He Ain't Heavy He's My Brother

Will AST shrivel up and die a quick and painless death or will it getby with a little help from its friend? Sean Fleming says only time willtell

Imagine if you can that your company's sales have fallen by more than one fifth this quarter. That's bad enough, but a similar thing happened to you last quarter. You haven't made any money, in fact, the rate at which you're losing it is perhaps the only part of the business that's growing. Oh, and the picture's been this bad and getting worse for the past year and a half, during which time you have failed to record a single profit. Sounds like a nightmare? Sounds like the sort of thing your bank manager would never let you get away with? Be that as it may, that's what life's been like at AST.

The PC vendor is now relying on its increasing ties with Samsung Electronics to prevent it from disappearing without a trace. But this relationship has itself raised the question of how long before AST is swallowed up by its Korean parent.

AST was the creation of three engineers: Albert Wong, Safi Qureshey and Tom Yuen - their first initials lending themselves to the company name.

Life for AST began in 1980, in a garage in Orange County, California.

From its humble beginnings, the company rose to become the fourth largest US PC manufacturer by the late 80s and early 90s.

In Q1 1996, it was the third largest vendor in the UK market, by units sold, but the company has not returned a profit for some eight consecutive quarters and there is little sign of improvement.

Qureshey's two colleagues were soon to depart from AST and he was to find himself at the helm of a company far bigger than he was comfortably able to control. One of his first stumbling blocks came in 1993, when he bought the PC manufacturing division of Tandy. The $105 million price tag was too big for the company to swallow and it began to amass a string of debts.

Qureshey remains chairman of AST, but he is there as a figurehead rather than an active force within the board. He still owns about five per cent of AST.

In July 1995, Samsung Electronics bought a 40.25 per cent stake in AST.

This figure has crept up to a point where the Korean giant now owns 61 per cent of the US PC vendor. One of the first things Samsung had to do in its new role as benefactor was to inject some $300 million of credit guarantees.

But this was not enough; in the past nine quarters AST has lost an astonishing $545 million, $200 million of which was lost this past year. The company returned a loss of $31.6 million in Q2 1995, but by Q2 1996 this had shot up to $98.7 million, far worse than anyone had expected.

Worldwide sales for Q1 1996 stood at $531 million, down from $670 million for the previous quarter, rising slightly to $554 million by Q2 1996.

Samsung's involvement with AST has never looked more vital. But it has prompted industry watchers to pose a number of questions about what the future holds for both companies. Harry Thuiller, chairman of Fraser Associates, voiced one of the more commonly heard concerns when he said: 'It's looking more likely that AST will be completely swallowed up by Samsung.'

There surely has to come a time when Samsung will no longer be so willing to pump huge amounts of cash into its loss-making junior partner.

Like many other semiconductor manufacturers that made big money a few years ago from the booming chip market, times are now somewhat leaner at Samsung and belts are being tightened.

So far, Samsung has spent $678 million on AST. After buying much of the company's stock, after shoring up its credit agreements and after involving itself in the redesign of some of AST's manufacturing processes, Samsung must view the increasingly bleak situation with a mixture of despair and incredulity - which is why some have suggested it is only a matter of time before AST disappears and becomes the Samsung Electronics' PC Division. Remember Apricot? Others have suggested the only way AST can turn itself around is by turning away from with the indirect channel and selling direct.

These ideas are scorned by AST. Marketing director at AST Europe Con Mallon is the first to try to put the record straight. 'We welcome Samsung's involvement, it is good to know you have the 14th largest company in the world behind you. As for going direct, it is just not going to happen.

The indirect channel has been a bedrock of strength for us, many other vendors are jealous of our channel relationships.'

'Samsung has invested heavily in AST stock, but more than that, it has made a huge investment in keeping AST going. From a sales and marketing point of view, we still do our own thing. We will be keeping our own identity - the key word here is partnership.'

Naturally, AST is overjoyed to have a company like Samsung around to lean on for financial help. But what of the Koreans? Why should Samsung want to buy a company that is losing money like it's going out of fashion?

Samsung has around 30 per cent of the Korean PC market and has attempted to break into the global PC business in 1990. It failed to do anything except lose money. This is the key to Samsung's enthusiasm for AST.

In September, Ian Diery resigned after nine months as president of AST.

Diery had made a name for himself as the master of the corporate turnaround before joining the company. But after failing to make any real progress, he was replaced by Young-Soo Kim of Samsung as president and chief executive.

