SCI Systems, Inc. History

Company History:

SCI Systems, Inc., is one of the world's largest electronics subcontractors. The Fortune 500 company's business is concentrated in government and commercial subcontracting. The commercial division designs, manufactures, markets, and services electronic products and systems for the computer, aerospace, telecommunications, medical, and banking industries. SCI's government division provides data management, instrumentation, communication, and computer subsystems for military and civilian applications. The company has seventeen plants that serve markets in North America, Western Europe, and Asia. SCI cultivated its billion-dollar business by manufacturing and delivering large quantities of high-quality products on time and at prices well below the manufacturing cost of its customers.

SCI was established in Huntsville, Alabama, as a partnership in 1961 by Olin King and several investors. Raised in rural Georgia, King was the son of a Methodist minister and was expected to assume his father's legacy. Instead, King trained as an engineer and went to work for RCA Corp. In 1956 he went to work with Werner Von Braun on the United States' first satellite program, and formed Space Craft Inc. (later renamed SCI) with two associates in 1961. With a total investment of $21,000, the company began operations in the basement of King's home.

Space Craft first manufactured small satellites, but converted to subcontracting when the new Apollo space program was undertaken by NASA. The high standards and state-of-the-art technology demanded by the government prepared Space Craft for the rigors of computer subcontracting. In the first decade of SCI's history, 80 to 90 percent of the company's business came from government contracts. The company produced technical systems and subsystems for the Saturn/Apollo program and the affiliated Skylab project. SCI started by providing electronic assemblies to NASA's Marshall Space Flight Center for the Saturn IB and Saturn V programs, equipping each Saturn V with over 400 SCI-built assemblies. When the Saturn/Apollo program was abruptly canceled, SCI began work on military missile projects, and earned contracts for the Titan III launch vehicle, Poseidon Fleet ballistic missile, and other military satellite projects.

The Poseidon Program became one of SCI's longest-running government contracts, enduring fifteen years form 1967 to 1983. Over the course of the project, SCI manufactured five types of hardware for the missile. The company's longest government contract was connected with the U.S. Air Force's Titan launch vehicle program, undertaken in 1966. SCI's participation in the program was expected to continue into the twenty-first century.

In the last few years of the 1960s, SCI integrated its manufacturing operations vertically. In 1967 the company formed SCI Metals, Inc., and the following year it formed SCI Plastics, Inc., and acquired Plastel Corp. of Huntsville and Simplex Piston Ring Mfg. Co. of Miami, Florida. In the last year of the decade, SCI purchased Decatur Plastics, Inc., of Decatur, Alabama. Decatur Plastics was divested in 1977, but SCI Metals and SCI Plastics were merged into the parent company in 1972.

In the early 1970s, the company created communications and test gear for Navy and Air Force jet fighters. During the course of the decade, the company diversified its customer base to include private contracts with original equipment manufacturers. SCI had experienced the cyclic, low-margin nature of government subcontracting, but did not wish to abandon the work entirely. The company earned its first commercial contract with computer-giant International Business Machines Corporation (IBM) in 1976. The relatively small contract for subassemblies for IBM desktop terminals that tied into mainframe computers helped SCI get its start in private industry. Thus SCI entered the field of subcontracting, offering manufacturing services to original equipment manufacturers at lower cost and higher quality than OEMs could achieve themselves. By mid-decade, the ratio of government-to-private contracts was about one-to-one. SCI still manufactured communications and test gear for Navy and Air Force jet fighters, but also marketed such diverse products as white blood cell analyzers and coin sorters for private industry. The company had grown to become Huntsville's second-largest private sector employer, with sales of $27.3 million in 1975.

The diversification into private contracts had given SCI capacity in plastic molding, aluminum casting, metal machining and forming, and electronic assembly. By the end of the decade, the company's operations were organized into three divisions: government, computers, and products. SCI had three facilities in Huntsville, and in 1979, the company achieved record sales of $36.8 million.

SCI realized its most significant growth in the 1980s due to three primary factors. First, and most importantly, the company nurtured its contracts with OEMs. SCI also made a commitment to strategic geographical diversification, and began to cater to customers' needs by locating manufacturing facilities near clients' operations. Finally, the company pioneered the surface-mount assembly process, a method that utilized smaller components and mounting devices to achieve space savings and soon became the design standard for the electronics industry.

Soon after IBM decided to compete with Apple Computer Inc. in the personal computing arena in 1981, the computer giant realized that the surface-mount process was expensive and time-consuming to implement. IBM fielded that work out to subcontractors, and chose SCI because of its reputation for high quality, low cost components. The company had recorded only one failure per 50,000 assemblies, and in the mid-1980s, its $12 per-hour labor costs were about half of IBM's. Contracts with IBM provided about 40 percent of SCI's revenue by 1987, and SCI soon became IBM's largest subcontractor.

