executives refused to cut the research and development budget. Fox and Trefethen were able to stave off the bankers with pay cuts and other cost-cutting efforts even as they spent millions of dollars designing new products.

They knew that the downturn would wipe out competitors and they needed to be in a dominant position when business eventually picked up. Indeed, the tech downturn forced nearly a dozen competitors to close or sell their businesses.

Because of industry wide layoffs, Fox recruited engineers with years of experience to help design new products. In addition, the company hired engineers to help sell these products. In the past, it employed sales managers who had little technical knowledge. Now, it was able to replace them with knowledgeable engineers who better understood customers' needs.

Meanwhile, it streamlined its distribution network to just two distributors and targeted manufacturers of television cable boxes, residential security systems and wireless modems that were selling briskly because of the booming housing market.

New products, new markets

By 2005, Fox Electronics had eliminated debt, reduced its inventories and was now ready to launch new products. Further, it decided to expand its presence overseas where some of the fastest-growing customers are located. It has opened sales offices in Hong Kong, Taiwan and London.

Despite advances in telecommunications and travel, having offices overseas allows Fox executives to build business relationships with top customers in Europe and Asia. "You have to have a face," Fox says.

The key is to hire people with experience overseas. "You hire talent, tell them what you want and get out of their way," Fox says.

Already, much of the company's manufacturing takes place in China, Korea and Japan. In fact, Fox owns part of a factory outside Shanghai in China in partnership with a Japanese businessman who helped Fox's father start the company in 1979.

"Every successful group has partners in China," Fox says. But doing business there is tricky and it's essential to work with Asian partners. "If you don't speak the language, you will get screwed," Fox says. With a chuckle, he adds: "If you speak the language, you probably will get screwed."

In addition to manufacturing, Fox plans to add some engineering functions in Asia. Fact is, U.S. schools are not producing enough engineers and American companies are increasingly turning to talent in other countries, Fox says.

Meanwhile, the company has launched new products it hopes will give the company a greater share of the market. For example, it created a new crystal oscillator that it can deliver to customers in a matter of days rather than the eight weeks it usually takes to make a traditional oscillator. In addition, the new oscillator costs 20% to 50% less than competitors' and it works better.

What's more, it recently signed a global distribution agreement with Digi-Key Corp., a Minnesota-based company that is one of the world's fastest-growing electronic distributors in the world, shipping products to more than 140 countries.

Although Fox executives say they have 1.3% share of the global market for their products, they're aiming for 10% within five years. Fox plans to top $150 million in sales by 2011, up from $27 million today.

The competition hasn't disappeared, though. The top four or five companies in their field are Japanese publicly traded companies such as Epson and NDK. But Fox executives believe they can, well, outfox the competition with new products.