Vtech 2001 Annual Report Download - page 8

66
Letter to Shareholders
Turning Around the Telephone Business
After acquired the Lucent business in April 2000, we
discovered that the conditions of the business were
much worse than we had been led to expect. Lucent
did not disclose when we signed the Agreement for
the Purchase and Sale of Stock and Assets that
actual sales were considerably lower than those it
had forecast while inventory levels were exceptionally
high in comparison to demand. The lower sales and
excessive stocks resulted in the Mexican factories
being under utilized and an increase in operational
losses. Our original integration plan was
compromised and a new plan was immediately put
in place to consolidate the operations in an effort to
cut overheads and clear the excessive stocks. We
attempted to negotiate with Lucent for compensation
but when no agreement was reached, on 25th
January 2001 we filed a complaint in the United States
District Court for the Southern District of New York
seeking damages in excess of US$300.0 million
against Lucent Technologies Inc. and Lucent
Technologies Consumer Products, L.P. for fraud and
breaches of the Agreement for the Purchase and Sale
of Stock and Assets. The litigation is continuing.
To accelerate the consolidation of the consumer
telephone business, I took direct control of the
business as an interim CEO at the beginning of the
year. I immediately put in place broader measures to
streamline the operation and cut further excessive
inventories. The Mexican manufacturing and repair
operations were closed and production was relocated
to our more cost-effective facilities in mainland China.
The majority of the US consumer telephone business
operations were consolidated into Beaverton, Oregon
from New Jersey in an effort to reduce expense. The
distribution and call centre operations were
consolidated and out-sourced to third parties in San
Antonio and St. Louis respectively to further cut
overhead. A new President has been appointed to
manage the combined sales and marketing
operations in North America. At the same time, I have
refocused our R&D effort onto higher margin and
more commercially viable products. The number of
projects and platforms has been streamlined to
improve efficiencies. To enable tighter project
management, we have closed the New Jersey and
UK R&D operations and its development activities
have been assumed by our Canada, Hong Kong and
mainland China-based R&D teams.
Our US and European sales strategies have also been
revised with an emphasis on gross margin rather than
sales volumes. A new process for order control
between the sales offices and the factory has been
put in place to ensure accuracy of sales forecasts
and minimize inventory build-up. The goal is to
increase significantly our inventory turns, so as to
maximize our return on capital employed.
At this point, I am pleased to report that we are
beginning to see some positive results from these
changes. With the restructuring now well on its way
to completion, a recruitment firm has been retained
to search for a permanent CEO for the consumer
telephone business unit.
Tackling Marketing Weaknesses
in Electronic Learning Products
The financial year 2001 has also been a difficult one
for electronic learning products (ELP), where sales
fell by 16.4% to US$291.2 million, mainly due to the
weak Euro, tight supply of critical components and
the success of a major US competitor, Leap Frog, in
taking market share from us. VTech is still the largest
ELP supplier in the world, with a strong position in
the ELA category. That sector, however, is shrinking
mainly because of the proliferation of low-cost PCs
and TV games.
Over the years, VTech’s success in the ELP category
has been mainly attributable to our excellent
technology, innovative product design and
exceptional quality. As the market becomes more
and more commoditized, however, superior
marketing has become a major factor in continued
success. To strengthen VTech’s competence in this
area, we appointed a CEO to direct the entire ELP
operation, including worldwide sales and marketing.
Given his strong background in consumer product
marketing, I strongly believe he can help reposition
and grow the business.