High-Tech Firms That Defy the Business Cycles : Technology: As the industry matures, cutting-edge companies are dodging market downturns with large research budgets, high quality, nimble marketing tactics and flexible work forces.

By OSWALD JOHNSTON

March 25, 1990 12 AM PT

TIMES STAFF WRITER

WILMINGTON, Mass. — The computer industry has been slumping for a year now. But Gary Cheek, engineering manager at a state-of-the-art semiconductor plant here, has a dream: a whole new manufacturing plant to match two already in operation. The cost? A cool $100 million.

It’s not as unrealistic as it sounds, because computer companies are not the firm’s only market. Cheek’s company, Analog Devices Inc., makes semiconductors that convert real-world information into digital signals that can be read not only by computers but also by other electronic equipment such as cellular telephones and video cameras.

Analog has already ordered two new high-resolution machines that make semiconductors by etching elaborate circuits on silicon wafers. At several million dollars each, these etching machines should be enough, Cheek says, to expand capacity “for nine months or a year, when we’ll have to expand again.”

Although Massachusetts has fallen into a mild recession after nearly a decade of substantial growth, Analog and other cutting-edge companies offer almost textbook examples of how high-tech manufacturers have been able to dodge the punches of the business cycle.

These firms, heavily weighted toward investment in research and development and in state-of-the-art manufacturing techniques, depend far less than traditional manufacturing industries on a labor pool that can be expanded in flush times and laid off in downturns.

“To compare a company like ours to the auto industry is completely a matter of apples and oranges,” said Analog Chairman Ray Stata. “In autos, the value added is almost entirely in the manufacturing process itself. Whereas in any high-technology industry, it’s much more a matter of innovation, product development and quality.”

Companies that spend heavily for research and development, Stata says, can quickly redirect their marketing strategy and even create new markets for new products. “But if you have a small R&D; commitment,” he said, “you’re pretty much stuck in the business you’re in.”

Boston’s high-tech Route 128 corridor boasts a passel of firms that are doing what Analog is doing.

Up the interstate a few miles, Genetics Institute Inc. is an even younger company in an even newer industry: biotechnology. It is on the verge of producing its first commercial biotechnology pharmaceutical products in a new plant at Andover.

Genetics Institute, barely a decade old, is still primarily a development company whose entire reason for being has been to invent, design and develop completely new products. Only now is the company spreading out from its birthplace, a laboratory in Cambridge where two Harvard biochemists founded the enterprise in 1980, to the production facility in Andover.

For the first time, Genetics Institute is on the verge of turning a real profit, not just a hypothetical profit on a balance sheet. Like Analog, it will thrive by innovating and creating new markets, or it will disappear.

Some 25 miles to the south, in a new industrial zone rising slowly from the urban wasteland near Boston’s South Station, Teradyne Inc., a 30-year-old manufacturer of electronic testing equipment, is likewise developing new products to create new markets.

Although it is firmly in middle age in the fast-growing universe of high-technology industries, Teradyne is seeking new customers abroad and pressing ahead to develop semiconductor testing machinery that other growing high-tech industries can use.

These companies are proving that they can cope and even flourish despite reversals in the computer industry that has provided much of their traditional customer base.

Computer companies such as Digital Equipment, now suffering sharply reduced profits, and Wang Laboratories, which has ordered layoffs resembling those of the steel and auto industries in the 1970s and early 1980s, have taken on many of the characteristics of fully developed, mature industries.

“Growth in the computer industry is comparatively slowing after years of accelerated growth, and it’s causing some pain in the industry,” said Jay Whittaker, chief economist at Digital. “After all, there used to be 20 auto companies in this country once upon a time. You can expect there will be winners and losers in the computer industry as well.”

In contrast, the younger and more supple companies in Massachusetts’ high-tech belt have not yet reached the point where success is a zero-sum game.

“The general slowdown in some high-technology industries, in computers, has not been relevant to biotechnology,” said Gabriel Schmergel, chief executive of Genetics Institute. “It has had no impact whatsoever. We are a technology- and innovation-driven business. And innovation creates its own markets.”

Because of long development lead times and the lengthy process of winning federal Food and Drug Administration approval for new pharmaceutical products, Genetics Institute has yet to come to market with a product. But 1990 will be the year. A lead-off innovation is a genetically produced version of Factor VIII, the protein whose absence in the body is virtually the sole cause of the crippling disease hemophilia.

