Lionel Hurtubise, Chairman, Ericsson Communications Inc.
SUCCESSFULLY MANAGING A GLOBAL BUSINESS IN GOOD AND BAD TIMES
Chairman: Gareth S. Seltzer, President, The Empire Club of Canada
Head Table Guests
Bart Mindszenthy, Partner, Mindszenthy & Roberts Communications and a Director, The Empire Club of Canada; Dr. Rev. John Niles, Victoria Park United Church; Boon Chang, OAC Student, Malvern Collegiate Institute; Leonard Katz, Senior Vice-President, External Affairs, Rogers Cantel; Dr. Carolyn Hansson, Vice-President, University Research, the University of Waterloo; Chris Robinson, President, Canadian Freestyle Ski Association; Paul Curley, President, Advance Planning & Communications; Brian Barry, President, Ericsson Communications Inc.; Gary Switzer, Regional Vice-President, Microcell Telecom; and Jan Dymond, Vice-President, ZED Communications and a Director, The Empire Club of Canada.
Introduction by Gareth Seltzer
In increasingly complex times, I am always impressed to find how many companies have captured an entrepreneurial edge and a new market for products and services that 10 years ago would not have been much more than a dream. I was recalling with a friend how I was so impressed with a school chum whose father had a car phone--one of the very first--and it was approximately the size of a large watermelon. It may have been awkward, but he did business on the road which at that time was forward thinking.
At the same time, there is so much movement in the marketplace, in terms of technology and the very highly skilled professionals who guide these companies that it can be hard to get the bare facts. I am reminded of the 1974 Fiat Spider which had on the dash an ideogram illumination intensity adjustment potentiometer. A dimmer switch.
Today, we are here to get the bare facts about one of the world's leading suppliers in fixed and wireless communications. Founded by Lars Ericsson in Sweden in 1876, it is active in 120 countries and has sales approaching $30 billion. The company commands more than 40 per cent of the world market for cellular systems.
In Canada, the firm is no less successful and we are pleased to have here today, Mr. Lionel Hurtubise, who has a long a distinguished record in the business. Mr. Hurtubise, a skiing and sailing enthusiast, seems to have been, or is, the chairman of basically every related professional organisation there is. So without any further delay, I ask that you welcome Mr. Hurtubise to our podium today to address the Empire Club of Canada.
Thank you. It certainly is an honour to have been invited to speak here today. I cannot but be impressed by the quality of the speakers that have preceded me and I am honoured to follow in their footsteps.
The reason I am here today is to address some key issues that are critical to the information technology and communications markets. I would like to share with you some of my experiences as the Canadian CEO and now Chairman of a large multinational company doing great things in Canada.
More specifically, in an era of globalisation, what lessons has a global company such as Ericsson learned about competing successfully in a business arena which is defined by a constant state of flux, incredible challenges, abundant opportunities, growing competition and rapid technological innovation? In short, how have we managed to succeed in the global telecommunications market and what role has Canada played in this success story?
I would like to stress at this point that while I will be referring to Ericsson quite frequently throughout this talk, this is not meant to be an Ericsson sales pitch. Rather, my aim is to use the Ericsson experience as an example of a successful Canadian initiative. Given the fact that Ericsson is present in 130 countries worldwide and has R and D facilities in some 23 countries, Ericsson is in many ways a microcosm of the world.
The Canadian company is constantly competing with all other Ericsson locations for the much-coveted mandates we are undertaking here in Canada. I can assure you that each one of the other R and D sites would enthusiastically welcome the opportunity to procure some of the responsibilities which have been given to our Montreal research unit.
Before I discuss some of the strategies which have ensured Ericsson's growth over the past few years, I would like to take you through a brief overview of the global telecommunications technology and market trends which are playing a determining role in how our company is managed both for the short- and long-term.
From a business development perspective, major new opportunities present themselves on almost a daily basis. An effective means of illustrating the staggering pace of market evolution and competition in the telecommunications industry is to provide you with one simple figure. Nearly $300 million is being spent annually in Canada alone to advertise the vast array of telecommunications products and services. Canadians, like citizens of most western economies, are being barraged by a bewildering and ever-changing array of new services.
