Organizing for Global Growth

Head Table Guests

Bill Laidlaw, Director, Government Relations, Glaxo Canada Ltd., and a Director, The Empire Club of Canada; The Rev. Kim Beard, Rector, St. Bede and St. Chrispin Anglican Churches; Ken McCready, President and CEO, TransAlta Corporation; Diane Francis, Editor, The Financial Post; Spencer Lanthier, Chairman and CEO, KPMG Peat Marwick Thorne; Peter Janson, President and CEO, ABB Asea Brown Boveri Ltd. (Canada); Julie K. Hannaford, Partner, Borden & Elliot, 1st Vice-President and President-Elect, The Empire Club of Canada; Dezo Horvath, Dean, Faculty of Administration Studies, York University; Arthur Sawchuck, President and CEO, Dupont Canada Inc.; Klaus Kuebel, President and CEO, Credit Suisse Canada; and Alanna Quinn, Managing Partner, Corporate Strategic Planning, Ontario Hydro.

Introduction by John Campion

Frankenstein's Jolt

On May 27, 1812, while Napoleon Bonaparte was in Paris planning his disastrous campaign into Russia, there was a gigantic firedamp explosion at Felling Pitt near Sunderland, England. The accident produced a sensation throughout Britain.

Firedamp deaths caused by open oil lamps used by miners, igniting inflammable, underground gases, were common enough, but this catastrophe caused 92 men and boys to lose their lives in a horrible accident that galvanized the population of Britain.

Coal production in that country was by far the largest mining industry in the world and produced the energy to power the first phase of the Industrial Revolution which itself led to the spread of steam engines around the world. Was this accident the fearsome break that was to strangle the basis of the whole industrial age? It was not to be.

The pitiful human tragedy, fired by a powerful sermon over the massed coffins to a tearful congregation, led to a world-wide offer of premiums by colliery owners for anyone who could invent a safety lamp.

The resulting cry for help found its way to Humphrey Davey, the Director of the Royal Institute in London. Davey had two young assistants: the first was Jack Lambton, "Radical Jack" as he was known, later to become The Earl of Durham, one of the architects of modern Canada; the second was a poorly educated but gifted, dure, rigorous and thorough young man, Michael Faraday.

It was Faraday who was granted his freedom to pursue science through work on the coal lamp. It was Faraday who became the world's most effective pioneer in the emerging science of electrical physics. It was that explosion 182 years ago today which released to the scientific world the man who, with others of his age, would pursue the science of electromagnetism and who, in 1821, designed and manufactured the first dynamo.

Faraday and his world could generate power. Faraday did his work with others of his age; those included Dare Orsted, the Dane who was able to describe electromagnetism. It included Wallastein whose sister Mary, inspired as a young girl by the poet Shelley, wrote "Frankenstein," a creature reborn by electricity. It involved Andre Marie Ampere, the French authority on electricity and Volta who discovered that the source of electrical power arose from the contact between two metals.

It was these men and woman of philosophy, science, letters and industry that formed the basis of electricity science.

Mr. Barnevik has drawn his inspiration from his beginnings in small town Sweden, his education in the ancient, beautiful, industrial City of Gothenburg on Sweden's west coast and his managerial leadership in Sweden, the United States and Switzerland.

Mr. Barnevik has helped create and stimulate to success an enterprise that is pre-eminent in applied electrical technologies, starting with a $2 billion enterprise in 1980 having $34 billion in sales in 65 businesses through 100 companies and 1,300 legal entities employing 220,000 people. Mr. Barnevik has a reputation for revolutionary leadership in corporate enterprise in the dynamic universe of business. He was Europe's manager of the year in 1991 and voted international executive of the year by the Fellows of the Academy of International Business in 1992. He is Chairman of Sandvik and Scanska and Director of DuPont and Investor Limited, a holding company for the Wallenberg Group. Please welcome Mr. Barnevik.

Percy Barnevik

Your Excellencies, ladies and gentlemen, it has been 10 years since I gave a public speech in Canada, so it is a special honour for me to be invited to this historic club to speak today.

Some of the points I will touch on today will include globalisation, business organisation, and recent events in Western and Eastern Europe, Asia and the Americas. I will comment on how Asea Brown Boveri and other successful companies have organised themselves for global growth and competitiveness. As well, I will review highlights of ABB's global matrix, decentralization and the development of its international managers.

World trade has grown much faster than world production, particularly throughout the past decade. The fastest growing trade areas are within Europe, within Asia/Pacific, within North America and, to a lesser extent, among these trading areas.

I am not very optimistic about the impact that the GATT agreement, announced amid much drama late last year, will have on the speed or development of trade. The reason for my pessimism is the imbalances in trade between the members: Japan, United States, Europe and Asia. The results of these imbalances are trade restrictions and the so-called 'voluntary' export restraints, a humorous name for one of the most involuntary things I know. In the beginning, America was the leading 'protector.' Now Europe is resorting to many quotas and invisible trade barriers.

