A year ago, electronics industry veterans Edward Meadows and Edward Wang had an idea: ship Asian television parts to the United States, assemble them here and make a tidy profit on sales to consumers interested in buying American.
So they acquired a public shell company, rented a small assembly plant in the City of Industry and started talking to potential customers. Last summer, Southern Products Inc. had 17 workers assembling thousands of low-end flat-screen TVs to sell online through Costco, Target and Wal-Mart.
But by December, the company had done an about-face, laying off all its local assembly workers and moving most assembly work to China. Southern Products executives had learned the hard way what many manufacturers already knew: Most customers care more about price than where a product is made.
“We thought we could get a premium for ‘Assembled in U.S.A.’ products,” said Meadows, who serves as chief executive of Southern Products. “But it turns out we can’t.”
The company managed to produce about 20,000 Sigmac brand LED and LCD televisions at its City of Industry headquarters last year. But retailers that initially expressed interest in domestically assembled products said they couldn’t sell the low-end televisions at anything more than rock-bottom prices, making it difficult for Southern Products to justify the added expense of American labor.
Still, the company will try again to assemble TVs here, but on a smaller scale. Later this month, a handful of workers will assemble products for Minneapolis retail giant Target Corp., which will promote Sigmac TVs as American made, and Meadows said he hopes to bring more assembly work back to the United States as the Sigmac brand gains recognition and can command a higher price.
However, it’s not at all clear that an “Assembled in U.S.A.” label will help the brand stand out in a marketplace where customers care first and foremost about price.
“Our research shows features and price are the key factors,” said Shawn Dubravac, chief economist for the Consumer Electronics Association, an Arlington, Va.-based trade group. “Other attributes definitely weigh in, and if they can differentiate their offerings by saying some of the assembly is done in the U.S., they’ll certainly try. But first and foremost are price and features.”
Ad hoc brand
Meadows, 65, spent most of the past 20 years selling electronics to big-box retailers, including Wal-Mart Stores Inc. of Bentonville, Ark., and Best Buy Co. Inc. of Richfield, Minn. But he hadn’t owned a manufacturing company until early last year when an electronics maker asked him to liquidate television sets it couldn’t sell. The TVs had been assembled in the United States on a limited run by a company owned by Wang, who for more than 30 years has run electronics manufacturing and repair companies in the United States and Taiwan. (Wang was traveling and was not made available for comment.)
The duo created the brand name Sigmac for the liquidation, and several large retailers bought the TVs and indicated they were interested in buying more given their domestic assembly.
“They’d never heard the (Sigmac) name before and the product didn’t have any unique features, so their selling point was going to be ‘Assembled in U.S.A.,’” Meadows said.
That interest from retailers spurred Meadows and Wang to start their own venture. In June, the two spent $20,000 to acquire Southern Products, a publicly traded Las Vegas startup whose founder wanted to build and sell custom tables for beer pong, a drinking game popular on college campuses.
But when it came time to sell the new TVs, Meadows said buyers suddenly seemed less interested. He declined to name specific retailers.
“Everyone said they wanted ‘Assembled in U.S.A.,’ but when it came down to the (purchase orders), they all said they had research that showed consumers wouldn’t pay a premium,” he said.
Indeed, a year after launch and with the Sigmac brand still little known, its TVs are among the cheapest on the market, selling for even less than similar offerings from better known bargain brands such as Coby Electronics Corp. of Lake Success, N.Y. For instance, Fry’s Electronics Inc. sells a 42-inch Sigmac LCD TV for $379, while a slightly smaller 40-inch Coby LCD TV retails for $419.
At those low prices, Southern Products was losing money on each set assembled in America. Assembly costs here can be $30 more expensive per unit than in China largely due to labor costs. That’s a huge added cost, Meadows said, because Southern Products’ gross margin is only about 7 percent.
“For a $300 TV, your margin is about $21. So if you’re paying $30 extra for the assembly, that becomes a loss,” he said.
Indeed, in its first six months of operations through November, the company had a net loss of $871,000. The company reported revenue of $3.6 million, but the cost of products sold was nearly $4 million.
Mexican factories?
Watching those losses mount and unable to raise prices as quickly as planned, Meadows and Wang last year found a contract manufacturer in China and started assembling some TVs there. Since January, all of the company’s assembly work has been done in China, and Meadows said he is also looking to move some work to Mexico.
The North American Free Trade Agreement allows TV components to be shipped from Asia duty free to Mexico and then for the assembled TVs to be imported duty free to the states. That’s been a big draw for electronics companies, which now assemble up to half of all U.S. TVs in Mexico, said Dubravac of the Consumer Electronics Association.
“Being tariff free, it’s huge, especially given the type of margin these products have,” he said.
For now, Target remains the only customer that wants U.S.-assembled TVs. Meadows said his company plans to hire back some workers at its City of Industry site to assemble an estimated 2,000 per month for that account.
“The ‘Made in U.S.A.’ got us the placement, but not the extra price,” he said. “We will lose money on those.”
Meadows said that he’s hoping the Sigmac brand will gain popularity and eventually command higher prices that might justify U.S. assembly long term. He added that the company would benefit if the federal government decides to offer hiring tax credits for domestic manufacturers.
Meanwhile, the company continues to pick up orders. For example, Costco, which previously took 7,000 sets, took an additional 2,300 last month. It is selling the 42-inch units for $399.99 and asked the manufacturer to bid on 10,000 more.
Southern Products will need more such orders. In its most recent public filing, it reported having just $51,705 in cash and $360,000 in debt as of Nov. 30.
Meadows said the company is seeking more financing but investors don’t seem perturbed. After the company issued its first press releases about its products this spring, shares rose from $1.10 on March 16 to close at $2.75 on May 2. The stock is traded on the over-the-counter Bulletin Board.
That gave the tiny company a market cap of $61 million and valued the shares of Meadows and Wang, who have a combined 55 percent stake in the company, at $33.5 million.
