Zenith Electronics Corporation Business Information, Profile, and History

Company Perspectives:

Zenith Electronics Corporation has a proud heritage of leadership in home entertainment products. For more than eight decades, beginning with the advent of radio, the Zenith name has been synonymous with quality and innovation. A pioneer in electronics technology, Zenith has invented countless industry-leading developments, including the first portable and push-button radios, the first wireless TV remote controls and the first HDTV system using digital technology.

History of Zenith Electronics Corporation

Having jettisoned its manufacturing operations in favor of outsourced production, Zenith Electronics Corporation has repositioned itself primarily as a designer and marketer of high-quality consumer electronics products under the Zenith brand. Among the products it sells are high-definition, flat-screen, and other television sets, set-top boxes for cable and satellite systems, DVD players, and digital audio products, such as MP3 players and CD recording systems. From its start Zenith advertised that its reputation would be built and sustained by the superior workmanship, reliability, and innovation of all products bearing the Zenith name. The company became a huge American success as a top producer first in the radio industry and later in television. Low-priced imports from Asia, however, began to rock Zenith in the mid-to-late 1970s. Although continuing to produce innovative products--including the high-definition television (HDTV) technology chosen as the standard by the industry alliance in the United States--Zenith posted losses through much of the 1980s and the entire decade of the 1990s. With no end in sight to the mounting losses, Zenith sold a controlling interest to South Korea-based LG Electronics Inc. (part of the LG Group conglomerate) in 1995, then emerged in late 1999 from a prepackaged bankruptcy as a wholly owned subsidiary of LG.

Radio-centric Beginnings

Zenith's beginnings were very modest. Two ham radio operators, Karl E. Hassel and R.H.G. Mathews, began manufacturing radio equipment at a kitchen table in 1918 under the name Chicago Radio Laboratory. Hassel ran an amateur radio station with the call letters 9ZN, from which they named their first product Z-Nith--the origin of the later name Zenith. These two men were joined by Commander Eugene F. McDonald, Jr., in 1921. McDonald, already a self-made millionaire when he joined the company, was pivotal to Zenith's growth. He was much more than a financial backer. McDonald's flamboyant style was echoed in the company's dramatic advertising methods and this style, coupled with innovative genius and an ability to sense changes in public tastes, meant that for more than three decades, in the public perception, McDonald was Zenith.

McDonald was counterbalanced by Hugh Robertson, who joined the company as treasurer in 1923. Robertson's financial expertise and careful planning led Zenith through many difficulties, including the Great Depression. The year 1923 was significant in many other ways. The company was incorporated as Zenith Radio Corporation that year, and 30,000 shares of stock were issued at $10 per share, with the largest single block going to McDonald. At that time, Zenith Radio Corporation took over sales and marketing for the Chicago Radio Laboratory, a maker of radio equipment. Zenith later acquired all of Chicago Radio Laboratory's assets and officially began to manufacture under its own name.

Soon McDonald, who preferred to be addressed as The Commander (as a lieutenant commander in the Navy during World War I he was entitled to the name), began to show his flair for drama. He persuaded Admiral Donald B. MacMillan to take a shortwave radio with him on his Arctic expedition. MacMillan's transmissions proved to be exciting demonstrations of the efficiency of shortwave communication. In addition to his advertising schemes, McDonald organized and became president of the National Association of Broadcasters in 1923.

Meanwhile, Zenith's inventors and technicians were developing landmark products. In 1924 Zenith introduced the world's first portable radio. Then in 1925, McDonald helped MacMillan organize another expedition, this time to the North Pole. McDonald was part of the expedition as a ship commander, but went only as far as Greenland. His shortwave radio broadcasts of Eskimos singing into the microphone were a great success, and Zenith's advertising always reminded the public that Zenith shortwave radios were the choice of the Arctic explorers.

More innovations followed. In 1926 Zenith introduced the first home radio receiver that operated directly from regular AC electric current, and automatic push-button tuning came in 1927. Also in 1927, the company's famous slogan, 'The Quality Goes In Before The Name Goes On,' was used for the first time. By the late 1920s Zenith was in 12th place in a $400 million industry.

