The Rise and Fall of Heathkit – Part 4: The Demise of Heathkit

Chas Gilmore joined the Heath Company in 1966 as a design engineer in the company’s Scientific Instruments group. By 1976, he was director of engineering for Heath’s technical products, which included amateur radio, instrumentation, marine, automotive, and weather products. This article, Part 4 of a series based on an interview with Gilmore, discusses the Heath Company’s changes after its acquisition by Zenith and then subsequently by France’s Groupe Bull. The article begins with Gilmore’s first departure from Heath in 1977 and then continues with his return to Heath in the early 1980s. Gilmore discusses the factors that drove the demise of Heathkits in 1992 and the businesses he ran after his second departure from Heath in 1993.

Chas Gilmore: In 1977, the VP that had been running the instrumentation part of Heath for a year and a half to two years moved to EMR Telemetry [owned by Schlumberger, like Heath Company] and his Vice President of engineering got a promotion to another group. Then he called me up and said, “I’d like you down here for an interview.”

By then, we were knee deep in introducing the Heathkit computer line: the H8 and all its family. And there are a lot of interesting stories around that one. But we had introduced it, and he called me up and said, “Would you be interested in being the head of engineering here?” EMR had a 150-person engineering department. He said, “We’re gonna take that department to about 350 people, fast. Can you do it?”

I said, “Yeah, I’ll come down and have a chat with you.” And because EMR Telemetry was located in Sarasota, Florida, I said, “Okay, that sounds interesting. By the way, my wife, I want her to come along.”

“Oh,” he said, “No, this is gonna take forever. You don’t need to bring her.” I said that I’d like to bring her. So, we went down on a Thursday, I guess. Had the interview on Friday. Spent the weekend down there getting shown around. Came back to Heath. Dove into things. The following Friday, they said, “You got the job. We want you down here Monday.” At that point in time, I said to myself, “Man, am I glad that they brought Polly along, because there wasn’t a prayer we were moving from Saint Joe, Michigan to Sarasota, Florida, without her even seeing it.”

Steve Leibson: Right.

Chas Gilmore: And Schlumberger was a little bit in the mode of saying, “Just tell her she’s coming.”

Steve Leibson: Oil-field mentality.

Chas Gilmore: And French mentality

So, with that I wound up in Sarasota as the head of engineering for EMR Telemetry. That was late 1977.

About 1981, maybe 1982, I split with them. They brought in a new general manager, and he and I did not get along. Later I left EMR and I got the idea, “Let’s put together a real time software company.” And that’s what we did for the next three, four, or five years.

Then, I got a call. “Would you like to come back to Heath?” That first time, the question was, “Would you like to come back as VP of engineering?” And I thought, “No. I’ve got a business. We’re going pretty well.” Then Heath came back and said, “Well, we’ll make it VP of all product development engineering, marketing, and sales. The works.” I said, “Okay.” I sold my company, and that’s when I went back to Heath.

By then Heath had been acquired by Zenith and they were up to their necks in trying to get computers cranked out.

Steve Leibson: Right.

Chas Gilmore: And…

Steve Leibson: There’s quite a disconnect between Zenith computers and the Heathkit computers, though.

Chas Gilmore: Well, yeah. Zenith’s objective was making fabricated computers, right?

Steve Leibson: PCs basically.

Chas Gilmore: Exactly, and at Heathkit, we had done, of course, the H8, and the H11, and the H18, but they were not PC compatible. And Zenith Data Systems really cranked into the compatibles. And by the time I got back there in ’83, computer sales were up to about $285 million (and they were all PC compatibles), if I remember, and the first year…

Chas Gilmore: Oh, good! So! I left shortly after all this computer stuff rolled out.

Steve Leibson: And then you came back in ‘83, ‘84.

Chas Gilmore: ‘83, yeah.

Steve Leibson: And what was the state at that point? Computers were dominant. The Heath part of the computer business was nearly $30 million.

Chas Gilmore: Yes. What had been Heath Computer Systems, the Heath name for the assembled – i.e. non-kit computers – w as changed to Zenith Data Systems. And it was about $285 million a year at that point and growing like a weed with a very substantial engineering department.

And as an interesting side note – at that point in time, Zenith was being run by a guy by the name of Jerry Pearlman. He had worked for a fellow by the name of McNamara in the automotive industry. Jerry was a financial wizard.

In 1978 or maybe 1980, when I was still at EMR at the time, Heath had, for I think the 13th or 14th time, a union vote. And that time, the union won. And then the story that I got, I wasn’t there at the time, but I knew a lot of people there and I think I got the story fairly clearly, was that at that point, within a few days, somebody, one very high-powered VP In Schlumberger, called up Dave Nurse and said, “There’s a fellow by the name of Jerry Pearlman at Zenith coming over to talk to you. We’re selling the company to him. We do not have unions in Schlumberger. End of story.”