Now, consider the following. As amazing as it may seem, 90 per cent of the world's population does not own a phone and half of the world's population has never made a phone call. Moreover, according to the International Telecommunications Union, only about 4 per cent of China's 1.2 billion people have a telephone. The Chinese government has made it clear that it aspires to increase that percentage to 21 per cent by the close of the century.
To give you an idea of what that implies from a network infrastructure point-of-view, consider this: China will need to install as many phone lines in the coming three years as there currently exists in the entire United States.
The developing world has come to take for granted that it must develop its telecommunications infrastructure to world standards in order to foster the same quality of life enjoyed by their counterparts in the rest of the world. Basic phone service is booming in areas of the world which have not traditionally been considered primary targets from a marketing perspective. These include parts of Asia, Latin America and Eastern Europe.
As I mentioned earlier, 90 per cent of the world's population does not own a telephone. It has been estimated that as telecommunications services become more readily accessible, many of the 90 per cent will make a technological jump directly to wireless communications. Simply stated, they will never own a fixed or land-line telephone. This technology-leaping phenomenon represents a fascinating trend and remarkable market opportunity for the wireless telecommunications industry.
From a global perspective, the outlook for the entire telecommunications industry continues to improve. However, two major trends are currently shaping the industry's evolution in both domestic and international markets. These trends are deregulation and the strategies adopted by developing, as well as developed countries to implement wireless communications technologies as their principal or alternative telecommunications infrastructure.
For example, Nortel announced yesterday that it has won a US$780 million contract to supply Teligent LLC of Vienna VA., much of the sophisticated networking equipment for the construction of a wireless communications system. Teligent will be competing in 74 American markets covering 700 cities and towns by offering local, long-distance and Internet services by early next year.
What is most significant about this announcement is that instead of digging up streets to lay copper or fibre optic cable, Teligent's approach is to use small microwave antennas, installed atop the office and commercial buildings occupied by its customers, to provide direct high-capacity and relatively low-cost connections for voice, data and video-conferencing traffic.
The technique falls directly into what I have been discussing in that it will bypass the local telephone company, inside and outside downtown city cores, effectively being in direct competition with the traditional telcos. In today's world, it has become obvious that in many cases the most cost-effective strategy to modernise outdated telecommunications infrastructures or to compete with existing infrastructures is to install wireless telephony technology rather than building an entire wireline infrastructure.
An effective illustration of the prevalence of this phenomenon can be found in the simple fact that when I joined Ericsson back in 1986, wireless products represented 7 per cent of total volume worldwide. Today wireless products account for close to 65 per cent of Ericsson's total revenues.
Aside from the technology-leaping phenomenon a second, and no less important, global trend within the telecommunications industry relates to deregulation. In the North American market, deregulation of the telecommunications industry has opened the door to a number of new entrants thereby dramatically altering market dynamics. New competitors have sprung up on both the product and service side of the industry while the telcos and cable companies continue to penetrate each other's sphere of influence.
On the whole, the effects of deregulation have been largely positive as the trend has forced companies to seriously re-examine their strategic focus. In addition, the advent of increased competitive pressures has ensured that the telecommunications marketplace will remain highly efficient in the future.
Now that you have a basic overview of the significant technology and market trends dictating the progression of our industry you may be asking yourself the following question which forms the basis of my talk today: How are companies such as Ericsson going to meet this challenge? Furthermore, how will they keep their customers ahead of the unrelenting wave of changing technology, while at the same time assuring shareholders and employees of continued employment and consistent and aggressive returns?
From an Ericsson perspective, the answer to these questions is crucial to our continued success. Ericsson has come up with a three-scenarios vision of potential future market opportunities. The strategy is entitled "2005-Ericsson entering the 21st century."
The first scenario in the Ericsson 2005 vision is entitled "Service Mania." This scenario focuses on access to information and services that dominate the interest of end-users. In this scenario end-users in the year 2005, including private persons and corporations, turn to brokers or agents to help them find and gain access to suitable information packages and interactive services.