But when the Great Depression hit after the stock market crash of 1929, the radio industry was thrown into chaos. Zenith's sales went from $10 million in 1929 to less than $2 million in 1932. Although the company suffered five successive years of losses, Treasurer Hugh Robertson managed to get the company through without borrowing until profitability returned.

McDonald, even during those times, did not give up his attempts to get Zenith technology into new areas. In 1934, he sent a wire to all U.S. oil and tire companies: 'Watch absence of people on streets between eleven and eleven thirty during presidential talk.' After the talk, he sent letters urging them to become Zenith auto-radio dealers and get rich.

One of McDonald's most popular ideas during the 1930s was the big black dial for radios. Its large clock-style numbers were designed to be read from a distance or without glasses. McDonald also promoted portable shortwave radios for $75&mdash′edecessors of Zenith's famous Trans-Oceanic radios--an idea that was ridiculed at the time but was extremely successful in the end.

Zenith management valued and encouraged worker loyalty. Therefore, when the company began to be profitable again in 1936 for the first time in five years, Zenith paid its workers, rather than its stockholders, a dividend, in appreciation for sticking out the tough times with little money. Net sales of $8.5 million in 1936 resulted in net income of $1.2 million. By 1937 sales were up to almost $17 million, and net income was nearly $2 million.

Mid-Century Move into Television

By the late 1930s, Zenith was exporting to 96 countries and was a pioneer in television and FM broadcasting. In 1939 Zenith's station W9XZV, the first all-electric television station, went on the air. This was followed the next year by W9XEN, one of the first FM stations in the United States. By 1941 Zenith had risen to second place in a $600 million industry, behind only RCA.

Although World War II meant a decline in normal consumer business, this decline was more than offset by war production. Zenith manufactured radar, communications equipment, and high-sensitivity frequency meters. Net sales were $23.8 million in 1941, and $34.2 million in 1942, with $1.4 million in net income that year.

Zenith's major product outside of war-related materials during World War II was a highly successful line of hearing aids that retailed for $40. A miniature adaptation of a radio receiving set, it made hearing assistance affordable for thousands of people. Zenith became the largest marketer of hearing aids in the world, outselling all other companies combined.

Once it was able to resume civilian research and production, Zenith concentrated on improving television, even though McDonald had resisted television for almost a decade. The company introduced its first line of black-and-white television receivers in 1948. Also in 1948, to meet an immediate increased demand, Zenith purchased the Rauland Corporation, a noted Chicago manufacturer of television picture tubes. One year after this purchase, the combined talents of the Zenith and Rauland researchers produced the nonreflective black tube.

While Zenith continued research and development on color television throughout the early 1950s, and even participated in the development of industry standards for a compatible color television system, it still did not get into the color TV market. McDonald was even more adamant about color television than he had been about black-and-white, saying, 'Someday, the technical and service problems of color TV will be solved. When that day comes, we will offer you a line of outstanding color sets. In the meantime, we will not try to make an experimental laboratory of dealers and the public. We will keep color in our laboratories until it is ready.' Zenith continued to work on its black-and-white televisions, inventing the first wireless remote control in 1956, and held the leading position in black-and-white television from 1959 on.

The color television breakthrough came in 1961, when Zenith introduced a ten-receiver line of color sets. Demand for these sets grew so quickly that it had to expand its facilities. Also that year Zenith's experimental stereophonic FM broadcasting system was approved by the FCC as the national standard.

1970s: Fierce Competition and Restructuring

Color television improvements continued steadily. In 1969 Zenith introduced the patented Chromacolor picture tube, which set the standard for brightness in the color TV industry for many years. In 1970, the company received awards from the American Association for the Advancement of Science in recognition of its years of technological achievements. By 1972, the year it introduced a line of 25-inch televisions, Zenith was number one in production of color television sets.

Enormous profitability led to expansion. In 1971 Zenith acquired a 93 percent interest in Movado-Zenith-Mondia Holding, a watch manufacturer. It also acquired a one-third interest in a Venezuelan television company in 1974 and significantly increased its U.S. product distributors. Zenith was able to maintain the leading position in the fiercely competitive U.S. color television market between 1972 and 1978, but was overtaken by RCA in 1979.

