Trying to diversify is no easy task. Just ask the executives at Trio-Tech International, a Van Nuys semiconductor testing firm.

Growing increasingly worried about the company’s exposure to the boom-bust cycle of the semiconductor industry, Trio-Tech executives decided two years ago to buy an equipment company in Southeast Asia’s booming oil and gas sector.

The gamble worked for a while as Trio-Tech snagged a couple of lucrative contracts. But the good fortune didn’t last; soon, the contracts were no longer flowing TrioTech’s way. The company couldn’t compete with established players in an industry that was completely outside its realm of experience.

So last month Trio-Tech announced it was abandoning its oil and gas equipment venture. That leaves the company once again wholly dependent on its two semiconductor testing-related businesses: testing chips and making chip-testing equipment to sell to other companies.

“We’re still looking for that third leg for our business,” said Trio-Tech spokesman Neil Berkman.

In the meantime, Chief Executive Siew Wai Yong, who is based in Singapore, has focused on paring back costs. He laid off some of the company’s nearly 400 employees and closed some offices in Asia. (While the headquarters are in Van Nuys, almost all of Trio-Tech’s operations are in China, Singapore and Malaysia.)

As a result of the cost-cutting, the company reported in earnings last week that losses from continuing operations narrowed to $165,000 during the quarter ended Sept. 30, compared with $938,000 in losses a year earlier.

Small bounce

The improving cost picture gave some cheer to investors as Trio-Tech stock rose 19 percent after last week’s earnings release to close at $1.60, making it one of the week’s biggest gainers on the LABJ Stock Index. (See page 52.) However, that’s only a small bounce up in the long-term picture. The stock price has fallen from a high of $6 a share two years ago; going back even further, Trio-Tech shares traded for around $20.

Trio-Tech began in the late 1950s testing hermetically sealed computer chips using a centrifuge process. The company then branched out into making equipment for testing semiconductor chips. The testing process involves exposing chips to high temperatures or voltage before they are inserted into electronic components. This ensures that the chips can operate as the electronic devices heat up after extended use.

The company soon moved its operations to Singapore to take advantage of cheaper labor rates.

In the early 1980s, Trio-Tech became a subcontractor to Advanced Micro Devices, a giant Sunnyvale chipmaker. Eventually, Trio-Tech’s work for AMD made up more than 50 percent of its revenue stream.

But AMD terminated its contract with Trio-Tech four years ago. After slashing 40 percent of its workforce, Trio-Tech started trying to find customers in Asia. Then the downturn hit, resulting in lowered demand for semiconductors, a trend that continues today.

“Right now, the industry is in the midst of a downhill slope,” said Chris Lahiji, president of LD Micro, an L.A. research firm that tracks small cap companies. “The industry has been consolidating for years, but there are still way too many semiconductor companies out there and only a few megacompanies as customers,” such as Apple Inc. of Cupertino; Samsung Group of Seoul, South Korea; and Dell Inc. of Round Rock, Texas.

Facing this bleak picture, Trio-Tech executives decided to diversify outside the computer industry. At first, they focused on new markets for their semiconductor testing technology, such as solar panels and autos.

Two years ago, while looking around for other industries, Trio-Tech executives saw the boom in offshore oil drilling in Southeast Asia and decided to purchase a controlling stake in a unit of another company that made storage sheds, dormitories and other equipment for oil and gas workers.

Contracts trailed off

The purchase paid off initially as a few lucrative contracts came in. But, after about six months, new contracts trailed off. After another year, Trio-Tech decided to get out of the business, letting the lease at the oil and gas equipment facility expire at the end of this year.

“We were bidding aggressively on contracts, but we just were not able to win a sufficient quantity of contracts,” Berkman said. “Undoubtedly, one factor is that we were going up against more established companies.”

Trio-Tech is far from the only company that has had difficulties with diversification.

“Diversification has a relatively low rate of success, especially if it’s in an area unrelated to a company’s existing skill sets,” said Arvind Bhambri, associate professor of management and organization at the USC Marshall School of Business. “You run up against companies that have built up skills and competencies over the years that you as a newcomer cannot match.”

Bhambri said Trio-Tech should look for needs among its existing customers or look at more closely related industries where the company’s expertise in semiconductor testing can be of use.

Berkman said the company is evaluating other markets to enter.

“The logic remains the same: We want to reduce the cyclical sensitivity of our business,” he said.