Pearlman was interested because he was smart enough to see that this personal computer stuff was really going to go places. He definitely saw that. He was having trouble with the TV business. It was bleeding, and it was close to a billion-dollar business, but bleeding like a stuck pig. Really rough. The difficulty was that – this is a side note – even when we got the computer line up to about a billion [dollars annually], it was also bleeding. When somebody finally started measuring it, because for a while the answer was, this was Pearlman’s baby. Don’t bother measuring it. Just put the money in that it keeps being called for. We’re building this business.

And, not unlike a lot of personal computer businesses, we had a lot of financial troubles. We grew too fast, and managing companies that are growing that rapidly, it was a very tough deal.

Steve Leibson: Well, and you had 200 companies competing for 2% of the market.

Chas Gilmore: Oh, yeah, yeah. All kinds of innovations and people working. Well, then, we didn’t have a lot of people writing application software at the time. There were a lot of headaches.

When I came back to take over the Heath products, all of the Heath product development stuff, the other assignment that I got was to sit on the Zenith Data Systems Product Development Committee, because originally it was conceived because Heath was making kits out of the Zenith Systems computers, which was a kind of a “we’re kit-izing” a built, an assembled product. They certainly were not designed as kits.

Steve Leibson: Which is the opposite of the instruments.

Chas Gilmore: Oh, yes, absolutely. So, I did get quite a good perspective on the computer side of the business from sitting in that committee and becoming pretty good friends with, especially, the guy that was heading up Zenith Data Systems.

Backing up a little bit – somewhere in the mid-seventies, or maybe the earlier seventies, we introduced something like 300 new products in a year. By the time I got back there in ’84, we were down to like 50 because our engineering resources were being drained heavily, just for computers.

But we weren’t getting any of the computers out of it, you know, we – well, when the computer design was all done, then it was, “Okay. See if you can make a kit out of this,” and a lot of the time, it was nothing more than just assemble a frame and stick some pre-built boards in.

Steve Leibson: Because that’s what you do to design for manufacturing.

Chas Gilmore: Oh, absolutely. Yeah. I mean, we had gone to, you know, full pick-and-place lines and automated testing. We have…

Steve Leibson: That’s what I believe is one of the major things that happened to the kit business: as soon as we got into surface mount, you could no longer manually assemble these things.

Chas Gilmore: Well, I beg to differ with you. There are quite a number of good kits on the market using surface mount components. In fact, I just built one about a year ago. A very, very nice, very low noise, 2-meter preamplifier. Now, the guy that designed it, an Australian fellow, was very nice, and he used 1206 parts. And I’ve worked it down to about a 603, and that’s the end of it. No way the typical electronic hobbyist can do a 402, or even a 102. You have to be careful. If you sneeze, you’ve got parts everywhere. And they’re not marked. And yeah, there were terrible problems for the traditional Heathkit business. One significant problem was the pervasiveness of electronic products for the consumer.

You know, in 1968, when somebody was visiting a Heath customer, and he – the market for electronic kits was very nearly 100% male – had a party at his house, and he was able to point at his television and say, “I built that.” Whoa! Are you something special! And you’ve got a color TV. Well, by the time you got to even 1978, everybody had a color TV, and – I can’t quite remember what the timing was – maybe they had a VCR. So, a lot of the pizazz went out of being a kit builder.

As one of my bosses once said, “Yeah, you know the thrill of having something that you built and then turn it on, and it worked. Wow! That was something.” And we had moved to where the answer was, you go to Kmart, and you get ticked off if you buy something and it doesn’t have batteries in it so that you can play it on the way home. You know, you needed that immediacy.

Then, when personal computers came around, the software became a very intriguing element for a lot of the people who would have normally gone over to building kit hardware. That really reduced the number of people who got joy from building a product. Even well into the eighties. I mean, we were still doing kits with a lot of through-hole components, etc. But one of the things that did go away was the ability to save a lot of money by buying the product. You know, back again during the heyday of the kits, the sixties, early seventies, we could pretty safely say you could save 25% or 30% on an equivalent product.

Steve Leibson: Right, that goes all the way back to the original oscilloscope.

Chas Gilmore: Sure $40.

Steve Leibson: Oscilloscope.