Domestic competition, however, did not prove to be Zenith's greatest problem. Manufacturers in Japan, Taiwan, and Korea began selling great numbers of electronic consumer goods in the United States at prices below what American companies could afford to offer. Zenith's then-chairman, John Nevin, filed suits against the Japanese and testified in Congress, accusing the Japanese of dumping goods on the American market at below-cost prices. Nevin's demand that the federal government enforce its antidumping laws was finally met, but not before significant damage had been done.

In 1977, Zenith sold most of its domestic hearing aid instrumentation operation. Also that year, Zenith contracted with Japan's Sony Corporation to market Sony's Betamax home video television recorder in the United States under the Zenith label. By 1978, Zenith had sold most of its Movado watch assets and laid off 25 percent of its American workforce, having established plants in Mexico and Taiwan. The latter move was intended to take advantage of the cheaper labor available in those countries and to address the increasing price competition.

Zenith President and CEO Revone Kluckman realized that action outside Washington was needed to combat the pricing crisis. Kluckman was credited with refocusing Zenith's competitive energies from legal battles back to the factory floor by implementing cost-cutting measures and improved manufacturing procedures.

A sweeping reorganization also began in 1978. The corporate structure was rebuilt along product lines, with each group receiving a charter to move aggressively into new businesses. Jerry Pearlman, then a senior Zenith finance executive, later chairman and president, was instrumental in pushing for one business in particular: computers. In 1979, Zenith acquired the Heath Company, a longtime maker of do-it-yourself electronic kits. The shrewd and inexpensive ($64.5 million) purchase occurred right after Heath announced its first personal computer kit and only months after Apple introduced its first personal computer.

1980s: Entry into and Exit from Computer Industry

Zenith Data Systems, a wholly owned subsidiary, was born in 1980 after the Heath acquisition. The parent company required that any new business tap at least two of three Zenith capabilities: technology, manufacturing, and distribution. Zenith Data Systems was a perfect match on all three counts. The first Zenith computer, the Z-100, was introduced in 1981; 35,000 Z-100s were shipped that first year.

In addition to complete computer systems, Zenith began to sell video terminals compatible with virtually all personal computers on the market. These became very successful, as were the components Zenith sold to other computer companies. Zenith also entered the market for decoders for the growing cable TV and wireless markets.

Nevertheless, the early success of Zenith Data Systems was not enough to offset the impact of price competition in the consumer electronics business. The company suffered a net loss of $24 million on revenues of $1.2 billion in 1982 and did not pay a dividend that year for the first time in almost half a century.

Zenith continued to push for cost reductions. These were achieved through the use of robotics and other improvements in design and manufacturing, which led to a higher sales volume to offset lower prices. By 1983, although it lacked the advertising dollars to mount the campaigns of other industry manufacturers, Zenith Data Systems boasted an installed base of 95,000 microcomputers. Computer sales mounted to $135 million that year, and Zenith was profitable. It also celebrated a short-lived victory in an antitrust suit against Japanese television manufacturers that year, a suit later overturned on appeal.

Zenith worked to win large contracts with educational institutions and the federal government, greatly broadening its impact on the personal computer market. It also held a virtual monopoly on the do-it-yourself computer market through more than 70 Heathkit Electronic Centers. Whereas overall computer sales accounted for 1.4 percent of Zenith sales in 1979 (exclusively Heath), they were up to 15 percent in 1984. Also in 1984, the electronics industry adopted a Zenith-developed system as the standard for MTS stereo TV broadcast and reception. It was another profitable year, marked by a name change from the long outdated Zenith Radio Corporation to Zenith Electronics Corporation.

The roller coaster went down again for Zenith in 1985. Although computer products sales rose from $249 in 1984 to $352 million in 1985, computer sales did not offset the $125 million loss in consumer electronics. The company was nearly $8 million in the red at year's end.

In 1986 Zenith introduced more new products than at any time in its history, especially in the home entertainment and computer improvement areas. Record numbers of videocassette recorders were shipped, up 34 percent, and cable operations were up 16 percent. Computer systems and components were up 56 percent to $548 million, accounting for 29 percent of total sales. Nevertheless, 1986 was another year of losses--of $10 million--due to pricing pressures and lower profit margins. Japanese, Taiwanese, and Korean prices in the United States were ten percent lower in 1986 than in 1985.

