Is Umax Crazy Or Crazy Like A Fox?

It's betting that Apple will come back and clones will take off

Last February, when Frank Huang met with top brass at Motorola Inc., he was the only one feeling upbeat. The iconoclastic chairman of Umax Data Systems Inc., a Taiwanese manufacturer of PC scanners, had gotten a license from Apple Computer Inc. to build Macintosh clones. Now, he needed a supply of Motorola's microprocessors, which are inside every Mac. But at the time, the Mac business was in the dumps, and "everyone else was running away from Apple," Huang says. At Motorola, "they wanted to figure out why I was so crazy."

Over the next few months, others may start to wonder the same thing. Huang is ramping up his clone business at a time when Apple is fighting to reverse a huge drop in market share.

Motorola is also making Mac clones, but it has to, to expand the market for its chips. So why is Huang jumping in? For one thing, he believes Apple CEO Gilbert F. Amelio can meet his goal of a significant turnaround (BW--July 22). On Oct. 16, Apple surprised analysts by announcing a quarterly profit, despite a drop in sales from a year ago. Down the road, Huang sees a flourishing market for all kinds of Mac clones priced below Apple's machines--from feature-packed models for graphics businesses to low-cost home models. But most appealing to Huang is the prospect of seeing the Umax name on high-profile products, such as home computers. "To survive long term, you have to have your own brand name," he says.

Apple execs appreciate Huang's vote of confidence, since the whole Mac-clone business--a linchpin in Apple's comeback strategy--is stuck in low gear. Apple has signed up a half-dozen licensees, including giants such as Pioneer Electronic Corp. and Motorola. But the only volume player is Power Computing Corp. in Round Rock, Tex., which sold 105,000 units in the first half of 1996, according to market researcher Dataquest Inc. Analyst Timothy P. Bajarin of Creative Strategies Inc. in San Jose figures all the cloners combined will sell 400,000 to 500,000 units worldwide in 1997, compared with 4.2 million or so Macs from Apple. "It's small potatoes next to Apple," says Bajarin.

Some Apple-watchers express confidence in the clone business. For one thing, in its quest for higher margins, Apple is concentrating on expensive models. So, in effect, Apple is "turning over some market to cloners," says Dataquest analyst Scott Miller. Apple may soon unveil a $1,500 model of its own, but it will remain mostly focused on the high end.

BUG FEARS. That suits Umax fine. It got into the business in January by buying the Mac systems unit of another California clone startup. Last May, it launched two upscale models priced at about $4,000. One, called Pulsar, competes with a $6,000 Apple machine. Next, Umax will sell two cheaper units, priced as low as $1,300. One will run on a 240 MHz chip--faster than any PC processor on the market today. All told, Huang hopes to sell 400,000 to 500,000 clones next year, boosting Umax' overall sales to $800 million in 1997, up from an estimated $225 million this year.

Such a huge leap seems improbable--and may not contribute much to earnings, which should reach $18 million this year. The clone niche is crowded, concedes Joseph M. Guglielmi, head of Motorola's Computer Group. In the beginning, he says, "it's clear we'll all be going after the same demand." And potential customers don't want to be guinea pigs. Thaddeus H. Wood, director of technology for game maker Big Top Productions in San Francisco, liked the Umax model he tested. But he doesn't want to buy a first-generation clone that may have bugs.

Huang says he's counting on strong sales in Asia. But that's also a gamble. In China, the company has had trouble lining up distributors. And in the giant Japanese market, competition is already fierce. Huang claims an advantage in "vertical integration"--Umax' ability to make memory chips, motherboards, and peripherals, such as scanners--which lightens dependence on outside suppliers for key components. But Motorola boasts similar skills.

And despite its surprise profits, Apple has still not restoked the growth that will be so critical to the whole market, including the clones. Absent a full turnaround, Apple-watchers may continue to wonder why Huang is betting on clones.