The second scenario of vision 2005 is entitled "Gran Tradizione." In this scenario the traditional values are the controlling factors for end-users. If human conservatism prevails in the control of market development, it seems feasible to assume that end-users will rely on their traditional operators.
The final scenario, entitled "Up and Away," envisions end-users gaining access to sophisticated communications solutions virtually free of charge. The only cost items will be their terminal equipment. Manufacturers of the equipment pay for the communications and provide end-users with access to communications networks. Commercials and advertising will cover the cost of content and its presentation. End-users will accept the fact that advertising appears on their terminal screens whenever they log on or connect to one of countless information banks, entertainment services or other services offered on the network.
With a better understanding of the ever-changing market requirements, or user requirements, a continued focus on research and development will be the key to our continued success.
Before I address some of our principal R and D strategies which have been the catalyst for Ericsson's sustained growth, I believe this would be a good time for me to provide you with a few words about our parent company LM Ericsson which is headquartered in Stockholm, Sweden.
With 100,000 employees in 130 countries around the world and annual sales approaching C$30 billion, the company is the world-leading supplier of telecommunications equipment and one of the three leading manufacturers of pocket phones.
In terms of market share, LM Ericsson currently commands over 40 per cent of the world market for cellular and PCS systems, which is twice that of its nearest competitor.
The company fully expects to continue this tradition of growth. There are presently 140 million wireless subscribers worldwide. By the turn of the century this number is expected to exceed 600 million. Currently, more than four million new users subscribe to wireless systems around the world every month.
As I am sure you can imagine, this growth creates tremendous challenges for Ericsson's marketing and product-development teams. Our commitment to R and D is well known and has been the catalyst for developing the company's global-leadership position in wireless communications. The company has always invested heavily in technological development. Twenty per cent of its gross sales goes back into research and development.
During the last recession, Ericsson maintained its strategy of investing significantly in research and development. Due to this commitment, Ericsson is now reaping the benefits from a bottom-line perspective. Moreover, since the early 90s Ericsson has experienced significant increases in both revenues and market share.
To truly appreciate the effect of Ericsson's relentless commitment to R and D consider the fact that our current improvements in revenues and market share were based on the delivery in most cases of products and services which were not even in existence three years ago. In 1996 alone, the company invested nearly $4.5 billion worldwide in its R and D activities which are conducted in 23 countries by approximately 18,000 engineers.
Make no mistake, investing in R and D is a long-term strategy for Ericsson. Fortunately, most recently this strategy has consistently produced favourable short-term, bottom-line results for the company. It has become obvious, in today's global economy, that focused, effective R and D separates the successful long-term players from the also-rans, at least in technology-intensive industries.
The Ericsson experience is actually not unique. Mounting evidence demonstrates that businesses that invested in R and D during economic downturns show superior rates of growth and profitability.
Investing in research and development demands skilled people to undertake the actual work. The telecommunications industry is exploding at such an intense rate that its own demands for skilled personnel exceeds the supply. This is an exceptionally important point which I will touch upon in greater detail in a few moments.
I would like to spend a few moments outlining the success of our Montreal-based research unit, as well as our entire Canadian operation. I believe that the story of Ericsson in Canada is a wonderful example of how a Canadian-based operation can play a key role in the realisation of a global company's corporate objectives and successfully meet the demands of global clients. I further believe that the Ericsson story proves that Canada can and should be perceived as an excellent location for the development of technology for the world.
Ericsson has had a presence in Canada since 1953 when the company maintained a small sales and after-sales support office. Things have certainly changed since then. In human terms, Ericsson in Canada now employs close to 1,400 employees in two divisions. I will be discussing each division in greater detail later on.
First, however, allow me to introduce Brian Barry who has recently come to the Canadian operation as its new president. Mr. Barry joined Ericsson in 1982 in Ireland, his home country. Brian continued his career with Ericsson in England. The changes that Brian has been involved with in the U.K., being one of the first markets to deregulate, parallel many of the rapid changes in the Canadian telecommunications industry and I am certain he will bring an experienced perspective to our market. We look forward to working with you and wish you the best of luck Brian.