Zenith Chairman Jerry Pearlman eventually asked the federal government to once again monitor foreign manufacturers' illegal dumping of inexpensive TV sets on the American market. His request did little good, however, because the government took years to investigate and act on the charges. As Zenith continued to lose money, pressure from investors to sell its consumer electronics unit mounted. Pearlman, however, could not attract an acceptable bid.

In 1988 Zenith reported a modest $12 million profit, ending a four-year streak of losses. But the company was saddled with heavy debt (incurred primarily in financing the growth of its computer business), and competition in both the consumer electronics and computer industries was heating up.

It was becoming increasingly evident to Pearlman that Zenith's continued participation in two tough business areas was hurting the company's competitiveness; although both were more than $1 billion in sales by 1988, neither was profitable. In 1989 Pearlman and the Zenith board suddenly decided to sell Zenith's computer business to Paris-based Groupe Bull. Zenith used the $511.4 million it received from Bull to pay off its short-term debt and some of its long-term obligations as well. Zenith management hoped this trimming would improve its ability to compete in consumer electronics in the 1990s.

1990s and Beyond: Continuing Red Ink, HDTV, and the Loss of Independence

But starting with 1989, Zenith posted five straight years of heavy losses--the smallest, the 1991 loss of $52 million; the largest, the 1992 loss of $106 million. In the midst of these losses&mdash′imarily caused by continued depressed prices for televisions--the company moved forward with the development of new, innovative products.

The company's most publicized foray involved high-definition television (HDTV), the super-sharp digital television technology that was supposed to replace the standard analog television. With the prodding of the U.S. government, which feared that Japanese manufacturers would completely dominate the television industry unless American companies moved quickly to develop HDTV, three company partnerships were formed in the late 1980s, each working on their own HDTV standard. Zenith and its partner AT & T Microelectronics developed a digital transmission technology that was among the finalists for adoption. In 1993, however, the government wanted to speed up the adoption process by having all seven company finalists cooperate on developing a digital HDTV system, forming the Grand Alliance. The following year, Zenith's transmission system was chosen by the alliance to be the U.S. standard to be submitted to the Federal Communications Commission (FCC) for final approval. With the alliance arrangement, Zenith would receive a royalty for its role--a slice of perhaps $10 to $20 per television set--but could not expect a sizable return on its $15 million HDTV investment until the early 21st century when the market for HDTV sets was expected to approach that of regular TVs.

With its HDTV payoff years away, Zenith faced a proxy fight in 1991 from a dissident stockholder dissatisfied with the management of the company. Pearlman was able to ward off this attempt for his ouster by wooing a foreign investor. South Korea-based Lucky-Goldstar Group, a huge conglomerate and maker of low-end consumer electronics products, purchased a five percent stake in the company for $15 million. Zenith and Lucky-Goldstar (LG) had a relationship dating back to the 1970s when the Korean firm began making radios for Zenith. Later, LG started buying picture tubes and other components from Zenith, while Zenith bought LG-made VCRs and combination TV-VCR sets. Following the equity purchase, LG also gained access to Zenith's work on HDTV and on flat, high-resolution screens for computers and televisions.

Starting in 1992, Zenith attempted to improve operating results through a series of reengineering efforts initiated by the firm's president and chief operating officer, Albin F. Moschner. In addition to reducing its workforce by 25 percent over the next two years, the program aimed to improve new product development and get products to market faster, increase quality, and establish greater integration between factories. These efforts, however, did not produce immediate results, and continuing pressure from shareholders over the lack of improvement led the Zenith board of directors to begin closely monitoring Pearlman's performance through frequent and lengthy meetings and the tracking of numerous performance measures. A further blow came in early 1993 when one of Zenith's creditors, the Bank of New York, found the company in violation of the net worth covenant in its credit agreement.

Zenith's performance did improve in 1994, but not enough to put it back in the black. The company continued to suffer from price erosion--$48 million worth--brought on by its foreign competitors, leading to another loss, this time of $14.2 million. This represented an $83 million improvement over 1993 results, in part attributed to savings of $40 million in costs from the reengineering efforts.

