High-flying Xebec gears up for Japanese competition

Forget for a minute that Xebec makes controllers for computer hard-disk drives - obscure products that could dampen anyone's interest. Instead think about a company whose net income has increased 13-fold over the past year. Think of a firm with at least 50 percent of a rapidly expanding market and a large chunk of its business going to that all-important buyer - IBM. Consider a company that went public in March, had a two-for-one stock split in June, and just this week issued another 2.45 million shares. And think of the challenge ahead for a president who wants to turn a $50 million company into a $ 1 billion one.

Xebec (pronounced ''zee-beck'') may be gathering laurels now, but it also sees a competitor coming from behind - Japan. At the moment, Xebec is not too concerned about US competitors because they are either ''undercapitalized, too small, or unprofitable,'' says Marcia Glow, Xebec vice-president of corporate development.

To prepare for the coming race with Japanese competition, the Sunnyvale, Calif., firm is building muscle with a strategy that stresses a broader product line, quality products, and complete factory automation, chief executive James Toreson said in Boston last week.

This preparation is already reaping impressive rewards for the nine-year-old firm. Besides IBM, Xebec makes controllers for computermakers like Hewlett-Packard, Philips Data, Victor, and Texas Instruments. Revenues are growing 20 percent per quarter, says Ms. Glow.

(A disk drive is the box-like attachment to a computer that holds a thin disk inside. On the disk is software - information that tells a computer how to do something, like compute an average. It's the controller that translates this information from the disk to the computer. Xebec makes controllers mostly for hard-disk drives - which use hard disks, as opposed to flexible or ''floppy'' disks, and hold more information. At the moment, there is a major shift in the computer industry from floppy- to hard-disk drives.)

Because IBM has put a hard-disk drive in its new Personal Computer XT, a drive that uses the Xebec controller, Mr. Toreson expects other manufacturers will follow.

''The company's relationship with IBM is helping tremendously,'' says Andrew Evans of Evans Llewellyn Securities Inc., which specializes in high-tech firms. ''The controller market is going to allow Toreson to double the size of his company in the next 12 months,'' says Ronald Elijah, an analyst for Woodman Kirkpatrick & Gilbraith, the San Francisco firm that helped underwrite Xebec's most recent stock issue. ''But he (Toreson) also wants a big company, . . . and it's going to be very difficult to do that just selling controllers.''

Mr. Toreson agrees. Controllers are ''high volume and low cost,'' he says. And in the near future, the field ''is subject to intense competition'' - especially from semiconductor manufacturers, the Xebec prospectus says.

So the company strategy is to broaden its product line - forward and backward: forward, to make other components used in disk drives; backward, to make some of the products that go onto its circuit-board controllers. Xebec is also making its own disk drive to sell to distributors.

Toreson plans to stay competitive with a lesson he picked up from his former employer, Hewlett-Packard. To remain a market leader and to stay ahead of the Japanese, he says, you have to produce quality products. And that means automation.

This past spring, Xebec began operating a new factory where robots insert pieces automatically in the circuit boards. ''We are now making zero-defective controllers,'' Toreson boasts. Xebec also has a $20 million deal worked out with IBM to get further help robotizing this factory and a new building going up at the same site. And IBM is helping Xebec create a ''peopleless'' clean room to manufacture semiconductors. Normally, highly trained assemblers take special precautions to work in these dust-free rooms.

Automation also gives Xebec manufacturing flexibility at little extra cost. ''There's a difference between turning on a machine and increasing manual hand stuffing,'' Ms. Glow says. Design changes and automation have also cut the cost of new controllers by 30 percent.

Management is flexible in research, too. Without having to commit vast amounts of dollars, Xebec has formed ''strategic partnerships'' with other companies to work on joint projects. ''It's like going steady, but not getting married,'' Toreson smiles. Since Xebec doesn't buy stock in the companies, it has the ability to start or get out of projects with relative ease.

How do analysts see Xebec's future? Mr. Evans says the next few years look good ''if nothing happens internally management-wise.'' Elijah adds: ''They've performed admirably up to now; it's pulling everything together'' that's the challenge. The two disagree on the stock. At $23.50 and a price-to-earnings ratio in the low 40s, Evans calls the stock a hold. Elijah, though, is bullish. Buy, he says.

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