Apart from having a new president, things at our Canadian operation have changed quite dramatically over the past few years. For example, since 1991, Ericsson Research Canada has won three world R and D mandates from its parent company. As a matter of fact, back in 1986, Ericsson Research Canada's entire development team was comprised of less than 10 individuals. Throughout the years, that small group grew at a rapid pace to meet the demands of our business. It is my pleasure to inform you that, today, 1,000 people are active in Ericsson Research Canada's organisation in the greater Montreal area. Our Canadian engineers create software for wireless telecommunications systems used by more than 25 million people around the world including close to 1.5 million Canadians.
Ericsson Research Canada can take great pride in its achievements as well as its contribution to the Canadian high-technology community. We now occupy over 350,000 square feet of space in the Montreal area and recently inaugurated our third building. More importantly--and more significantly I think--Ericsson's rapid growth and continuing expansion can best be measured not in square feet but through our most precious asset: our employees. It is the extensive pool of knowledge available in Canada that, first and foremost, accounts for the impressive growth and success of our Canadian activities.
I am proud to report that Ericsson is now ranked 6th within the Canadian Corporate R and D Database amongst R and D spenders across all industries. Furthermore, our Canadian R and D unit is ranked second among firms undertaking R and D in the telecommunications industry. To put this into perspective for you, Ericsson spent $137 million in Canada on R and D during 1996.
Our Mississauga-based sales and marketing operation has also undergone tremendous growth. The facility currently has the mandate to serve the Canadian market for cellular/PCS systems and sells and distributes the Ericsson brand of mobile telephones, private radio products and systems and "Mobitex" mobile data communication systems and access products. Ericsson in Mississauga is also a full service provider of complete telecommunications network solutions.
Some of the impressive accomplishments of our sales and marketing operation include the following:
• Our 12-year relationship with Cantel (Canada's only nationwide cellular operator) as its primary network supplier, has resulted in over 1.5 million Cantel cellular subscribers today.
• Ericsson has a contract with Microcell Telecommunications Inc. to supply its PCS network. The agreement includes a $200-million financing arrangement for the purchase of network switching systems, base stations and related services.
• Our EDACS system (Ericsson Digital Access Communications System) has become the standard in Canada for public safety and dispatch radio applications. Ericsson in Canada has recently won contracts from the city of London police and Ottawa-Carleton police.
• Ericsson in Canada has built the world's largest and most sophisticated trunked radio system for Sasktel Mobility. It provides dispatch communications on a province-wide (150,000 square miles) basis to both public and private organisations.
• Ericsson has facilitated local agreements with Canadian firms such as Task Micro Electronics, Silonex Inc. and Telelink to manufacture components and sub-systems for export to Ericsson assembly plants around the world.
• Ericsson has subcontracted local Canadian expertise to support major system contracts such as Paramax, in support and maintenance of sophisticated Ericsson radar technology on the Canadian frigate programme.
• Delivery of sophisticated radar jamming training technology to the Canadian Air Force will commence within the next months.
• Commencing in 1997, Ericsson in Canada has committed to sponsor the Canadian freestyle ski team for three years. Ericsson is proud to be associated with these daring young men and women, known as the "Canadian Air Force," who won three medals at the Lillehammer Olympics.
You may be asking yourself how we became so prominent in such a relatively short period of time. Twelve years ago, when Cantel began to build its cellular network, it chose Ericsson as its principal network software and hardware supplier.
In 1986, as part of our commitment to Cantel and the Canadian government, Ericsson established a small R and D centre in Montreal. Over time, as we were able to demonstrate our technological competence, we were given some autonomy to conduct small development projects.
Based on our highly talented research team, we convinced our parent company to continue investing in Canada based exclusively on business performance. We were able to prove that we could provide the corporation with quality research and development in a productive and cost-effective manner. In a whirlwind of activity we won three world mandates in the face of stiff competition from other Ericsson technology centres. We also celebrated our 44th anniversary in Canada, expanded our facilities and now stand poised to take on greater challenges.
When we consider the success of Ericsson in Canada, we must first and foremost recognise our tremendously talented and dedicated staff. We have learned to appreciate that Canada's information technology industry relies upon a large pool of well-educated and highly skilled researchers and others that are trained in the finest educational institutions. Moreover, Canada's engineers and researchers have become noteworthy for their productivity and creativity. This is especially significant when we consider the importance our parent company has placed on technological leadership.
