R&D costs a top priority for Amelio
Published: Feb. 5, 1996
BY DEAN TAKAHASHI
Mercury News Staff Writer
GILBERT AMELIO'S BIGGEST CHALLENGE as the new top executive at Apple
Computer Inc. will be to bring down the computer maker's costs so that it
can compete with the Intel-Microsoft juggernaut in the personal computer
He'll face the difficult conundrum that one of Apple's biggest assets, its
vaunted research and development division, is also a source of its high
costs. Under Michael Spindler -- who was fired last week after a turbulent
two-year run as its CEO -- Apple reduced its research costs to about 5
percent of revenue last year from 8.3 percent of revenue in 1993.
But arch-rival Compaq Computer Corp. can get by spending only 2 percent of
revenue on R&D, allowing it and other PC makers to sell machines far below
Apple's costs. Compaq can do this because it relies on Microsoft Corp. and
Intel Corp., to develop the operating system software and microprocessors
that are the heart and brains of the PC.
Apple won't be able to outspend the larger ''Wintel'' duopoly of Microsoft's
Windows operating system and Intel's microprocessors, which own about 80
percent of the PC market. Instead, Amelio will likely focus on this issue
with a strategic strike, as he suggests in ''Profit From Experience,'' the
book he co-wrote on managing transformations in companies.
And, if he keeps with his philosophy, Amelio will strike quickly. He thinks
managers must be swift to cut costs and change cultures. That doesn't
necessarily mean Amelio will fire thousands of workers. Apple already is in
the midst of laying off 1,300 people as part of a reorganization ordered by
Spindler last month, and Amelio isn't expected to start whacking away even
more just so the company can proclaim a short-term turnaround.
Amelio believes that transformations are long-term affairs that marshal the
resources of the company and require the active input and ''buy-in'' from
employees, says Kirk Pond, one of the chief operating officers at National
Apple's fans say the R&D funding is money well spent: It's obvious in
Apple's graceful, easy-to-use computers and software. But Apple also is
known for failing to turn its expensive new ideas into high-volume products,
falling victim to competitors who copy the ideas and capture the mass
Apple originally created an evangelical, anti-bureaucratic environment for
its engineers where they could work on futuristic technologies without
regard to cost. To keep its best people, Apple paid them well and set up
laboratories where they could immerse themselves in high-tech playpens.
During bad times, when R&D projects like the Newton didn't get finished on
time, this culture got blamed for Apple's problems in the market.
''They would sometimes sacrifice low-cost for the sake of engineering
elegance,'' said Martin Reynolds, an analyst at Dataquest Inc. ''But
elegance doesn't sell.''
In a big company, there are always examples of excesses and efficiencies.
Apple's spending habits were by no means unique among Silicon Valley's elite
companies. Its over-hyped Newton hand-held computer tainted Apple's
reputation for churning out quality technology.
Stem the flow
If he is to restore the technical side of Apple, Amelio will first have to
staunch the exodus of Apple's talent. At National Semiconductor, Amelio
organized many retreats and communications sessions where he impressed upon
employees the need to change attitudes.
It's already too late to keep researchers like Martin Haeberli, a 14-year
veteran Apple engineer who left a couple of weeks ago to work for Netscape
Communications Corp. in Mountain View. Haeberli said researchers'
productivity was often hurt by management decisions that switched courses in
mid-stream. That problem only multiplied in the past few years because of
high management turnover.
''When layoffs are announced or rumored, then morale and productivity would
go into the toilet,'' said Haeberli, who spent the last two years in Apple's
vaunted Advanced Technology Group. ''I never thought of it as a country club
for engineers. Apple has a lot of extremely talented people, but it's a
question of how they are led. I think the senior management team played a
lot of country club politics.''
Amelio will most likely move into high gear Apple's plans to license other
manufacturers to make Macintosh clones, says Tom Thornhill, analyst at
Montgomery Securities. For years, Apple was reluctant to give other computer
makers the rights to make its Macintosh computers, fearing it would cut both
profits and its control over the Macintosh faithful.
Licensing lip service
Richard Doherty, a multimedia consultant in Seabrook, N.Y., says its obvious
that Spindler only paid lip service to the strategy of licensing more
''Maybe Apple won't be able to use it, but someone else might,'' said
Doherty. ''They have to do something besides collect patents. They've been
slicing and dicing on their costs, but they haven't made any pate=AC.''
If Apple allows more computer manufacturers to make its computers, the
volume of Macintosh sales could rise. With higher overall sales, prices for
Mac components would come closer to those in the Wintel camp.
Apple already has shifted much of its manufacturing to low-cost areas,
redesigned its computers so that they can use lower-cost components used in
Intel-based PCs, and relied more on outsourcing techniques such as getting
other companies to make keyboards.
Amelio might conclude that the company will have to get out of manufacturing
altogether and concentrate its resources on creating the best software.
Spindler rejected that strategy, saying it would result in Apple becoming a
much smaller company.
All these possibilities have been obvious for a while, but Amelio has a
chance to execute them the way that Spindler and his predecessor, John
Sculley, never did: with speed. But he'll face a horde of skeptical
investors, consumers and employees who might think it's all too late.
Amelio, who served on Apple's board for a year, is critical in his book of
CEOs who delay major decisions, such as when Lou Gerstner took over top post
of IBM. In his book, Amelio writes, ''The words we need to carve over the
doorways of business for the '90s and beyond are 'Speed is life.' ''
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