Kim, although a Samsung man, has spent most of his career in the US and has become a US citizen. He is committed to the idea that Samsung will be a major player in the global PC arena. Kim has said: 'You are not in the PC business if you're not a global player.' He should know, he was behind Samsung's aborted 1990 global PC market offensive.

Young-Soo Kim is not a lone voice at Samsung. Kwang-Ho Kim, vice chairman of Samsung, has said the Korean colossus will be prepared to look at further requests for aid from AST. 'Samsung and AST will continue to closely monitor the potential need that AST may have for further financial support from Samsung,' he said in August of this year.

So, for its new-found Korean big brother, AST represents a springboard to the worldwide PC market. Not just for the sake of selling PCs, but just as importantly for Samsung, this would mean an increased demand for its PC components.

AST already uses many Samsung components in its PCs, such as chips, memory and the screens for its notebook PCs. Anyone involved in the manufacture of PC components, particularly semiconductors and all things chip-related, knows there is an obvious benefit in establishing channels for the disposal of those components.

It might not end there for Samsung. It may set its sights on becoming a dominant force in the global PC market and choose to go chasing after the likes of Compaq and Big Blue. Anyone thinking this is far-fetched should ask themselves how many people had heard of Daewoo cars three or four years ago and compare that number with how many people know the Daewoo name today.

AST's new president recognises that Samsung is not realistically in a position to take on the global PC market and win - not on its own, anyway.

'The reason we failed with PCs in foreign markets is that we did not have marketing savvy and service infrastructure,' he says.

For Samsung to become an established international PC vendor would require a vast investment in skilled engineers, technology, sales and marketing professionals and in the recruitment of an effective sales channel in each geographic market. This could require an investment well in excess of one billion dollars.

Alternatively, it could find an established vendor in need of help, but on the whole very sound, and work on implementing a series of improvements.

Even at $678 million (and rising) AST may turn out to be a bargain.

The indirect channel may be a fickle beast, but it stands by those vendors that stand by it and AST may have cause to yet again be thankful for having never trod the direct-selling path. If Samsung, in the guise of AST's new president and CEO, has recognised that one of its own shortcomings is the lack of a service fulfilment channel, the indirect channel could be in a position to do very nicely out of this US-Korean partnership.

For AST, the future may not be a settled one, but it is anything but a foregone conclusion that it will never see off its troubles. As a brand, AST still has considerable equity and as a brand name, it is far from sinking without trace.

In June 1995, AST signed a six-year sponsorship agreement with Birmingham-based Aston Villa FC. The deal, for an undisclosed sum, is described as having been worth 'several millions' by AST sources.

Mallon is convinced that, even at a time when this sort of outlay might appear extravagant, AST has benefited from the pact. 'We get something like 100 million viewing hours' of coverage from this,' he says. 'It has helped prompt awareness of the product, we have used it to do work within the local community and, of course, we can use it to entertain clients. It has given us another angle - I've even had feedback from AST colleagues in Europe and the US.'

An increase in sales is crucial to AST's long-term survival. If it can avoid a falling away of market share it will be in a strong position to weather the storm. In September, AST launched its new multimedia home PC, the Advantage, which it has made available through the Granada TV rental chain.

Consumers will be able to buy the PCs on a rent-as-you-buy basis which should open AST up to a new market. The company is also the number two notebook vendor through the UK retail channel and has said it will be looking to recruit an increasing number of independent retailers over the next 12 months.

Given Samsung's undoubted strength in the whole area of consumer electronics, this would appear to be an area of the market where AST could find it reaps huge rewards.

One note of caution would be for AST to ensure that it does not give out the wrong signals to its corporate customers. If it is seen to be pushing vigorously into the home PC market at the expense of the commercial side of its business, AST may find major corporate users looking toward brands perceived to be more serious-minded.

Given the nature of any Samsung-led turnaround in fortunes, it may well be that AST finds itself beginning to favour the consumer market.

In which case it would do well to remember that if it goes burning bridges in the channel, there may be no easy path back to the corporate buyer.

There are many variables at play as far as AST's future is concerned.

The final outcome will be dependent on the way in which a number of factors combine to produce the setting for success or failure. Mallon best describes the next phase of AST's development: 'Who knows what the future holds.

It will be an ongoing story - it will evolve over time.'