The Key To Success A New Direction

When she started on the assembly like at Key Tronic Corp., standard keyboards passed under Arleigh Nelson’s nimble hands.

But as two decades have passed, Nelson has worked on almost every new product the company’s made - including laptop computers, on/off switches for computer printers and, now, hand-held remote controls and medical devices.

Nelson took a job at Key Tronic to support her family while her husband recovered from a work injury at another company.

“I was only coming in temporarily — but temporarily lasted 21 years,” she says.

Now she leads a production team at the Spokane Valley plant, overseeing about 20 people who make the high-end and experimental products that could carry Key Tronic into the next century.

Although keyboards and a move to Mexico have gotten the company this far, it can’t depend on those alone for its future.

Key Tronic’s corporate strategy includes expanding its production to Asia and Europe, and moving beyond keyboards into the dynamic world of new products.

Abstract to concrete

Scratch out a product idea on a napkin and Key Tronic can probably bring it to life.

It has the engineers, the tool-making equipment, and the plastic molding capabilities.

The keyboard market is not growing as fast or bringing the potential returns that these new ideas could make for Key Tronic. So, the company produces hand-held bar code readers and instruments that measure fluid in the middle ear.

Toshiba came to Key Tronic with a “napkin” sketch of a device that can surf the Internet, run a stereo and operate a television. Key Tronic took the concept and made one from scratch — the InTouch Module — essentially launching the product for its customer.

Creating these “original design products” is a $70 billion marketplace, which is expected to climb to $120 billion by the year 2000.

Key Tronic is busy just responding to queries about creating products, says Doug Voda, director of the company’s Original Design Manufacturing department.

“If you have an idea and you have money, you can come to us and we can help you,” he says.

Original design may be a key to future success, but Key Tronic has run into a glitch or two.

“We’re finding that the design cycle is longer than we anticipated,” says Jack Oehlke, company president and chief executive officer.

“We were a little optimistic. We thought that we’d see results in nine to 12 months, and we’re finding the real cycle is probably 15 to 18. It’s a new market for us and we’re learning.”

Analysts agree that it will take something beyond making a standard keyboard for the company to record significant profits.

“Unfortunately it’s a commodity product,” says Daniel Kunstler, analyst for J.P. Morgan Securities in San Francisco. “Companies are cutting costs so much that it’s hard to compete.”

While trying new markets, Key Tronic is not leaving keyboards behind.

The company’s reputation is strongest for producing the middle to high-end keyboard equipment for such companies as Microsoft and Hewlett-Packard. It is still trying to win the market for inexpensive keyboards.

To do that, the company needs a global presence. The cost-cutting move to Ciudad Juarez, Mexico, in 1993 and 1994 was the first step in its international expansion.

The second move came this March when Key Tronic branched into China. It contracted with an existing plant in Shanghai to produce keyboards for Hewlett-Packard and other customers with operations in Asia.

“It allows us to fill the entire shelf of our retail customer,” Oehlke says.

Key Tronic is also contracting work at a site in Dong Guan, China, where it will manufacture original design products.

Moving abroad is not a question of finding cheaper workers just to make more money, Oehlke says. The moves were necessary. Key Tronic had to expand to other labor markets simply to stay competitive, the company says.

While $6 a day wouldn’t feed most Americans, in Juarez it’s a living.

Compared to other factories there, “we are very competitive in the wage market,” Oehlke says.

“The wages are going to be different regardless of where you are in the world,” Oehlke says. “It’s also what you bring to the workers, not just what you’re paying them.”

In Juarez, Key Tronic also offers its workers two meals a day, an on-site medical clinic, an education program and transportation to the plant. Each worker has the opportunity to get more training and be promoted.

The company has no plans to further expand that plant except for moving some product lines to China and making room in Juarez to manufacture original design products.

Next year, company leaders say, Key Tronic may branch into Eastern Europe.

A technology leader

Though Key Tronic is expanding worldwide, it plans to keep design, development and special orders in the Spokane Valley. From its headquarters on Sullivan Road, the company has led the way for technology in the Inland Northwest.

“They were one of the first and earliest,” says Ken Olson, vice president of the Spokane Area Economic Development Council. “They have been a company we’ve been able to highlight to other companies that we’re trying to get into the area.”

Key Tronic also has developed a skilled labor pool and is a customer for supplier businesses that move to Spokane, such as Proto Technologies, which uses lasers and a liquid polymer to make models and molds.

“I think that’s helped the economic development of the area,” Olson says.

Not everyone is optimistic about Key Tronic’s future. In fact, investment analysts have all but abandoned the company.

“I dropped them probably six months ago,” says Les Childress of Childress Investment Research in Seattle. “The company has always been hard to follow.”

He was one of the last of the equity analysts to follow Key Tronic and he says he gave up because he never got much information from the company. “They gave you the basic stuff and very little comment,” he says. “It was like pulling teeth.”

Analysts soured on Key Tronic after turnaround artist Stanley Hiller stepped down as president in September 1995. The quarterly returns didn’t shine as much as they should have after the company was restructured and production moved to Mexico, Childress says.

In the past year, the stock price has dropped below $4, a price not seen since Hiller took over in 1992.

“I can’t do anything about the stock price,” Oehlke responds. “The way we look at it at Key Tronic, the thing we can control is revenue growth and profitability.”

Will Key Tronic survive into the next century?

Yes, says Hiller, who is still chairman of the board and holds stock, but is not active in day-to-day management. It will succeed, he says, if Key Tronic continues with plans to expand into the original design market, go global and keep hold of its current keyboard customers, and if the management sticks around.

The company’s managers, many who were handpicked by Hiller, also believe in survival. “If we’re not going to do it, I don’t think it’s able to be done,” says Ron Klawitter, chief financial officer.

The company is also carefully courting the right customers.

“We’re totally dependent on the customer. Their success is our success.” Oehlke says. “Hopefully we’ve chosen the right customer base.”

Now that a strategy is in place and the big moves have been made, Key Tronic could weather well into the next century, Oehlke says. “I guess I’m a believer if you do the right kind of things, it takes time.”

, DataTimes ILLUSTRATION: 3 Color Photos 3 Graphics: 1. Key Tronic at a glance 2. Key Tronic’s financial statement 3. Key Tronic’s stock performance

MEMO: Special thanks The Spokesman-Review acknowledges Dr. Ray Sadler, chairman of New Mexico State University’s history department, and Dr. Jose Garcia, director of the university’s Center for Latin American Studies, for their help with this project.