Early in 1995, Pearlman retired as CEO, naming Moschner to the position. Pearlman also announced that he would retire as chairman at the end of the year. Shortly thereafter, Moschner and Pearlman revealed that the firm planned to concentrate on the production of large-screen TV sets, those with screens larger than 30 inches. This segment of the market was predicted to enjoy much greater revenue growth than the industry overall. To begin production of the large-screen TVs, Zenith needed $150 million to upgrade its production facilities, money it did not have and needed to secure from the outside. Once again, Zenith turned to the Lucky-Goldstar Group, later known as LG Group, for an infusion of cash. LG Electronics Inc., a subsidiary of LG Group, acquired a nearly 58 percent controlling interest in Zenith through the purchase of $351 million in Zenith stock. The last of the American-controlled television manufacturers was thus in the hands of foreign ownership.

Through the sale, Zenith acquired the immediate capital it needed for its plans to produce large-screen picture tubes and large-screen TV sets. The deal was synergistic in that Zenith would also be able to make large-screen picture tubes for Goldstar TVs sold via LG's distribution system to such emerging markets as Latin America and Asia. The cash infusion and the potential for further LG investment in Zenith if the need arose placed Zenith in a stronger position to survive until it could benefit from its commitment to large-screen TVs and from its investment in HDTV.

But with the payoff from its high-end consumer electronics products still off on the horizon, and with sales and prices of television sets falling, Zenith continued to bleed red ink--at an accelerating pace. The company posted losses of $92.4 million, $178 million, and $299.4 million in 1995, 1996, and 1997, respectively. Moschner resigned abruptly in July 1996 and was replaced by Peter S. Willmott, first as interim CEO and president and then on a permanent basis. In late 1996 Willmott announced the layoff of 25 percent of the company's U.S. workforce, or about 1,175 workers; the indefinite postponement of the construction of a $100 million large-screen picture tube plant in Woodridge, Illinois; as well as layoffs at the company's four plants in Mexico. Early the next year, Zenith attempted to revitalize its brand image through a redesign of the corporate Z-bolt logo and a $10 million national ad campaign, the company's first in five years, which promoted its sleeker and more technologically advanced line of standard and large-screen television sets. It also began using a subbrand, Inteq, on its high-end products to differentiate them from lower-end models. At the same time, Zenith continued to pursue cutting-edge products. In 1996 it joined with U.S. Robotics Corporation to build a cable modem for accessing the Internet through a cable television wire, and it won a $1 billion contract to build three million digital television set-top boxes for Americast, an alternative cable consortium owned by several Baby Bell phone companies and the Walt Disney Company. In addition, in late 1996 the FCC adopted Zenith's digital transmission technology as part of the HDTV standard in the United States.

During 1997, Zenith shipped its first DVD player, which actually had been manufactured by Toshiba. In August it canceled outright plans for the Woodridge large-screen picture tube plant. Instead, it focused its capital expenditures on its existing picture tube plant in Melrose Park, Illinois. The following month, Willmott, after only ten months on the job, announced that he would retire earlier than expected, sometime during the following winter. Following a successor search, Jeffrey P. Gannon, a 24-year veteran of General Electric Company, was hired as the new president and CEO in January 1998.

Under Gannon's leadership, Zenith moved ahead on the HDTV front, shipping its first HDTV set in August 1999, a 64-inch widescreen rear-projection model. The market for HDTV remained small, however--there were only 70 digital TV stations on the air by September 1999--and the company posted another substantial loss in 1998 of $275.5 million (on sales of just $984.8 million). Zenith began planning a more radical remake centering on its exit from manufacturing. In late 1998 Zenith closed its only remaining U.S. factory, the Melrose Park picture tube plant. Then in August 1999 the company filed a prepackaged bankruptcy plan with the support of its creditors as well as LG. It emerged from bankruptcy in November of that year as a wholly owned subsidiary of LG, and as a company focused solely on designing, marketing, and distributing consumer electronics products. Of the company's remaining Mexican manufacturing plants, three were sold off and one was transferred to LG ownership. Zenith began outsourcing all of its manufacturing, with most of the products built by LG itself. These moves left the company with a workforce of fewer than 7,000, after having started the decade with 32,000 employees.

