Kingston Technology and the power of memory
You may not recognize John Tu’s name, but if you’ve ever used a flash drive or added memory to a digital camera, you’ve probably bought a storage device made by his company, Kingston Technology, the world’s largest independent manufacturer of memory products. The co-founder and CEO, 73, loves playing the drums in his own rock band — JT & Friends — which performs for charity. The group rehearses at Kingston headquarters in Fountain Valley, Calif., where Tu’s office is a modest cubicle. The private company’s last disclosed annual revenues were $6.5 billion in 2010. His story:
I was born in Chongqing, China, and our family moved to Shanghai in 1945, where my father worked for the Nationalist Chiang Kai-shek government. After two years the civil war in China was getting close to Shanghai, so we moved to Taiwan.
We speak Mandarin, and had to get used to the Taiwan dialect. I felt totally lost at school. I had an uncle in Germany who owned a Chinese restaurant, so after graduating from high school in 1960, I went there. I knew how to speak a few sentences in English, but no German. After several weeks I went out on the street to find someone who spoke English. A biker led me to an old priest who had lived in China, and he sent me to a language school in Munich.
I wanted to study electrical engineering, but in Germany you have to apprentice for two years [first], so I worked at a shipbuilding factory. The foreman looked at me as cheap labor, and I had to tough it out.
Those two years were crucial in my life. German society is very homogeneous. There were few foreigners, and they were called Ausländers, implying second-class citizens. When I wanted to rent a room, no one wanted a foreigner. The apartment I found had no hot water. Every day the landlady would put a bucket of water in front of my door. Overnight it would freeze, and I’d have to break the ice to wash my face. Later, when I had challenges with Kingston, I would think, “Compared to that time in my life, this is nothing.”
After getting my degree in electrical engineering, I went to work for Motorola in Wiesbaden, Germany. In 1970 my sister agreed to petition for me to become a U.S. citizen. She moved to Arizona, where I was hoping to get a job with Motorola.
But the economy was bad, and I couldn’t get an interview, so I decided to be entrepreneurial. I opened a gift shop in Scottsdale, and it worked. I sold things imported from China, but after two years I had no savings. The biggest expense was the rent, so I decided to be a landlord. My parents loaned me about $5,000, I got a mortgage and a construction loan, and I built my first building. In 1972, I became a U.S. citizen. I bought another lot, and another. I told my mom, “I’m famous now. I’m a developer.”
But something was missing. My sister moved to Los Angeles, and I thought, “This is the place for me. You can buy Chinese groceries, and Hollywood is here.” So I bought a small place in Redondo Beach and tried to figure out what was next. A friend introduced me to [Kingston’s co-founder] David Sun, who liked to play basketball, as I do.
He worked for Alpha Micro, which designed add-on products for Digital Equipment Corp. [DEC]. I found out there was an enormous profit in making memory modules that were compatible with DEC’s machines. If we could do that and charge less, we’d still make tons of money. So we made a prototype, and it worked.
I had no experience with computers, so David gave me the product to sell. We put a phone line in my garage and ran an ad in a trade magazine. The phone started ringing, and I had no idea what to say, so David wrote me a bunch of buzzwords.
In 1986, DEC called and said it would like to schedule an appointment to visit us. I was so nervous. I was sure DEC would sue us and close us down. David and I rushed out and got an office. We asked all our friends to call while the DEC representatives were there, so it looked as if we were very busy. The DEC people stayed two days and finally told us they knew we weren’t a real company. What they wanted was to license our design because it would take them too long to get a compatible memory product to market. When they offered us $250,000, it seemed incredible, and we signed immediately. Once we were licensed, the business took off.
In 1986 we sold the company for $6 million to AST Research. It was the American dream come true. That $6 million became $4 million because of Uncle Sam, but life was very good. David and I each gave our $2 million to a money manager. Then Black Monday happened on Oct. 19, 1987. In one day we lost all the money we had. It felt like the end of the world.
David said he could get a job at his old company. I said, “You make something, and I’ll sell it, just like last time.” He said okay, but what product could we make? We knew the PC would replace the DEC machines. We knew how to do memory storage and upgrades. So we went back to Superior Manufacturing, which had made our original DEC prototype, and the company made some samples for us.
It worked, and friends started buying from us. We didn’t know there was a shortage of memory devices. We had no idea what we were doing — again. It was the right time, the right place, the right product. When we needed a name, we started with Kensington because it sounded regal. But another company already had that name. I had loved the Kingston Trio, so we became Kingston Technology.
We were incredibly lucky. We accumulated cash every day and had no time to process the money. So we stuffed it all in a shopping bag, and David’s wife would deposit it in the bank the next morning.
We worried about what would happen when the memory shortage ended. When we found out how horrible service was for add-ons, we found another niche. We created a flexible service policy; no complicated return policies.
In 1996, Kingston was valued at $1.8 billion. I went to talk to Masayoshi Son, founder of SoftBank, because I thought his company could carry our product in Japan. But Masayoshi made an offer to buy 80% of Kingston. We felt responsible for the lives of our employees. If we took SoftBank’s offer, we’d have close to $1 billion to share with them. So we sold Kingston and gave $100 million in bonuses to the 450 people or so who worked for us.
Two years later Masayoshi saw it was the digital era, which conflicted with [his acquisition of Kingston]. He told us he’d like us to buy Kingston back. At the same time, there was a huge shift in the market, with an oversupply of our products. Prices dropped. So we bought our 80% back for $450 million.
The papers called us geniuses, but this is what really happened: Back in 1996 when we signed the deal, SoftBank asked if it could give us cash and stock and $300 million in an IOU that it would pay over two years. The contract said that if it defaulted, we could take the company back. Instead, we forgave the $300 million IOU because we felt Kingston wasn’t worth $1.8 billion at the time. SoftBank was shocked.
When Masayoshi wanted to sell, he sold to us because it was a way to pay back the favor for our honesty and generosity to him. The market started to go up after we took it back, and we’ve expanded every year since. Emerging markets like Brazil, India, China, and Russia saved us during the 2007-08 recession.
On a daily basis I try to stay ahead on the tech and the business. Kingston goes out of its way to be fair, and the result is that we’re profitable. A lot of people think success is financial success. I say it’s not how much money you have but what you do with that money.
Overcome your ego and be honest about your strengths and weaknesses. To make the company strong, you have to figure out the best way to run the team. You should never shoot a basket if you’re better at defense or rebounding.
Show customers that you stand behind your products. We offer a lifetime warranty as long as you own our product. As a result, our return percentage is very low.
Survive first, then focus on success. Most startup companies fail because they cannot survive long enough to make a go of it. The longer you hang on, the more time you have to adjust the idea and make it better.
This story is from the December 23, 2013 issue of Fortune.