Area’s High-Tech Firms Outgrow Military Origins

Many local technology companies that sprang up from decades of Cold War spending are booming now, a decade after the military slowdown, this time as makers of chips, lasers and other components that are powering the information revolution.

The region’s technology companies, once driven by the military’s needs for exotic equipment, find themselves creating the next generation Internet--a high-speed, high-reliability thoroughfare filled with video and sound.

“There’s nothing better to stimulate high-tech development than throwing a bunch of engineers out of work,” said Byron Auguste, a partner at the management consulting firm McKinsey & Co.

Companies such as Qualcomm Inc.--San Diego’s high-flying developer of chips for cell phones--Newport Beach-based Conexant Systems Inc. and Broadcom Corp. of Irvine have thrived on a buildup of computer networking and communications systems.

New companies have sprouted, creating pockets of technology like the 101 Corridor in Ventura County and the San Fernando Valley, where network equipment maker Xylan and ACT Networks Inc. sit within a few miles of chip makers Semtech Corp. and Vitesse Semiconductor Corp.

The emergence of this tech sector defies the thinking that went on after the Cold War, when the federal government rushed out a multibillion-dollar program to encourage defense conversion in Southern California and other major military production centers.

The policy failed to enable defense manufacturers to turn out toasters or hot tubs, and by the mid-1990s political support for the concept of conversion began to fade. But separately, the local defense industry began to exercise its own brand of creativity.

With the frantic development of the Internet, Southern California companies are also being bought up by larger telecommunications and networking companies scouring the country for new technology. Among the bigger deals last year was the purchase of Calabasas-based Xylan by French telecommunications equipment giant Alcatel for $2 billion. That sale was topped this year by Lucent Technologies’ proposed purchase, for nearly $3 billion, of Alhambra-based Ortel Corp., the makers of tiny semiconductor lasers used in fiber-optic networks for cable television.

Despite the surge of many local technology companies, there remain uncertainties about how the rapid convergence of the Internet, entertainment, telecommunications and e-commerce will develop, and which businesses will benefit the most.

Although the Silicon Valley remains the undisputed capital of computer networking businesses, with such powerhouses as Cisco Systems Inc. and 3Com Corp., Southern California has begun to make a name for itself as a maker of high-performance equipment that in many instances is a direct outgrowth of products created for the military.

Where the government needed high security to protect its military secrets, consumers and e-commerce companies now demand it to protect credit card numbers. Where the government required high-speed connections to handle satellite and radar communications, consumers now are clamoring for them, this time for television via the Internet and interactive Web games.

More than 30 years ago, a young UCLA professor named Leonard Kleinrock and two other scientists started a consulting firm called Linkabit to earn a little extra cash by helping the Navy develop an advanced communications system.

At the time, only the military had a real use for the research, and even that work was limited, so the scientists operated for a while in Kleinrock’s Brentwood home. “My garage was a classified facility,” Kleinrock said.

Linkabit was eventually sold, but the ideas behind the company blossomed decades later as Kleinrock’s partners, Irwin M. Jacobs and Andrew J. Viterbi, created Qualcomm.

All told, nearly 30 companies in satellite and wireless communications sprang out of Linkabit, and with Qualcomm’s success, it helped turn San Diego from a sagging military town into the mecca of wireless communications.

“The military isn’t the driver at all now, it’s the consumer markets doing it all,” said Kleinrock, still a professor of computer science at UCLA and the president of a recently founded networking company named Nomadix.

Malcolm Currie, the former chief executive of Hughes Electronics Corp., said that the boom in networking and communications stems in part from the defense cutbacks of the late 1980s, which spurred companies to look for new products and pushed entrepreneurs to strike out on their own.

Hughes, one of the area’s oldest defense electronics companies, started out making radios and radar for the military after World War II. It was among the first companies to develop military satellite systems. After defense work slowed down, the company shifted its expertise in communications to consumer products such as the DirecTV satellite television service and DirecPC, a similar service to deliver high-speed Internet access via satellites.

“In 1987 and ’88 about 90% of our business was with the government, so we invested heavily to disperse ourselves,” Currie said. “By 1994, only about 40% of our work was in military electronics.”

Rockwell International found new riches last year by spinning off what used to be a small research team focused on semiconductors for rockets and satellites.

The new company, Conexant, now makes chips for modems, computer routers, wireless phones and digital cameras, and has become one of the largest communications chip makers in the world, with sales last year of more than $1.6 billion.

The biggest boost for the region’s high-tech industry has come from new companies started by engineers and scientists who were nourished by the military for a while, but eventually realized that the bigger fortunes were to be made in commercial markets.

Ortel was started 20 years ago by Caltech professor Amnon Yariv and two students who saw the potential of developing high-speed semiconductor lasers. The company grew slowly during the 1980s when it was dependent on the military, which then was one of the few entities that used fiber-optic networks.

“By the end of the 1980s, the Cold War was starting to fade and we had to figure out how to do something new,” said Nadav Bar-Chaim, a co-founder of Ortel and now a senior vice president in charge of strategy. The idea they hit upon was making lasers for the cable television industry.

The company went into overdrive in the past year because of the cable industry’s need to provide high-speed Internet access over its lines.

Bar-Chaim said it took 20 years for the civilian world to catch up with the military’s need for high-speed communications.

In many ways, large defense contractors were poorly suited to shift to commercial projects. Suresh Nihalani, founder of the Moorpark communications equipment company Accelerated Networks Inc., said the culture among defense firms was slower-paced and there was little concern about costs, marketing and mass production.

Nihalani came to Southern California in 1980 to work for Litton Data Systems in Van Nuys, building a military communications system for the Saudi Arabian government.

Two of the most successful high-tech entrepreneurs in the region, Steve Kim, the founder of Xylan, and Marc Hamon, the founder of network test equipment maker Netcom Systems Inc., were also working at Litton, at the same time on the same project.

“The whole structure of Litton was defense-oriented,” Nihalani said. “They had no sales department, no marketing. In defense work, you don’t have to do any marketing.”

But he said the demands for high reliability and security in defense work proved to be one of the strongest assets that grew out of the years of military dependence.

“We all come from that background and all these concepts are very valuable and applicable now,” Nihalani said.