Like many businesses before it, Xaar, an innovative printing equipment company, is finding that making the most out of a promising new technology can be strewn with difficulties.

The 18-year-old company, which reports interim results on Wednesday, was set up to commercialise a radically new method to print high-quality images on to paper, plastic and other materials, aimed particularly at the advertising and consumer goods industries.

One goal is to make it easier to bring about what is known as “on demand” packaging – printing “tailored” images to go on items such as drinks cans or packs of food.

Ian Dinwoodie, Xaar’s chief executive, says: “Using our technology, we can devise equipment that will print 1,000 labels [for a consumer product] that are all different, at no greater cost than if they are all the same.”

But for all its promise, the Cambridge-based company has struggled to convince its supporters that it can deliver maximum benefits. “It has a habit of tripping up,” says Steve Medlicott, an analyst at Kaupthing Singer & Friedlander.

The latest setback came on July 11 when Xaar warned that sales in the key market of China were slowing. It also said that a big expected order – from an unnamed company – was unlikely to happen. Investors responded by dumping the shares, which fell 36 per cent in just a few hours. Since then the share price has stabilised, closing last night at 122p – little different to the price when Xaar floated on the LSE in 1997 at 110p.

To most outsiders, the immediate prospects are unexciting. Landsbanki, Xaar’s broker, is forecasting a flat sequence for pre-tax profits, which it expects to rise to no more than £7.6m next year from £7.4m this year on sales that are projected to rise only marginally from £47.9m last year to £49.6m in 2009.

However, Mr Dinwoodie, who has run Xaar since 2003, insists the application of the company’s technology to “on-demand” packaging will eventually be a money-spinner. These ideas should, he says, appeal to the many companies that must change their images for packaging more frequently than in the past to fit in with a faster turnover of new products, plus more fragmented markets.

Current printing methods used in such industries are based mainly on old-style analogue control techniques that require long set-up times when switching between different print runs. Xaar’s technology is based on using exotic piezoelectric materials to direct tiny ink droplets towards paper or other materials under computer guidance.

In this way, sophisticated one-off images can be created at high speed and relatively cheaply. The company has sold its special printing heads to several large printing equipment makers, such as Agfa of Belgium, the US’s Hewlett-Packard, Océ of the Netherlands as well as about 20 Chinese printing machinery makers.

Andreas Liefke, chief executive of ALS, a German printing equipment maker that is working with Xaar, says the company’s ideas are “unique” and “full of potential”.

One problem for Xaar is that it has up to now built sales mainly through selling its heads to printing machine makers for use not in packaging but in the printing in short production runs of very large advertising posters. The market for machines for this type of job is still growing – but at a slower rate than previously.

Another longstanding headache is that, about a decade ago, Xaar decided on a “twin-track” policy of building sales. While selling its print heads to machinery makers, it also licensed its ideas to several Japanese electronics equipment groups, subsequently making them competitors.

In the past few years, some of these licensees have used their factories in Asia to drive down costs. The result has been to limit Xaar’s freedom to increase prices for its print heads while also cutting the company’s market share.

Asked whether it might have been possible to restrict some of the licensees from competing directly with Xaar in specific markets, Mr Dinwoodie says: “That would have been nice, wouldn’t it?” He refers questions about the terms of the licence deals to “members of the previous management [before 2003]”.

Some observers believe that the most likely event ahead is that Danaher, a US equipment company that held talks with Xaar last year about buying the company for slightly more than 200p a share, could return to the negotiating table and might end up making a full bid.

If Danaher bought Xaar, it could give the US company the chance to make something of a technology whose full potential still appears some distance away.

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