Costs in Canada are extremely competitive with those of other countries due to high productivity, very low annual employee turnover and an excellent R and D tax credit system.
Apart from the obvious availability of skilled manpower, Canada boasts pro-active and understanding governments at all levels. Their foresight and business acumen have created a fiscal environment in which we have been able to prosper. Being that deregulation is one of the critical trends in telecommunications, I would like to congratulate the Canadian government for its foresight and diligent work throughout the deregulation of Canada's telecommunications industry. It certainly was and continues to be a job well done.
Another issue I have chosen to talk about today is the exceptional quality of life in Canada. It goes without saying that a happy employee is a productive employee. As a result, the allure of Canada is very important to us. Canada is a wonderful country to live in and the families we bring in from Sweden and around the world truly appreciate the quality of life here. As a matter of fact, annual surveys of Ericsson employees in Canada have registered some of the highest employee satisfaction ratings of all Ericsson facilities around the world.
Ericsson employees have always considered Canada a vibrant and pleasant place to live and do business. Canada's cost of living is relatively low and offers an abundance of choice in living accommodations and leisure activities. Canada offers a diversified cultural life which resembles, to some extent, a European lifestyle in North America. Our employees truly appreciate this.
I would now like to comment on the importance associated with each individual CEO's long-term vision of his or her Canadian operation.
The procurement of world mandates for our Canadian subsidiaries is directly related to the ability of individual CEOs to identify strategic business opportunities for their Canadian organisation, and to promote those opportunities to their parent companies in an effective manner. The promotion of a world mandate to the corporate parent company represents a major undertaking in time and effort for any CEO. It often requires the CEO to step outside the primary mandate of operating the existing business in Canada. Promoting a world mandate takes vision and a commitment to the realisation of that vision.
I encourage other CEOs to emulate what Ericsson and others have done, which is to actively seek mandates from their parent company. Canada offers what is necessary to win and maintain mandates from our foreign parents. Apart from the Ericsson example consider the success stories of other Canadian-based subsidiaries of foreign multinationals such as Astra Pharma, Pratt & Whitney, Harris Farinon, and Merck Frosst who have all recently announced significant investments in Canada.
Without visionaries going out and promoting Canada for global corporate mandates, Canada will miss out on many growth opportunities.
Although I have covered the reasons why Ericsson has chosen to invest and reinvest in Canada over the years, it would be remiss of me not to spend a little time covering some of the problematic issues that Canada faces. I hope that my discussing them here today may shed some light on potential strategies which could help enhance foreign investment in the country.
The first problematic issue I would like to address relates to the status of the education system in Canada. After having read several studies and reports on the matter, I inevitably come to the same conclusion. There are simply not enough computer scientists to fill job openings in Canada today.
For example, in its survey entitled "Education for export? Keeping Canadian-trained computer and electrical engineers in Canada," the Canadian Advanced Technology Association reported: "As the Canadian high-tech sector booms, it has become widely apparent that there is a growing shortage of computer and electrical engineers. For example, the Software Human Resource Council projects a shortfall of 20,000 software workers in Canada by the turn of the century."
Similarly, Harris Miller who is the President of the Information Technology Association of America, reported recently that one in 10 information-technology positions in the U.S. are currently unfilled due to a lack of people with the necessary competencies.
With unemployment as high as it is, something seems to be amiss. It seems to me that we need to start playing a more active role in encouraging our young people at the high school level to consider entering the fields of telecommunications and information technologies. Our young people need to know that promising, well-paying and fulfilling careers await them within these disciplines. Oftentimes, it seems to me that young people are not fully aware of the consequences of their academic choices.
Please do not interpret my comments as narrowly focused and not accepting of the notion of academic freedom. Everyone should have the opportunity to pursue whatever interest he or she may have. However, young people need to be fully aware of the vast employment opportunities which await them in the telecommunications and information technologies fields during their decision-making process.