Chas Gilmore: Well, and up until the late sixties or so, your typical manufactured electronic product had just about an equal amount of parts cost and labor cost. By the time you got to the end of the 1970s, only 4% or 5% of the total cost to manufacture was in labor, and the rest of it was parts. Well, bang! You just took all the savings out of building a kit. So, from the labor-saving standpoint, only a few products like linear amplifiers for the ham line (which are very labor intensive) really offered savings in kit form.

Steve Leibson: Right.

Chas Gilmore: Not only that, but we had some extra cost which was that you had to put all these parts in the individual bags, etc. Now towards the end, what we did, for example, is that we would use tape machines and put the leaded components on tapes as though they were going into an automated insertion. But the resistors, caps, and all, were there in the order in which you put them into the board. So, among other things, you didn’t have to read the color codes, which were going to hell in a handbasket, and the markings on the components, like capacitors, sometimes they were blurry because, hey, nobody needed them for assembly anymore. So there were a lot of factors that led to the demise of building kits. And yes, the automation part of electronics product assembly was part of the problem. Big time. Because again, you know, if you want to build a big hi-fi receiver, all of a sudden, the kit hi-fi was not an economical buy anymore. You didn’t go to these things for economics.

Now, in the ham radio world, you had a lot of people who were still awfully interested in building their own transmitter or their own receiver.

Steve Leibson: Right, that goes beyond economics, though.

Chas Gilmore: Yes, it does very definitely. Whereas you had a lot less of that with the audio. Yes, there are certainly audiophiles who wanted to say, “I handcrafted this amplifier.” But a lot of the audiophiles, they turned to Heath, “A,” because they were damn good products, and “B,” because they could save a lot of money with respect to the other stuff that was on the market. And that latter element had disappeared.

I think had a lot of those other factors not come into play, Heath could have continued with kits, certainly with the larger surface mount devices. But as I said, you can’t compete with the components in an iPhone. It just ain’t gonna happen. In some of the niche markets you could compete, but you’re not going to do the 30% savings anymore. It’s more of the pride of “I built my own unit.” The other element for Heath was that the kit business was never really suited to be part of a large corporation.

Steve Leibson: And the educational aspect.

Chas Gilmore: Yeah, the educational aspect and the pride of authorship if you will.

So, during the eighties, well, we started out OK, but when I got there, it was one of those, after you take the job and you begin looking around for about 6 months, you say, “Whoa, this thing’s in a lot bigger hole than I ever thought.”

Steve Leibson: Right.

Chas Gilmore: From a financial standpoint. Because there were some funny financials going on, and a tremendous amount of the talent had been grabbed and moved elsewhere, and, yes, the electronics market had changed as well.

So, we ventured off. For example, one of the groups that got started when I was there developed passive infrared lighting and wireless doorbells. We built that up into a $75 million business. But that was all assembled. It’s all sold through big box stores, and we were assembling in China. So, we had that, and the Heathkit Educational Systems, which were selling both to individuals who just wanted to learn electronics and very heavily into the tech schools. That was a fairly reasonable business. Nothing wild, but it was a reasonable business, and it had a positive bottom line. And that business carried on well beyond after I left Heath in the mid-nineties, I guess. Mid-nineties, maybe even late nineties.

But what happened was the electronic trade school business was going downhill, because repair became module replacement. You don’t need to know Ohm’s law. You don’t need to understand how flip-flops work, or what an op amp is, or anything of that nature. So that business declined.

Then the other transition that happened was in 1988, I believe. Groupe Bull, which was the French government-owned computer business, acquired Zenith Data Systems. At that stage of the game, Zenith was in financial deep doo doo, because they had both the computer business and the TV business, both losing money. And Pearlman tried like hell to sell the TV business. Nobody wanted to buy it, but Groupe Bull came along and said, we’re going to get into the personal computer business, and we’ll buy your little business, which at that point was a billion dollars.

And one of the nice things about Groupe Bull was the fact that they were at the time about 2 billion dollars, I think, and losing 200 million a year. However, it’s owned by the Republic of France, so once a year, they’d go back to the Republic of France and say, “Hmm! We have a $200 million deficit on our balance sheet,” and the French government would say, “Okay, here’s $200 million. Now, you’re even. Keep going,” because they wanted the country to have their own businesses.

Steve Leibson: Right.

Chas Gilmore: How did they wind up with Heath Company? Well, that was an accident. When they bought Zenith Data Systems, Heath went along with it, probably mostly because we were co-located in the same facilities. The French didn’t understand this business one little bit. The French don’t get their hands dirty, doing things like building kits.

Steve Leibson: I see.

Chas Gilmore: It’s interesting. Both the French and the Germans exhibit that characteristic (at least for the level of consumers who can afford those products.) We did have, through the late sixties and well into the seventies, a plant in England making kits and Europeanizing them, including, you know, translating manuals into French, German, Spanish, and Italian, etc.

