Kernet Corp.

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Kernet Corp.

P.O. Box 5928
Greenville, South Carolina 29606
U.S.A.
(803) 963-6300
Fax: (803) 963-6322

Public Company
Incorporated: 1987
Employees: 8,400
Sales: $473 million
Stock Exchanges: NASDAQ
SICs: 3675 Electronic Capacitors

Kernet Corporation is a leading global supplier of capacitors, which store, filter, and regulate electrical energy and current flow and are found in virtually all electronic products and components. Specifically, Kernet is the largest producer of solid tantalum capacitors in the world and the second largest maker of multilayered ceramic capacitors in the United States. Going into the mid-1990s the company was shipping 11.5 billion capacitors annually from factories throughout the United States and Mexico and was selling a total of 35,000 different products.

Kernet was created in 1987 when Union Carbide Corporation decided to jettison its “Kernet” capacitor manufacturing division. The capacitor industry was hurting at the time, and Union Carbide decided that the division no longer complemented its overall corporate goals. On April 1, 1987, the managers of the capacitor operation, with the cooperation of GE Capital Corp., bought out the subsidiary and renamed it Kernet Electronics Corporation. Kernet became a stand-alone company with Union Carbide as a 50 percent shareholder. Dave Maguire, the former leader of the unit, was named chief executive of the new company. Under his direction, Kernet accelerated its rate of investment in the burgeoning surface-mount capacitor business.

Maguire’s decision to attack the surface-mount business was influenced by a number of trends that were emerging in the capacitor industry, an understanding of which provides insight into Kernet. Capacitors are among the most common components found in electronic circuits and are generally considered commodity items. They are named according to their dielectric, which is the material used to store and regulate the electricity. Different dielectrics include ceramic compounds, aluminum oxide, tantalum pentoxide, mica, plastic, paper, and even air.

During the 1970s and 1980s, tantalum and ceramic capacitors became widely used in electronics industries for integrated circuits.

Most capacitors are mounted on a printed circuit board, which contains other electronic devices. A capacitor can be mounted by inserting lead wire’legs’ extending from the dielectric through holes in the board, or by soldering the capacitor directly to the surface of the board. Capacitors used in the former technique are called “leaded” capacitors, whereas the devices utilized in the latter technique are known as “surface-mount” capacitors. Until the late 1980s leaded capacitors were considered conventional. In fact, not until the mid-1980s did surface-mount capacitors begin increasing in popularity with equipment manufacturers. A primary advantage of surface-mount devices is that they can be applied to both sides of a printed circuit board, whereas leaded capacitors can only be attached to one side. That feature allows electronics manufacturers to build smaller devices.

The market switch from leaded to surface-mount capacitors complemented Kernet’s operations, because Kernet had long been a leader in the production of tantalum and ceramic capacitors; those two dielectrics are widely used with integrated circuits and possess characteristics that are particularly useful in surface-mount applications. In fact, Kernet, as a subsidiary of Union Carbide, had made the decision to target the tantalum capacitor industry shortly after Bell Laboratories invented the solid tantalum capacitor in the 1950s. The advantage of the tantalum dielectric was that it was useful in applications that required low-voltage semiconductors in electrical circuits. Kernet’s decision was a prosperous one, as demand for high-tech tantalum capacitors mushroomed during the late 1950s and 1960s.

Kernet succeeded in the tantalum capacitor business for reasons dating back to the company’s inception. Kernet was established as a division of Union Carbide in 1919. Union Carbide created the unit to purchase the assets of the Cooper Research Company of Cleveland, Ohio. Cooper had invented a promising high-temperature alloy shortly before the buyout, and Union Carbide believed that it could integrate the technology into some of its operations. The name “Kernet” was derived from the words “chemical” and “metallurgy.” Kernet used the advanced alloy to create high-performance grid wires utilized in triode vacuum tubes; the grids were used to regulate the flow of current in triodes, which were the precursor to the transistor. In 1930 Kernet’s product line was broadened to include barium-aluminum alloy getters, which were an essential element in all vacuum tubes.

