IBM PC Clones Multiply Amid Price Battles

A Freelance Designer Sees Commodity-Type Market

By Michael W. Miller, Staff Reporter
The Wall Street Journal

June 17, 1986

Sunnyvale, Calif. -- Personal computers used to be like babies: The people who conceived them also nurtured them and sent them out into the world.

Things aren't that clear-cut any more. Here in the small Silicon Valley office of Stephen S. Kahng sits a Leading Edge Model D personal computer, manufactured by a South Korean conglomerate and sold by a young Massachusetts company. Nearby sits a Novell 286A file-server, a data-storage computer made by another Korean giant and sold by a small Utah company.

Both machines were designed in yet another part of the world: in California, by Mr. Kahng.

The 36-year-old Korean native is one of a new breed of middlemen in the global computer assembly line. Attracted by the exploding market for low-cost imitations of International Business Machines Corp.'s personal computers, a slew of independent computer-design companies and free-lance engineers are reshaping the personal computer business.

Working behind the scenes, the freelancers come up with new ways to stitch together computer parts that suit the particular markets their clients have in mind. Above all, they search for designs that will bring down their products' cost and help their clients survive in a market battle increasingly fought on price alone.

"Personal computers are getting to be more like a commodity item," says Mr. Kahng, who creates his designs for Asian manufacturers that ship the finished products to U.S. sales companies. He argues that it takes a small, nimble operation to crank out a low-end clone before the market shifts to more advanced products and lower prices. "Big companies can't move fast enough to bring them out," he says.

Mr. Kahng himself set up shop as a free-lancer two years ago, when he landed an assignment from Daewoo Group, the huge Korean industrial company, to design an inexpensive IBM PC clone to be marketed by a then-obscure concern called Leading Edge Hardware Products Inc.

The result, the $1,495 Model D, stunned the industry by selling an estimated 50,000 units in its first year, becoming one of the earliest successes from small U.S. computer marketers teaming up with large Asian factories. Although the Model D's sales were small by IBM's standards, its success gave the PC clone business an enormous push by providing the first forceful proof that PC customers were ready to choose a product on price alone.

It also made Mr. Kahng a busy man. Novell Inc., based in Orem, Utah, hired him to design its 286A file-server, which Samsung Group, in Korea, is producing. Lucky-Goldstar Group, another large Korean concern, has ordered its own IBM imitation, and Mr. Kahng says he is talking to several large U.S. computer companies about marketing that machine.

Today, going into the personal-computer business doesn't require a team of engineers and a new factory. All it takes is a shopping trip to a few clone-component vendors, a computer designer and a contract with an overseas manufacturer.

The game's new rules have thrown the IBM-clone market wide open to players of all shapes and sizes, all seeking to satisfy the huge demand for less costly alternatives that run the same programs used in IBM's PCs, which have become the office standard. Dozens of suppliers of these clones have sprouted up and with them suppliers of all the special parts that go into an IBM-compatible computer.

The best-known IBM-compatible computers continue to be those made by such electronics giants as Tandy Corp., Compaq Computer Corp. and Zenith Electronics Corp. But nipping at their heels is a pack of about 100 upstarts who sell through mail-order catalogs, hobbyist magazines and other grass-roots channels.

A few recent issues of PC Magazine, for instance, offer advertisements for the Plain Vanilla computer from PC Designs of Tulsa, Oklahoma; the A-Star from Wells American Corp. of West Columbia, S.C.; the Dynamic XT from Computer Dynamics Inc. of Austin, Texas, and many models that are called only PC Compatible.

Computer retailers are joining the game too, marketing clones under their own names. Last week, Businessland Inc. said it will offer a line of computers made by Wyse Technology, a small Silicon Valley company with manufacturing operations in Taiwan. Just yesterday, ComputerLand Corp., the largest PC retail chain, unveiled its own clone, created by a Southern California design firm and manufactured in Korea.

"Making a PC is really a cookbook proposition now, as opposed to something that requires any real science," says Geoffrey Burr, a personal-computer manager at Digital Equipment Corp. and a former product-development executive at Leading Edge. "The marketplace is so enormously competitive that the only way to make money is to limit your inventory exposure and your research-and-development expense."