Some seven or eight years ago, Europe was in a Eurosclerosis debate, feeling lost and overwhelmed by consumer products from Japan. European businesses were talking about after-industry development and all types of wishful dreams. Then they were injected with the ambition to create an open Europe with what are called the four freedoms: labour, capital, goods, and services. Now, in spite of all the political hassles, discussions and debates about Maastricht that you may have read about, there has been a lot of progress in Europe toward economic integration. The public sector has historically been a protected market worth $600 billion. Only two per cent of the $600 billion was open to international public bidding. Now things are rapidly changing.

Let me use an example from the locomotive industry. Currently, there are 37 locomotive factories in Europe, against two in the United States and three in Japan. With high manufacturing costs, it is not cost-effective to have production happening simultaneously in so many small workshops in so many countries. The result is that, at the end of the day, half or maybe three quarters of the manufacturing facilities will be gone and, by combining these production efforts, locomotives will be built at half the cost. Other changes on the way within Europe include the downsizing of overblown railway authorities, and standardization within the electric energy production, telecommunications and utility fields. These changes will result in fewer manufacturers and fewer people needed to make the goods--although there will be more goods and Europe will become more competitive. The winners will be those who adapt quickly to the new situation, those who work with Eastern Europe. The losers will be those businesses that cling to protective measures and continue to ask for government support.

The opening of Eastern Europe, beginning in 1989 with the elimination of the Iron Curtain, doubled the size of the European trading region to create a consumer base of more than 800 million people. The people of the Soviet Union and Europe thought the elimination of communism would mean a dramatic increase in their standard of living, but it will take some time, a few decades, for these countries to catch up to the Western World.

The question may be: What business would dare to move into the former Comecon countries, with their economic and political chaos? My position is that there is tremendous opportunity for visionary companies willing to enter the fray. Electrical production is just one such area of opportunity. There exists enormous waste and inefficiency in the generation, transmission, distribution and usage of electric power. To revamp this huge, wasteful and polluting system would be a gigantic undertaking. However, it must be done if these countries are to become competitive and to develop a decent living environment. It is a great opportunity for companies in the electrical engineering field.

In contrast to many under-developed countries, the population is very well educated. I used to say to the Russians that though they do have raw materials and energy, their best asset is their people. The former Comecon countries have a quarter of the world's engineers, one million PhDs and a well-trained work force. I would say that in spite of the political chaos, they are ahead of the Western World in certain niches of the defense industry sector.

To date, the West has done almost nothing to help Eastern Europe. Financial support, credits, aid, and soft credit have been very marginal. You may read about pledges of support on the order of five and 10 billion dollars, but the fact of the matter is that at the end of the day Eastern Europe has taken delivery of only a small fraction of these pledges. Though we cannot immediately lift Russia and Eastern Europe into integration with the rest of the world, we can at least trade with them. The problem is that we block them. With the recession in Western Europe, we put quotas or high tariffs or other non-tariff barriers on almost everything Russia and Eastern Europe can export, including agriculture, textiles, steel, aluminum, and cement. Thus, all of their major exports are blocked.

It is a rather sad story because in order to import computers, telecommunications and that type of thing, these countries must, of course, export. But the vested interests in the West, the unions, the management, the countries, have loud lobby groups who effectively block them out of trade. Trade is growing, but at a very slow pace. That pace must be increased. As the prime minister of the Czech Republic, Mr. Course, said: "We need trade, not aid."

Direct investment by Western companies will play an important role in creating, from the bottom up, a modern economy. To my mind, one of the great tragedies of our century is the lack of leadership in the post-communist era. The communist regimes that suppressed people so badly have disappeared and the people left behind are unable to cope. And we lack the leadership in the West to address these issues.

Leaving the macro perspective I will focus on my own .company and what we tried to do. In 1988, we concluded that we should allocate certain parts of ABB to the different countries of Eastern Europe so that the Austrians, for example, could take care of Hungary, Sweden could take care of Poland, West Germany, East Germany, etc. I made a map and was told that I should redo it because it looked too much like Field Marshal Moltkes' military plans before the First World War. So, I revised the map to look more friendly, with arrows in both directions. As a result, even before the Wall came down, we built up a business of about 10,000 people in Poland, down to about 7,000 to 8,000 now, in 10 companies. We went from $50 million to some $3,000 million in sales in 1993, and I think in a few years we should be up to some $700 million in sales. Thirty per cent of that total is exported goods and services.

Don't make the mistake of believing that Eastern European countries cannot produce high quality goods. In Poland, we make gas turbines, one of the most complex machines you can make, and we export them to the United States and other countries. The experience we had in Poland was that business arrangements took a long time to negotiate and involved some external difficulties including inflation, hyper-inflation, lack of domestic demand, and so on.

But there was also a tremendous speed in restructuring. These people want change. They see a chance to move forward, to really get out and make a better life for their children. It is stunning to see how they can lift productivity and quality within two or three years. The Polish people have a very strong spirit and co-operated fully with our criteria that all management or special assignment staff speak English. We sent a number of English teachers and found the people highly motivated, studying English on Saturdays and Sundays.