Kernet benefited during the 1930s and 1940s from the deep pockets of its parent, Union Carbide. That financial backing allowed Kernet to develop automatic machinery that made possible the production of high-quality getters in the massive quantities that were needed to match the rapid expansion of vacuum tube demand. Indeed, vacuum tubes were the basic building block of the electronics industry during the period. Importantly, demand for vacuum tubes during World War II exploded as production of communication, radar, and other types electronic equipment boomed. Evidencing the importance of Kernet’s role in the vacuum tube industry, the company supplied an estimated 80 percent of all the vacuum tubes consumed by the Allies during the war.

Kernet continued to prosper selling vacuum tubes during the postwar economic boom. Interestingly, Kernet carved out a niche as a supplier for early vacuum-tube computer equipment. Then, in the early 1950s, Bell Telephone Laboratories invented the transistor. It soon became clear that the highly compact and efficient transistor was going to rapidly displace the vacuum tube. Kernet management foresaw the shift and decided to change its direction accordingly. Bell Laboratories had also invented the tantalum capacitor. Tantalum is a white, malleable, metallic element. When processed, the metallic substance offers specific characteristics needed for certain capacitor applications. Because Union Carbide had experience in the fields of high-temperature metals and alloys, the solid tantalum capacitor was chosen as Kernet’s second-generation product to complement existing lines and eventually provide an alternative route to growth.

Kernet got into the solid-state capacitor industry on the ground floor. Demand for its capacitors ballooned during the late 1950s and early 1960s, and the devices quickly supplanted vacuum tubes as the company’s core product. To keep pace with growth, Kernet built a 50,000-square-foot capacitor manufacturing facility in 1962 in Greenville, South Carolina. The plant opened in 1963 and remained Kernet’s key production facility for several years. The plant was still operating in 1995, by which time it had been expanded and about 450,000 square feet were being used. By the late 1960s Kernet had established itself as a leading U.S. capacitor manufacturer and the top producer of solid tantalum capacitors in the world.

In 1969 Kernet expanded its capacitor line to include multilayer ceramic capacitors. Kernet’s sales continued to rise during the 1970s and into the early 1980s. Shortly after entering the ceramic capacitor industry, the company opened a new production facility in Matamoros, Mexico. The Cleveland plant was then phased out and all of its equipment and personnel were transferred to the South Carolina facility or to the Mexican plant. New plants were subsequently opened in Greenwood, South Carolina, and Columbus, Georgia, but the Georgia plant was later shuttered. Increased capacity allowed Kernet to make heady advances in the market for high-tech ceramic capacitors. When Kernet entered the industry in 1969 there were 35 U.S. producers competing in that segment. By 1974 Kernet was the second largest supplier of ceramic capacitors in the nation, a position that it would retain for the next 20 years.

Kernet’s success up until the 1980s was largely attributable to its savvy use of advanced capacitor technology, although its gains partially resulted from the United States’s domination of many of the industries that incorporated capacitors. That situation began to change in the 1970s, when foreign manufacturers, particularly in Japan, began vying for American market share. In fact, a number of Japanese and other Asian companies entered the electronic device industries during the late 1970s and 1980s and became tough competitors against companies like Kernet. Heightened competition placed downward pressure on prices and reduced profit margins. In the United States, the capacitor industry, like many other electronics sectors, became consolidated as companies joined forces to achieve economies of scale. By the mid-1980s, only a handful of the several hundred companies that had competed earlier in the century remained.

Kernet managed to survive the industry shakeout for several reasons. Its sheer size was one important advantage. In addition, Kernet managed to keep costs down by having much of its more rudimentary assembly work done at its low-cost Mexican production facility. Still, by the mid-1980s production of most types of capacitors had essentially become a commodity business. Large producers pumped out billions of capacitors for pennies apiece, and the companies that could create them at the lowest cost usually had the edge. To make matters worse, original equipment manufacturers that purchased most of the capacitors were increasingly moving to Asia and other low-cost manufacturing regions, which had the effect of depleting some of Kernet’s U.S. customer base.