Until Genetics Institute’s development of a synthetic Factor VIII that is not derived from whole-blood plasma, even the most rigorous screening of existing products ran a risk of carrying unwanted extra proteins and, far more dangerous, infectious and killer viruses such as hepatitis and AIDS.

Even if serum derived from whole blood is 98% pure--about the best obtainable today, says Genetics Institute Senior Vice President Tuan Ha-Ngoc--a hemophiliac who must take steady Factor VIII treatments runs a high risk of ultimately incurring a deadly infection. “Some 80% of hemophiliacs now test positive for HIV, and the treatment is never used on children because the risk is so high,” Ha-Ngoc said.

Synthetic Factor VIII, he says, can be made in potentially unlimited amounts. “And it would be 100% free not only of hepatitis and HIV virus,” which causes AIDS, “but of other viruses we don’t even know about yet.”

“When we started, we had five full-time employees,” Schmergel said. “Now we have more than 500, and we have not had in our history any layoffs.”

Big companies have so much invested in their products that they cannot abandon them even when other, newer products threaten to make them obsolete, Schmergel said. “It is not so easy for you to say, ‘To hell with that,’ and redirect your resources to a new product,” he said.

“For a small company like ours,” he added, “we don’t have the cash flow that a big company can command. But we also don’t have the disadvantage of being tied to defensive positions.”

In 10 years, Schmergel said, “we’ll likely be much larger, in a more mature phase. And thus we’ll be more vulnerable to business cycles.”

Stata, the chairman of Analog Devices, recognizes that the slumping computer industry poses a threat to sales of his company’s semiconductors. Like Schmergel, he sees innovation and flexibility as the key strategies for avoiding the pitfalls that larger companies cannot avoid.

“We try to maintain a consistent commitment to investment, especially in research and development,” Stata said. “We are always trying to diversify into new market sectors. We are able to do that because we are a high value-added industry.”

At the same time, Analog managers are pressed hard to step up productivity with the resources they have. Cheek, the engineering manager at the Wilmington plant, has recently merged the production staffs of the two semiconductor fabricating units under his command, one to make analog-to-digital converters and the other to make ultra-high-speed microprocessors.

“Now a single group of operators, maintenance technicians and engineers can run both module fabs,” Cheek explained (“fab” is industry slang for a fabrication plant or machine). “We can shift people from one to the other, according to need.” In all, this involves 35 engineers, 50 maintenance technicians and 120 operators.

“It’s the same number as before,” Cheek said, “but because we get higher productivity, there is no need to hire any more people over the next 12 months.”

Teradyne, the manufacturer of electronic testing equipment, resembles computer companies in some ways: It makes an intricate piece of hardware that incorporates semiconductors and microprocessors and requires elaborate software to operate.

But it also differs in some important ways. It must be perpetually positioned at the cutting edge of the high-value technology employed by the semiconductor manufacturers that regularly use Teradyne equipment to test their own products. Indeed, Teradyne and Analog are longstanding suppliers of one another.

With the slowdown in computers, “the company is diversifying from exclusively semiconductor testing equipment toward more telecommunications testing equipment,” said Frederick Van Veen, a Teradyne vice president. “We’re also moving into testing for consumer electronics equipment and mixed-signal equipment.”

Teradyne, which is pushing hard for customers overseas, sells nearly half its product in Europe and Japan. “We are the leading supplier of test equipment to Japanese consumer electronic companies such as Sony for VCRs and camcorders,” Van Veen said. That market segment has also become a prime target of Analog, which makes many of the semiconductors that convert visual or audio signals into digital messages that can be encoded on compact discs, digital recorders and high-definition television.

The symbiotic relationship between Analog and Teradyne, as mutual suppliers and customers, reflects the strategies adopted by the many high-technology companies that are trying to stay a step ahead of the computer industry’s economic downturn. They are pushing for ever-improving quality and efficiency.

“As competitive pressures get more severe, we have had to become a higher-performance company,” said Analog’s Stata. “And when you do it right, it cuts costs because you get more efficiency. All this comes under the banner of quality control, higher performance. Companies not committed to this are in danger of fading out of the picture.”