Gemplus Wants Its Gleam Back
It was once known as the ultimate Provençal success story: the tech startup that grew from nothing into a market leader with over $1 billion in sales, in just a dozen years. Based in Gémenos, a tiny French town a half-hour's drive east of Marseille, Gemplus helped create the global market for smart cards -- thumbnail-size chips that securely store personal data in everything from wireless phones to credit cards. Its prospects looked so bright that U.S.-based Texas Pacific Group poured $500 million into Gemplus, the largest private-equity investment in Europe.
Then, after years of rocket growth, Gemplus hit a wall in 2001. A legacy of seat-of-the-pants management ran straight into a downturn in the telecom business, which generates 70% of the company's revenues. The situation worsened last year, amid bitter boardroom battles between founder Mark Lassus and Texas Pacific Group. Sales fell 23% and losses mounted to $337 million. "It was a perfect storm," says newly installed chief executive Alex J. Mandl, the company's fifth leader in five years.
The job of rescuing the French tech icon falls to this 58-year-old Austrian-born American and onetime president of AT&T. It won't be easy. Gemplus is the world's leading maker of prepaid phone cards, but that market is shrinking fast. In the more lucrative business of devices with built-in microprocessors -- used to encode the owner's identity in wireless phones and payment cards -- Gemplus is a strong No. 2 to Franco-American rival SchlumbergerSema. Unit sales here are still growing, but fierce competition is driving down prices. Analysts figure that, at best, revenues for the overall smart-card market will grow by just 16% per year through 2006. "Gemplus isn't going to get back to the glory days of 40% to 50% growth," says analyst Derrick Robinson of IMS Research in Wellingborough, England.
Mandl, who has been on the job for just five months, won't quibble with that assessment. The 58-year-old executive recently shocked rivals by saying smart cards have become commodities. Prices have sagged 20% in the last two years. Olivier Piou, president of SchlumbergerSema Products, disagrees, arguing that the devices remain highly specialized and require sustained innovation. "Prices always go down, but you have to move customers up to higher-end products. I'm not sure Mandl gets it," says Piou.
The American has a different idea. He wants to turn Gemplus into the lowest-cost producer. Then he aims to pump up profits by hawking software and services, such as systems to manage mobile-phone customer relations via smart cards. Already, 10% of revenues come from such businesses. Even so, Gemplus won't likely return to profitability until 2004.
Investors, impressed by Mandl's résumé, are cautiously optimistic. Mandl was once a candidate for AT&T's top job, then left to lead a wireless startup in 1996. Gemplus shares are up 29% since he took over. Still, many remain unconvinced that Gemplus has a bright future. "I'm very pessimistic," says Emmanuel Matot, an analyst with Paris-based Group ETC. He thinks trying to compete on cost against Asian rivals is futile.
Investment banks aren't the only ones taking a dim view of Mandl's strategy. Gemplus' 6,000 workers also regard their new boss with suspicion -- and not just because of his rich pay package, which includes a $1.4 million salary and relocation package worth up to $5 million. Mandl's plans to sack 1,000 workers this year has French unions up in arms.
Then there were the rumors that Gemplus' new CEO is a spy. The French business paper La Tribune has written that Texas Pacific is using Mandl to steal France's smart-card technology and take it to America. To quell the rumors, Mandl resigned his board seat at a Central Intelligence Agency-backed venture-capital fund.
Mandl is bracing for a tough year. Analysts predict Gemplus will have losses of about $115 million. But Mandl is optimistic that the market will eventually pick up. Demand for smart ID cards has jumped in the wake of the September 11 terrorist attacks, while the transition to third-generation mobile phones should eventually spark millions of new sales. And a planned 2005 rollout by Visa and MasterCard of a new standard for credit and debit cards will require hundreds of millions of people to switch to upgraded chip cards. "We've got a good business here," Mandl says. "We've just got to execute on it better." And chase away the ill wind blowing through the hills of Provence.
By Andy Reinhardt in Gémenos