Key Tronic Corp., the Spokane maker of keyboards and other computer-input devices, has steered into the promising waters of an industry segment called original design and manufacturing (ODM), and is preparing to churn up a wake.
Although the company began implementing the strategic move just six months ago, it says it already has about 10 ODM projects in the hopper. They involve new undisclosed products of different types that Key Tronic expects to begin manufacturing within the next year or so for some of its customers.
Having fulfilled its immediate goals of generating new business within its current customer base, the company decided about a month ago to broaden its pursuit of contract-manufacturing work, says Craig D. Gates, the companys executive vice president of marketing, engineering, and sales. Its doing that by seeking out such jobs with other computer and peripheral-product companies.
Once Key Tronic feels it has tapped into that market sufficiently, it intends to expand its efforts further by promoting its services to companies in the telecommunications and medical products industries, Gates says.
Its just going to be a stepped plan of attack as we broaden the markets knowledge of what our capabilities are, he says.
Key Tronics early success in its diversification effort may reveal a lot about its prospects for long-term health. The companys current predicament is that the global market for keyboards, which remain its core product, is flat. A continuing decline in keyboard prices is offsetting a steady increase in the number of units it sells. Thus, as Key Tronic President and CEO Jack W. Oehlke explained to attendees at a recent breakfast meeting of technet, a high-tech networking group here, the worldwide keyboard market likely will remain stuck at about $1 billion a year for the foreseeable future.
That compares with an ODM market that is estimated to be about $70 billion annually and growing at 30 percent a year. Key Tronic is targeting a $14 billion annual segment of that market, seeking orders for certain electronics-related products, other than computer boxes, that companies are willing to pay to have designed and built for them.
Oehlke told the technet group that the ODM market fits in well with Key Tronics core competency, which he says essentially is the ability to take a basic design and wrap plastic around it.
Toughened by brutal competition, Key Tronic now considers itself a leader in quick-turn engineering and design work, plastic molding and tooling, and high-quality, low-cost assembly, all of which it believes can be adapted to a wide range of products besides keyboards.
Oehlke emphasized to the technet group that the company has no plans to abandon keyboards and, in fact, has boosted its overall share of that market to about 20 percent globally. He added, though, that, The real growth (of the company), we believe, is going to be in the ODM market.
Gates says the companys keyboard operation will serve as a venture capitalist that funds and owns a stake in the companys startup business. We need to make sure our venture capitalist stays healthy if the ODM venture is to succeed, he says.
One of the attractive aspects of the ODM business is that the products generated within it are not commodities, as keyboards have become, Gates says. The custom nature of the business tends to make it more stable and, at least in the short term, less prone to bidding wars.
Another plus, he says, is that the customer pays for the engineering and tooling on its product, so the strain on the balance sheet is less than when the company gets ready to add a keyboard to its own line. Tooling costs alone for a new keyboard typically run between $500,000 and $1 million.
Because Key Tronic gets involved early in ODM projects, the gestation periodmeaning the length of time between when the company is handed a sketch on a napkin for a new product and when it begins cranking out finished piecestypically is nine to 16 months, Gates says. That compares with only about three months for a new keyboard, since producing a new keyboard usually involves modifying an older design.
Gates declines to divulge details about Key Tronics upcoming first graduating class of ODM products, except to say the clients that have ordered them include some big-name companies.
Although Key Tronic began turning its attention to the ODM market only recently, it has been involved peripherally for about three years, as some of its keyboard customers have come to it with other needs.
A couple of Key Tronics earliest ODM contracts were for a plastic panel on a Hewlett-Packard Co. printer and a multimedia control module on a Toshiba desktop computer. The latter piece, which contained electronic components, was instrumental in teaching us what we needed to put into place to be proficient at that type of work, he says.
Another ODM product, which Key Tronic began manufacturing only about six months ago for Massachusetts-based MDI Instruments Inc., is a handheld diagnostic instrument called the EarCheck Pro Otitis Media Detector.
Using a built-in microphone and a microprocessor, the detector registers the response of the eardrum to different frequencies of sound and analyzes the results to determine the absence or presence of fluid in the middle ear. Its being marketed to health-care professionals and others as an alternative to painful ear exams for children, who often suffer middle-ear infections.
Thats a pretty classic example of the ODM products we believe were going to be getting into, Gates says.
The ODM market creates a lot of new opportunities for the company, but has its own set of challenges, he says. We have to learn to be competent on a lot broader array of parts and processes.
Despite the diversification effort, Key Tronic hasnt allowed its keyboard operation to lag. Over the last year, it has picked up significant new business, signing contracts with such companies as Microsoft Corp., Gateway 2000 Inc., Nortel, and WebTV Networks Inc., the latter for keyboards that use infrared technology and have built-in, universal TV remote functions. The company also has been developing keyboards that offer fingerprint recognition and smart-card reader capability.
Key Tronic employs 3,400 people and operates facilities in Spokane, Mexico, and Ireland. The companys overall employment has risen by at least several hundred people over the last year, but its Spokane work force has fallen to about 600 from about 800 a year ago as it has shifted more production to Mexico.
The company has gone through some restructuring in recent years to improve its operating efficiency and compensate for declining keyboard prices. For its fiscal 1998 second quarter ended Dec. 27, it reported net income of $248,000, or 3 cents a share, up slightly from $143,000, or 1 cent a share, in the same period of fiscal 1997. Sales in the most recent quarter were $44.1 million, down from $47.1 million in the year-earlier period.
Subscribe today to our free E-Newsletters!SUBSCRIBE