By the mid-1980s the capacitor industry had lost its luster in the eyes of Union Carbide executives. Profit margins were under pressure from foreign competitors, and the value of shipments by the U.S. capacitor industry was declining. Union Carbide decided to sell the company by way of a management leveraged buyout in 1987. As described earlier, Union Carbide retained 50 percent of the newly formed Kernet Electronics Corporation until the company could get its feet on the ground, and former division head Dave Maguire took over as chief executive of the company. In 1990 Union Carbide completely divested itself of Kernet shares, and Kernet management and other investors, including Citicorp Venture Capital, completed the leveraged buyout. Not until 1992 did Kernet go public, as Kernet Corporation, with a stock offering on the NASDAQ over-the-counter market.

Maguire believed that Kernet, under Union Carbide’s ownership, had failed to take advantage of opportunities in the market. Although Kernet was operating in a depressed U.S. industry, the company maintained certain strategic advantages that could exempt it from the malaise. Chief among those advantages was Kernet’s position as a leader in tantalum and multilayered ceramic technology. Those two technologies were of vital importance in the trend toward surface-mount circuits. Immediately after taking the helm, Maguire launched an aggressive drive to increase capacity for producing surface-mount ceramic and tantalum capacitors. Indeed, during the next eight years Kernet would spend more than $175 million adding new production capacity—all of which was for surface-mount products.

In addition to redirecting Kernet’s product mix, Maguire initiated a comprehensive quality program. During the early 1980s, U.S. and European producers had been left in the dust by Japanese competitors on the basis of quality. To recover lost ground, Kernet adopted a Total Quality Management plan designed to completely turn around its customer service and product quality. The effort worked. By the early 1990s Kernet was recognized as a global leader in quality. At least one analyst called Kernet’s focus on quality and customer service obsessive and unsurpassed. Sales to what became one of Kernet’s largest customers shot up more than eightfold during the late 1980s and early 1990s because of its quality and service, according to the buyer. In 1992 Kernet achieved registration to the stringent and respected ISO 9001 standards for quality. It also received Ford Motor Company’s Total Quality Excellence Award, which was considered among the most prestigious awards of its kind in the country.

Kernet’s aggressive quality initiatives, combined with its emphasis on surface-mounted capacitors, supplied hefty sales and profit gains during the late 1980s and early 1990s, despite overall sluggishness in the U.S. capacitor industry. Indeed, demand for surface-mounted capacitors mushroomed during the period and Kernet was among the best-positioned companies in the world to exploit the demand. Kernet’s revenues from the sale of surface-mount capacitors shot from about $30 million in 1988 to nearly $300 million in 1994, reflecting annual compounded growth of 36 percent during the seven-year period. Meanwhile, sales of leaded capacitors declined only slightly. The net result was that Kernet’s sales mushroomed from less than $200 million in the late 1980s to about $475 million annually in 1994. Likewise, net income vaulted from a deficit in the mid-1980s to about $30 million annually by 1994.

Kernet entered 1995 as the largest manufacturer of tantalum capacitors in the world with 18 percent of that thriving market—up from third place in 1988. It was also the fourth largest global supplier of multilayered ceramic capacitors with about seven percent of that segment. By 1995 Kernet was churning out a whopping 11.4 billion capacitors annually from ten different manufacturing plants in the United States and Mexico, and was offering a total of 35,000 different types of capacitors. Regardless of the cyclical nature of the electronic device industry, Kernet was well positioned for both short- and long-term gains. Revenues from Kernet’s surface-mount business, for example, were forecast to jump past $500 million annually by 1997.

Principal Subsidiaries

Kernet Electronics Corporation; Kernet de Mexico S.A. de C.V. (Mexico); Kernet Electronics S.A. (Switzerland); Kernet Electronics Asia Ltd. (Hong Kong).