By the mid-1980s, SCI had become the world's largest electronics subcontractor, and was known as a customer-first company. Its reputation for on-time delivery was illustrated with an anecdote in the Wall Street Journal (August 1987): "In 1984, an SCI cargo plane ran out of fuel at 4 a.m. and plunged into the Florida Everglades on its way to ... 'a big customer' (probably IBM). Mr. King ... dispatched airboats to fetch the circuit boards, which were rushed to a Florida motel, where SCI technicians tested them for damage. Meanwhile, Mr. King roused some of his slumbering workers, opened the company's Arab, Alabama, plant, and rented another plane. By 10 a.m., SCI delivered enough circuit boards from both the Florida swamp and Alabama to meet the customer's production schedule for that day."

Over the course of the 1980s, the company showed strong growth and steady profits in the ruthless, notoriously low-margin (6 percent pretax) subcontracting industry: by 1987 earnings had increased an average of 35 percent every year from 1981 to 1986, when they reached $13.8 million. But some critics, especially the International Brotherhood of Electrical Workers, felt that this financial success was gained through unfairly low wages. The union tried unsuccessfully during the 1980s to organize SCI's workers. In 1985 a complaint was filed with the National Labor Relations Board charging that the company illegally laid off 250 workers who had union ties and coerced other workers to stay out of the union. The case was settled when SCI paid $83,000 in back wages without admitting guilt. King acknowledged that SCI's wages were low, but pointed out that the company's workers had better benefits than comparably employed workers in the region.

During the 1980s, SCI began to produce on contract some finished products, like computers, computer peripherals, business machines, industrial automation equipment, and medical instruments. At that time, SCI also started to develop its own line of computer-related products, including high-speed rotary printers, microcomputer systems, and microcomputer-based business machines. In 1984 SCI launched a line of microcomputers that were sold to larger companies such as Kodak, who sold the machines as their own. The new business earned pretax margins as high as 20 percent, and helped SCI gain a measure of independence. SCI's government contracts in the 1980s included work with the MX "Peacekeeper" missile program, wherein the company delivered more than 300 units with a 100 percent rate of acceptance.

By the end of the 1980s, SCI had grown to rank on Fortune magazine's list of the United States' 500 largest companies, and had spawned two major subsidiaries: SCI Technology, Inc., and SCI Manufacturing, Inc. The Technology subsidiary controlled the Government and Computer divisions' four facilities, as well as two smaller subsidiaries in Canada and Hong Kong. The Manufacturing subsidiary operated fourteen plants throughout the United States, Western Europe, and East Asia. From 1979 to 1989, sales increased from $36.8 million to $987 million.

SCI surpassed the $1 billion annual sales mark in 1990, but a recession in the early 1990s brought many changes to the computer industry. Many of SCI's customers liquidated their inventories, and those that did not lost market share. Component prices fell, and some customers delayed or canceled orders. Some analysts have criticized SCI's dependence on contracts from IBM because the computer giant could bring SCI's contracts in-house, find another provider, or try to cut into SCI's already slim margins. Although sales increased by almost $200 million from 1989 to 1990, profits dropped from $20.88 million to $2.31 million over the same period. SCI responded to the crisis by working to broaden its customer base and expand its product line.

As the recession deepened in early 1992, SCI's revenues declined 7 percent from 1991 to $1.05 billion, and profits declined to $3.8 million, down significantly from 1991's $12.6 million. But since SCI tended not to have large inventories, it was able to maintain a positive cash flow, and reduce its debt by $111 million. The company totally computerized its purchasing system, and extended on-line data communications from the Huntsville, Alabama, headquarters internationally to the United Kingdom, Mexico, and Ireland. Canada and Asia were added in 1993. SCI looked forward to emerging from the recession with certification according to International Standards Organization's strict ISO 9000 guidelines. The company worked plant-by-plant to bring the United Kingdom, Irish, and Singaporean operations, and eventually all manufacturing plants up to meet this stringent worldwide quality controls. Moving into the mid-1990s, SCI planned to improve efficiency and thereby raise the profit margin and make capital investments in infrastructure.

Principal Subsidiaries: SCI Technology Inc.; Consolidated Communications Corp.; SCI Foreign Sales Inc.; SCI Mex Inc.; Adelatos de Tecnologia S.A. de C.V.; SCI U.K. Holdings Inc.; SCI U.K. Ltd; Sci Holdings Inc.; SCI Development Ltd.; SCI Manufacturing Singapore Pte Ltd; SCI Systems (Thailand) Ltd.; SCI Irish Holdings; SCI Ireland Ltd.; SCI Alpha Ltd; SCI Systems (Canada) Ltd; Cambridge Computer Ltd.; Norlite Technology Inc.; Newport Inc.

Further Reading:

• Gilman, Hank, "SCI Flourishes as Main Subcontractor in Electronic Industry," Wall Street Journal, August 14, 1987.
• Russler, Beth, "Hunstville Firm Is Still Growing," Birmingham Post-Herald, September 27, 1976, B5.
• Stavro, Barry, "Riding the Tiger," Forbes, October 8, 1984, 181, 184.

Source: International Directory of Company Histories, Vol. 9. St. James Press, 1994.

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