York stands for the fun of high technology, commercial as well as technological - and the risks. Geoffrey Foster reports.
High-tech is different. The excitement of operating at or near the extremities of knowledge, of devising novel applications, of breaking new ground, of being first, is - at least according to those who have been there and done it - unmatched by any other experience that the working world can offer. And it is not just the design engineers and laboratory researchers who have the fun. In more mundane sectors of industry, the managers and marketing men like to define their niches and count their USPs. Only in high tech (and then only occasionally) does it happen that there really are no niches: that the market stretches away into the mist, like an unknown coast with only a few peaks clearly visible. No one can be sure what opportunities may appear as you get closer.
Or what perils. In Britain, unfortunately, it is usually the dangers that people are most aware of. Whether because of the repeated failings of economic management or the conservatism of industrial buyers or the timorousness of providers of capital (choose your own chicken and egg), comparatively few high-tech ventures have been able to progress as far as adolescence unless they were originally conceived and nurtured within a major high-tech company. Certainly it is difficult to imagine any British technological David powering its way to world status, and opening up an immense new market in the process, in the style of Apple Computer.
Britain's few independent high-tech stars - although their success may have to be qualified - tend to have two features in common. Businesses such as Oxford Instruments (which led the way in NMR imaging) and Celltech (the current hope in biotechnology) were built upon technology transfer from academia to industry, and right from the start they identified the world as their oyster.
York Ltd, of Chandler's Ford near Southampton, belongs in the same category. Not as well known as others outside its own industry, it is nevertheless a world leader in a high-tech field, with 50% or more of the market for some types of product. But what makes York so interesting right now is that it is staring at a number of emerging markets which could have enormous consequences for its future. Because they do not yet exist, their size is literally immeasurable, but they will undoubtedly be huge. One serious problem, when it comes to cultivating these markets, is that York is a small private company employing 110 people and turning over around £7 million. In other words, a company of decidedly slender means.
York's business is fibre optics. The telecommunications industry's conversion to optical fibre is generally reckoned to date from 1966 and a theoretical paper prepared by engineers at STC. This gave rise to a flurry of research on both sides of the Atlantic, but it was not until about 1980 that the first big installation contract was awarded in the UK, and fibre optic cable went into large-scale production. York came into being in that year.
The company was not set up in order to manufacture fibre, though. What York is best known for are quality control and other instruments that are used by the big cable and glass companies which actually produce the raw material and wind it into cable. The same kit is also used by their customers in the telecommunications field. The company's original product was an instrument for analysing "preforms", the glass rods from which the optical fibre is drawn in a continuous thread, and whose characteristics determine the fibre's optical quality. The device uses a light source in a way that makes crude, destructive methods of testing redundant. The original lash-up from which it was derived had only lately been shown to work by the fibre optic research group at Southampton University, headed by Professor Alex Gambling.
It was an earlier - and lucky - meeting at an exhibition in Brighton of a senior member of the same research team, Dr Dave Payne, and a sharp-eyed entrepreneur, Ed Kluth, which had led to the company's formation. Payne showed Kluth work which was then being done at Southampton, and the latter saw at once, he says, that "this could be ideal for a new kind of business". Kluth, who is a German-born Canadian, had spent the previous eight years running a small British electronic instrument company which had been bought by an American group, and he was on the lookout for fresh opportunities. He was also well aware of the potential of fibre optics.
Kluth alerted a fellow director of Brookdeal Electronics, John Dawnay, 11th Viscount Downe, and between them they found nearly a dozen individuals who were prepared to join in subscribing about £175,000 towards a greenfield venture. The founder-members included Gambling and Payne from Southampton University; also a couple of Americans who were known to Kluth and Downe as directors of a former American competitor of Brookdeal. One of them, then a patent attorney in Princeton, NJ, provided York with its first home in the United States. Lord Downe recalls that "We felt it essential, from the very beginning, to have an American address" - both to provide access to the market and to convey high-tech credibility. The National Research Development Corporation (now British Technology Group) put up some £50,000, which lifted the total to £225,000.