Mr. Kahng uses the same basic recipe as most other clone-designers, as all their products are intended to resemble IBM's PC line as closely as possible. Indeed, in many ways the biggest challenge in crafting a new clone is coming up with a machine that works just like an IBM PC but tiptoes around IBM's various patents.

He uses a microprocessor -- the computer on a tiny silicon chip that serves as a personal computer's internal engine -- designed by Intel Corp., the semiconductor maker that supplies microprocessors for IBM. His operating system -- the software that controls a personal computer's inner workings -- comes from Microsoft Corp., IBM's operating-system designer.

In addition, he buys two products from closely held concerns that have built handsome businesses selling packages designed to imitate IBM PC features. A piece of software called the "basic input output system," which essentially hooks up the computer's hardware and operating system, comes from Phoenix Technologies Ltd., a Norwood, Mass., concern with some 60 clone-maker customers. And like many designers Mr. Kahng lately has been buying semiconductor packages from Chips & Technologies Inc., a Milpitas, Calif., company that sells a set of five special microchips that do the work of 70 chips in IBM's machine.

A handful of clone makers have drawn fire from IBM for mimicking its designs too closely. IBM has sued some two dozen computer makers for violating its copyrights, and forced out-of-court settlements in other cases.

Usually independent designers prefer to labor in obscurity. "There are other people like Kahng," says Mr. Burr, "but most of these guys have anonymity as their stock in trade -- they really don't want the world to know they exist." Computer marketers fear it will cheapen their image if it's widely known that free-lancers designed their products, Mr. Burr says.

One reason Mr. Kahng is eager to talk about his work is that he's zealous about promoting his native South Korea as a computer maker. While clones are pouring into the U.S. from several other Asian nations, such as Taiwan, Hong Kong and Japan, he contends that Korea's industrial conglomerates have superior manufacturing clout and a better-educated low-cost work force. "My direct goal is to make Korea the leading manufacturer of personal computers," he says.

Six months ago, Mr. Kahng moved his workshop out of a spare room in his home and into a Sunnyvale office park, hired a receptionist and three technicians and christened the operation Up To Date Technology Inc. He says the company will record at least $3 million in sales this year, more than three times his 1985 revenue, which included a $200,000 fee to design the Leading Edge computer.

That ambition has put Mr. Kahng in the dicey position of juggling assignments from three rival Korean conglomerates: Daewoo, Samsung and Goldstar. But so far his clients don't seem worried about potential conflicts.

"They know that Mr. Kahng is helping us and we know that Mr. Kahng is also with Daewoo and Samsung," says Sungho Kang, a Goldstar vice president who runs the company's Silicon Valley semiconductor operation. "The U.S. market is big -- I hope we should avoid each other."

Mr. Kahng's family immigrated to the U.S. 20 years ago when his father, a mechanical engineer, accepted a faculty post at Michigan Technical University. He went to college and graduate school in Michigan and then took a string of computer-industry jobs, quitting in 1984 when he landed the Leading Edge contract.

These days, Mr. Kahng has slipped into the routine of a driven Silicon Valley entrepreneur, working late, traveling often and indulging his only hobby -- classical music -- during commutes between his office and his suburban home.

Mr. Kahng and independent designers like him have some daunting challenges ahead of them. For one, designing clones for future generations of IBM PCs, as Mr. Kahng intends to do, will require more elaborate engineering feats than simply mixing and matching commodity clone parts.

Moreover IBM, stung by the clones' recent success, is expected to use more proprietary designs in its future personal computers, making them harder to knock off. Here, IBM faces a difficult dilemma. The company owes much of its triumph in the personal computer market to its policy of keeping its systems "open," so other companies can easily design compatible machines. Any move to make its designs more secret also could jeopardize its status as an office PC standard.

For its part, IBM promises to maintain its policy of designing open systems. But Mr. Kahng, who spent six years designing mainframe computers for IBM, believes the company is taking subtle steps to discourage clones.

"They are hiding more and more things," he says. "I think they made it clear they'll make it much more difficult for competitors."