After leading the company through its reorganization, Gannon resigned from his leadership position. The new president and CEO was Australia native Ian G. Woods, a senior LG executive who had served previously as CFO of Australia-based Matrix Telecommunications Limited. With its finances on more stable ground and its new leadership in place, Zenith in early 2000 unveiled a revamped product lineup, which featured HDTV sets, flat-screen plasma displays, liquid crystal display (LCD) TVs, a KidsView line of TVs for children, home theater projection TV systems, HDTV satellite receivers, a five-disc DVD player, digital audio products, and a variety of accessories. This impressive range of projects and the company's improved financial performance during 1999 appeared to signal the beginning of a long-awaited Zenith turnaround.

Principal Subsidiaries: Interocean Advertising Corporation of Illinois; Zenith Distributing Corporation of Illinois; Zenith Electronics Corporation of Arizona; Zenith Electronics Corporation of Pennsylvania; Zenith Electronics Corporation of Texas; Zenith/Inteq, Inc.; Zenith Video Tech Corporation; Zenith Video Tech Corporation--Florida; Zenith Radio Canada, Ltd.; Zenith Taiwan Corporation; Zenith Electronics (Ireland), Ltd.; Zenith Electronics (Europe), Ltd.; Cableproducts de Chihuahua, S.A. de C.V. (Mexico); Zenith Partes De Matamoros, S.A. de C.V. (Mexico); Productos Magneticos de Chihuahua, S.A. de C.V. (Mexico); Telson, S.A. de C.V. (Mexico); Zenco de Chihuahua, S.A. de C.V. (Mexico); Radio Componentes de Mexico, S.A. de C.V.

Principal Competitors: Emerson Radio Corp.; Hitachi America, Ltd.; Matsushita Electric Industrial Co., Ltd.; Motorola, Inc.; Philips Electronics North America Corp.; Pioneer Electronics (USA) Inc.; Samsung Electronics America, Inc.; SANYO North America Corporation; Scientific-Atlanta, Inc.; Sharp Electronics Corporation; Sony Corporation; Thomson S.A.; Universal Electronics Inc.

Chronology

• Key Dates:

• 1918: Two ham radio operators form Chicago Radio Laboratory.
• 1921: Commander Eugene F. McDonald, Jr., joins the company.
• 1923: Company is reincorporated as Zenith Radio Corporation.
• 1924: Zenith introduces the world's first portable radio.
• 1926: Company introduces the first AC-powered radio.
• 1927: Company debuts the first push-button radio.
• 1939: The first all-electric TV station, Zenith's W9XZV, goes on the air.
• 1948: Company's first line of black-and-white TV receivers makes its debut.
• 1956: Zenith invents the first wireless remote control.
• 1961: Company's first line of color TVs is introduced; Zenith's FM stereo broadcasting system is approved by the FCC as the national standard.
• 1969: Company introduces the revolutionary Chromacolor picture tube.
• 1979: Heath Company, maker of do-it-yourself electronic kits, including a personal computer, is acquired.
• 1980: Zenith Data Systems is created as a computer subsidiary.
• 1981: The first Zenith computer, the Z-100, is introduced.
• 1982: Company suffers a net loss of $24 million and fails to pay a dividend for the first time in nearly 50 years.
• 1984: The electronics industry adopts a Zenith-developed system as the standard for MTS stereo TV broadcast and reception; company changes its name to Zenith Electronics Corporation.
• 1989: Company sells its computer business to Paris-based Groupe Bull for $511.4 million.
• 1991: South Korea-based Lucky-Goldstar, later LG Group (LG), purchases a five percent stake in the company for $15 million.
• 1994: The industry chooses Zenith's transmission system as the U.S. standard for HDTV.
• 1995: LG gains a 58 percent controlling stake in Zenith by buying $351 million in company stock.
• 1996: Company announces the layoff of 25 percent of its U.S. workforce; FCC adopts Zenith's digital transmission technology as part of the HDTV standard.
• 1998: Zenith closes its last U.S. manufacturing plant.
• 1999: Zenith begins shipping its first HDTV sets; the company emerges from a prepackaged bankruptcy filing as a wholly owned subsidiary of LG and as purely a designer and marketer--not a manufacturer--of electronics products.