With Kluth as managing director and Downe as non-executive chairman, the company got down to work in a small factory, which once made sausages, at Winchester. (The name York was a mere caprice: it was chosen following a fibre optics conference in that city, but mainly because Lord Downe, whose family seat is Wykeham Abbey near Scarborough, is a loyal Yorkshireman.) Amazingly, for a high-tech start-up, the venture was an almost instant success. There was no competition for the preform analyser, which sold all round the world, including to the Japanese. It was largely thanks to this product that within four years the company was making a gross profit of just under £1 million - and nearly £300,000 at the pre-tax level. Sadly, that level of profitability has not been seen since.
The preform analyser is still in production, in updated versions, and still virtually without a rival. "There's nothing like having 100% of the market for a product to get things moving," comments a senior manager. The magnificent beginning enabled York to start manufacturing in the US. It also allowed the company to bring out, in fairly short order, other instruments combining fibre optics, electronics and highly sophisticated software. In the early days the products were developed in parallel on both sides of the Atlantic; later, since this led to inefficiencies, each factory became fully responsible for its own part of the product range which was always offered worldwide. Throughout the company's history 85% or more of sales revenue has been generated outside the UK. "We never had anyone whose job title was 'export' anything," boasts Downe.
Wherever they were made and sold, York instruments were the best - certainly in the eyes of their maker. Engineer Keith Johnson, who runs the instrumentation side these days, is telling no more than the simple truth when he states: "York always prided itself on being the technological leader in the field." In volume terms output is surprisingly slight. But small-scale batch production is all that is needed: even the preform analyser only ever sold in tens per annum. The company deliberately avoided competing with manufacturers of "the kind of thing you take down manholes". Laboratory equipment, by Johnson's reckoning, accounts for about 10% of the fibre optics test equipment market worldwide. "We sell £6 million worth of instruments in that area and we have more than 50% of the market."
Probably the nearest thing to a volume product in the instrumentation catalogue is a neat little electronic device costing a couple of thousand US dollars. It is designed to cut optical fibres much as scissors cut human hair - which has a similar thickness. When two fibres have to be joined together, it is important that each should be sliced at a right angle - or as nearly as possible - so that the severed ends can then be made to abut precisely. York's electronic cleaver is accurate to less than half of one degree. The company has sold several thousand of this model. "It's the most expensive in the world," claims Johnson. "It's also the best."
At the other end of the scale - of both size and complexity - is a large, bench-like instrument which costs up to £225,000 in a fully computerised configuration. Called a "fiber characterisation system" (York has universally adopted the US spelling of fibre), it is designed to measure all the important parameters of optical fibre by conducting a rapid sequence of tests on a single machine. "This was an extremely ambitious project," recalls Johnson, who joined the company as head of research and development while it still consisted of approximately 20 eager engineers at Winchester. "The technology was only just available. It took a huge amount of engineering effort, and caused us a number of problems."
In the end, after considerable delay, the problems were overcome. The FCm1000, as the all-purpose measuring machine is known, "ultimately became a successful product". It also won a Queen's Award for Technology in 1986. But it cost the company dearly. And while Johnson and his team were still struggling to make it work, York moved from Winchester into an empty shell on the industrial estate at Chandler's Ford, outside Southampton. (Its new home, in once fashionable brown cladding, has a suitably high-tech appearance which is in some ways slightly misleading: manufacturing, at least, is highly conventional, and consists of assembling circuit-boards and other clever bits by hand, then fitting them into cabinets supplied by local metal bashers.) In the 15 months to September 1986 the combined effects of product development and dislocation were to push the company to a £780,000 loss pre-tax, on a turnover which was well down on the £4 million-plus of the previous 12 months.
This fall from grace no doubt sent tremors through the boardrooms of Barings, Lazards and a couple more institutional backers which had only shortly before paid approaching £500,000 for a large minority stake in York. The new shareholders - and old - were in for a bumpy ride. A return to modest profits in 1987 was followed by another (less serious) loss in 1988 and a goodish year in 1989. The company has been slow to publish figures for 1989/90 but they will once again be disappointing, for sales to the Eastern bloc dried up abruptly last year when impoverished governments temporarily found more immediate things to worry about than investment in telecommunications.