In my opinion the effort to council young students on career paths should be redoubled in the case of women. I understand that there is still a high percentage of women who drop out of scientific studies at some point in their academic careers. I find this phenomenon truly disappointing. The percentage of women employees at Ericsson Research Canada is approximately 30 per cent. Let me tell you from first-hand experience that they rank among our most talented and creative inventors and managers.
While on the topic of education, I recently read with dismay that the computer science departments at Montreal universities could only accept one-half of all eligible students because of a lack of professors and facilities and I presume that other universities are facing similar circumstances.
If indeed, Ericsson Research Canada is a microcosm of the world, then we must acknowledge the fact that there are many employment opportunities for people with the right kind of training. Therefore, once again with unemployment so high, it seems to me that something is amiss.
Let me start by reaffirming that the remarkable pool of knowledge and talent available in Canada is the number-one reason for Ericsson's growth in Canada.
However, I would like to draw your attention to the entire array of fiscal incentives, including both direct and indirect subsidies, that our governments have traditionally made available to industry. Certainly, these measures have been very instrumental in the establishment and development of a number of small- and medium-size businesses as well as affiliates of international firms, including Ericsson.
Above and beyond these measures, however, I would argue that governments should pay just as much attention to supporting and investing in our institutions of higher education. For this reason, Ericsson felt compelled to be a part of the solution by working with the University of Waterloo to create the Centre for Wireless Communications as an example. The exciting win-win factor for Ericsson and the rest of the Canadian telecommunications industry is that the centre will produce highly qualified home-grown talent for our industry. Students studying at the centre will graduate from the programme with the essentials--a Masters of Applied Science in Electrical Engineering with special training in the field of wireless communications.
Let me acknowledge that R and D tax credits are excellent and necessary incentives. However, the most important incentive for today's leading firms, especially in high-technology sectors competing for a share of global markets, remains the pool of knowledge normally available through our educational institutions that are renowned for the quality of their teaching staff, exceptional students and state-of-the-art facilities.
I would therefore suggest that our governments start questioning their normal approach to attracting business and that they consider complementing their current industrial development strategy with an action plan based on furthering the development of our colleges and universities. Make no mistake, without the required pool of local talent, knowledge-intensive industries will go elsewhere.
In conclusion, let me reiterate Ericsson's strategic focus in the ever-changing world of telecommunications. Simply stated we must understand these changes and the needs of our customers and their customers, the end users. Then, we must maintain our strategy of investing and reinvesting in R and D through all the vicissitudes of the business cycle. By maintaining its level of R and D spending, even during difficult economic times, Ericsson is constantly poised to offer the world cutting-edge telecommunications solutions.
However, this recipe for undertaking focused research and development is contingent upon the recruitment of talented and creative technical employees. I know that other sites around the world are hard-pressed to match the technological competence available here. The availability of highly skilled engineers and technicians is the single most important factor for the rapid development of Ericsson in Canada. As I mentioned, our growth would not be possible without the tremendously talented technical people available here.
However, please take notice that warning signs are there and that our pool of talented young people is rapidly eroding. I urge both government and private industry to redouble their efforts to ensure that our higher-education institutions remain the best in the world. I also urge professionals guiding our young people to make it clear that Canada has wonderful employment opportunities in the telecommunications and information technology industries. If we can no longer produce the requisite numbers of technical students, technology-intensive corporations will go elsewhere.
When I think back to our very first pitch to Stockholm in 1990, the excellent lifestyle in Canada, the proven technical competence of our engineering staff, Canada's proximity to the U.S. markets, the low level of employee turnover, as well as our proactive governments and tax incentives for R and D, helped make our sell extremely potent.
I urge other subsidiaries of foreign-based multinationals to seek additional mandates. Canada is an ideal place for high-technology corporations. If there is a single lesson that I have learned as CEO and now Chairman, it is that Canadian CEOs must aggressively sell Canada abroad. We must address the fact that Canada does not have a high technology profile abroad.
However, be convinced that few locations globally can compete with Canada as a preferred site for significant investment. In short through my experiences, I am convinced that Canada can and we should all spread this message around the world.
The appreciation of the meeting was expressed by Jan Dymond, Vice-President, ZED Communications and a Director, The Empire Club of Canada.