Anyway, Let’s see, we’ve…

Steve Leibson: Well, I think we’ve reached the end of your career at Heath, and it’s time for you to start some more companies.

Chas Gilmore: Yeah. Well, I left Heath in 1993 or 1994. Came here in January of ’94, and that was a turnaround job. There was a…

Steve Leibson: Where’s here?

Chas Gilmore: Akron, Ohio.

Steve Leibson: Okay.

Chas Gilmore: And there was a company here. Just a quick bit of background on it. This company that’s making industrial X-ray inspection equipment and machine vision apparatus mainly aimed at the container industry. It was part of a group of seven companies that had been part of Ball, the glass jar manufacturing company.

Steve Leibson: Right, and also Ball Aerospace.

Chas Gilmore: Also Ball Aerospace, indeed! And Ball decided that there was a collection of these companies that had been acquired kind of in the… “Well, we’re dabbling in this. So let’s buy this company.” So, for example, they bought a company that made zinc blanks for pennies. I’m trying to think what the reason was that they bought that company, but there was something to do with the jars, and then you use zinc seals on things. There was a company that rolled sheet metal and printed it. And they made up this group of seven companies. About 1994 or so, Ball said, “Now we’re spinning them off.”

This was when business got into the “we have to focus on core” mode. So, once they got it spun off, and somebody took a look at this operation in Akron, which was in the industrial X-ray and machine vision business, and said, “It doesn’t look like it’s making money.” So let’s let go of the guy that’s running the company.” It was the guy that had started it many years before, and it had been acquired. It was four acquisitions that were merged together, and they retired him, and I came in to do a turnaround.

We got it turned around. The company name was Altrista, which owned these seven companies. And then they looked at that and Altrista said, “Wait a minute, this company LumenX, up in Akron, that’s the only capital equipment company we’ve got. Everybody else is making product that goes into some other company’s product.” There were a couple of plastic molding injection companies, etc. So, they decided that the right thing to do was to sell it off, and, if they had to, they’d sell it in pieces. The logical split was the X-ray and the machine vision parts.

Somewhere along the line there. I started working with some folks at Phillips in Hamburg, Germany, who also had the Phillips industrial X-ray business, and Phillips didn’t like that. They were into medical X-ray. So, Altrista sold off the machine vision part, which I thought was a mistake, because it was definitely up and coming, and there was a lot more needed, and we were beginning to incorporate it in parts of the X-ray for inspecting tires, because one of the X-ray things – Akron, Ohio – tires. Oh, yeah, we were doing that.

So, we got together with some guys at Phillips and brought in somebody else from a company in Denmark called Andrex, and we pulled that all together, found venture capital, and formed a company called XYLON, named by the German group. They were the bigger of the group.

Anyway, I then spent three years, I guess, with that group heading up the US operations. They kept insisting that, you know, we can build this stuff in Germany cheaper than you can make it in the States. And I kept saying, “You’re crazy, you know. I’ve got a burdened manufacturing rate of $37 an hour, and you’ve got a burdened rate of $75.”

Steve Leibson: That explains why BMWs are so much cheaper than Fords.

Chas Gilmore: Yes. So finally, because the venture cap firm was German, that was one where I said, “No, guys, I’m not in. Bye. We’re splitting the company. I’ll take my buyout option and bid you farewell.”

I started doing a small amount of private consulting at that point. And then, not long after, a guy that had worked with me as Vice President of sales and marketing at LumenX, and another guy who was Director of Customer Service – interesting character, who was a BSE and a JD – the three of us bought a little company up in Cleveland – PPM – which was the one that that had been started by a Case Western graduate back in 1960. So, that was how I got into that. And then, in 2008, we had a bit of a tragedy. The younger of the three of us, the EE lawyer, who was kind of running the manufacturing side of the business, died.

I really stuck to the strategic marketing and technology, and the third guy really did sales. We were doing quite well. The company had been losing money. We got it turned around. We were going, and the young fella suddenly died in his fifties. Cliff and I, as the remaining two partners said, “Heck, that was our retirement plan. Dale was going to take it. So, we started shopping around for an alternative, and the alternative that worked out best was that we licensed our products to two other companies. They paid us in sales royalties, which meant they didn’t have to have a big upfront cash flow, and we didn’t get massive taxes, as we didn’t get a massive bundle of cash right up front.

Steve Leibson: Right.

Chas Gilmore: These were five- and ten-year agreements, and we had consulting along with it, etc. And finally, we started winding things down in 2010, and we formally closed the company in 2020. Since then, I’ve been doing some consulting. I’m busier than hell.

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