Occasional loans from directors, and periodic invitations to subscribe, have helped bridge the various peaks and troughs. Since York does not pay a dividend on its ordinary shares, it might be thought an investment of somewhat limited appeal. On the other hand, there are those among its present members who clearly believe that it is rather like a small E and P oil company which is sitting on enormous proven reserves - in a couple of quite separate fields.
One technology which York has been exploring over many years involves the application of fibre optics to remote sensors. This may not sound very interesting, but the implications are immense. It means that online monitoring of underground cables, undersea pipelines, hazardous environments in the middle of chemical works and inaccessible places of every kind, can be simply and cheaply provided using optical fibre. A thread of optical fibre will detect hot spots in electrical transformers, and so on. What is required is that the fibre should be built into the product, and connected to a "black box" provided by York. Optical switching devices, also made by York, would permit monitoring of networks, or of several sites simultaneously.
The company spent over £2 million - very similar to the sum that it poured into the FCm1000 - developing the first black box, which it calls a distributed temperature sensor (or DTS). In the past it generally had a fairly clear idea of what its customers in the optical fibre industry would buy, but in this case it was venturing into the unknown. Johnson admits that it was "gambling that the world would take up a new technology ... For a fibre optics company like us it could be make or break." A prototype was built and shown around the world. Potential customers were interested but critical: they wanted more sensing points. "The effect on design was mind-boggling," says Johnson. "We almost had to start again ... But we've done it."
Now York is looking for partners in the main areas of application, to iron out the details and help spread the load. It already has a helpful Japanese partner, who paid a little less than half the cost of the project in return for rights in Japan. The odds seem to be shortening that the world will adopt York's technology. "But it remains to be seen if we can continue to dominate it."
Partnership is also the name of the game in the other corner of technology that is causing excitement just now. As far back as 1982 York obtained rights to certain special fibres developed at Southampton University. Special fibres "doped" with rare earths such as erbium have applications in sensors and lasers and amplifiers. Remarkably, it is possible to intensify a light signal simply by passing it through a doped fibre, which has obvious relevance to undersea cables which always need repeaters at regular intervals. Yet another type of fibre makes a very handy gyroscope: there are no spinning or other moving parts, just a coil of light.
York had (and has) hopes of selling fibre gyroscopes to the military, for sighting tank-guns and telling missiles which way up they are. Despite the worldwide military rundown, it might make sense to some military buyers that missiles slowly rotting in their silos should have their lives extended. However, the first openings for fibre gyroscopes have already appeared in civil aviation. By the end of the century, York believes, a much bigger market will be provided by stabilisation systems in motor vehicles. Developing this potential will be "a relationship marketing exercise", according to one manager. "We know a lot about specialist fibres and a little about gyroscopes." It seems that everything could depend on getting into bed with the right people.
In recent months York has undergone what might be a highly significant reorganisation. The instrumentation division headed by Johnson (and incorporated as York Technology, the original name of the company founded by Downe, Kluth and co) has up to now been the backbone of the venture. Whether it was in profit or loss, its cash flow was what made expenditure on research and development possible. (York "never spends less than 20% of turnover" on R and D, a level to shame many another research-based enterprise.) Now, remarkably, instrumentation has all of a sudden begun to look like a stable, almost mature, business.
Sensors and fibres are certainly scheduled to grow much faster in the years ahead, and that could put severe pressure on existing resources. Johnson argues that there should be no difficulty in raising funds to build a separate factory for fibre gyroscopes, say, provided that the demand could be proved. But it would help if the organisation made clear where the boundaries lay. That, maybe, is why York Sensors and York Fibers have just been incorporated as separate subsidiaries, with their own managements (in the case of Sensors reporting direct to deputy chairman Raymond Lye) and their own facilities, sharing only a few services with York Technology.
The new set-up could also simplify a sale of any one of the little group's three component parts to some as yet unknown partner or competitor. No one inside the group is making that suggestion, at least not publicly. But sooner or later investors are going to want to get some money out. Separation might make commercial sense, too, since all three are niche operators in quite distinct market niches. All in all, it is unlikely that York, as now constituted, will ever grow beyond the small company stage. But this is Britain, after all.