I will never forget when I came to Southern Poland for the first time and the union leaders came to me and said: "We have one demand, Mr. Barnevik, and that is that we can buy shares in the company." They had been under a communist regime for 45 years. They didn't ask for guarantees, they didn't ask for a raise, they asked for shares because they believed in the company. I found this very inspiring.

Clearly, it is possible to create islands that work well, even amid chaos. You may ask why anyone would buy a company in the Ukraine, a country that is now falling to pieces with 10,000 per cent inflation. We do it by safeguarding supplies and safeguarding sales, with the result being a low-cost, high-quality production facility inside a totally chaotic environment. It is not problem-free, but overall we are making money today in Eastern Europe. I do not have to excuse myself to shareholders. Sometimes I get the question: "Are you investing with your heart or your head?" While my heart is emboldened by the strength of these emerging nations, I invest with my head, and I must invest because it is a good economic proposition.

The winds of change in the areas of industry, quality, and time-based management are coming to Eastern Europe. Though North America is five to seven years ahead of Europe in these areas, there remains the threat that, with some 60 million workers in Eastern Europe versus 40 million workers in the West, and a wage difference by a factor of 10 or 20, when these people achieve an adequate level of quality and productivity they will be positioned to be tremendously competitive.

My own company, for example, has 22 plants in Eastern and Western Europe making turbines and generators. As you can imagine, we don't need 22 plants. It's like having a plant in New Jersey, Toronto, Ottawa, here, there, and everywhere. It's crazy. But as the move from west to east continues, there will be fewer plants left in the West to do certain things and some plants in the East doing other things. Eventually all Europe will run as one market. People who sit back and cling to the old traditions are going to lose out.

That was a little about Europe. Now, a few words about the Asia/Pacific Rim. I will speak first about China, having recently spent a week there and it being fresh in my mind.

Within the huge expanse of China you confront all types of views, from the very pessimistic to the extremely enthusiastic. China has a fifteen year track record of nine per cent average annual growth in GNP. They have doubled their electrical generation capacity in seven years. One measurement of their increased standard of living is that seven to eight per cent of all urban households now have refrigerators. Trade has grown a lot. At long last, China is once again a major factor in world trade patterns. Tremendous growth is forecast for all China's base industries: mining, steel, pulp and paper, and building materials. Already, China is the biggest steel producer in the world, surpassing Japan in the first quarter of this year.

Although they have progressed significantly, they have a tremendous way to go. In the area of electricity, China must build as much production capacity for electricity within the next 30 to 35 years as half of what the whole world has built in 100 years. China is the place to be if you want to participate in the infrastructure industry. It doesn't make much sense to sit around in Europe or the United States, fighting for the few jobs available, when you have this gigantic market evolving.

China moves 75 per cent of all goods by rail. And they have a tremendous need to modernize their railway system. China needs 1,000 locomotives per year for the next 20 years. There are 10 cities with more than two or three million people who need metros.

Still not convinced? Look to Hong Kong for an example of China's tremendous growth potential. The five to six million Chinese living on that rocky island went from insignificance to being the world's eighth-largest exporter in 35 years. They had, with all due respect to the U.K. and China, two sick parents in the seventies, who didn't give them much support. They succeeded without support and without raw materials. Despite the political turbulence, I predict there are some 50 Hong Kongs waiting to be realized by the 1.2 billion people of China.

ABB is in China with 11 joint ventures and nine engineering centres all over the country. The biggest problems I foresee for growth in the Pacific Rim are our lack of knowledge regarding the Chinese language and what is perceived by Westerners as an exotic business culture. There is a certain anxiety that if we export technology from Europe and America, Pacific Rim countries may come back and overwhelm us economically with applications later on. But quite simply, if you want to be a world player, you have to be an insider in the Pacific Rim, no matter how difficult that goal is to achieve.

A few words about ABB. Our organisation started in this industry about 100 years ago as Asea and BBC and grew from a Scandinavian base to become one of the global players. In 1988 we merged organisations in Scandinavia and continental Europe to create ABB. At the time, the industry was a little like a ketchup bottle: it had been pretty frozen in structure for many years, particularly in Europe. But like a ketchup bottle, everything finally comes out. In Europe, practically all medium-size electrical engineering companies were bought up by ABB, or by our competitors, in a period of rapid acquisitions. To the 160,000 original employees, we added another 120,000 people; 30,000 were through acquisitions in North America. We went on to lose some 70,000 people due to streamlining and plant mergers. We now have three regions, after a rather hectic six years of restructuring: Europe, the Americas, and Asia. Of the segments in which we now work, about half of the business is power, one-third is industry-building systems, automation, robotics, and so on. About 10 per cent of our business is transportation including high-speed trains, with the remainder representing local activities and financial services.

Normally you associate a global company with a particular country. For example, Mitsubishi is Japanese, General Electric is American, Siemens is German and so on. We, however, have many homes. Though I may sit in a small office in our headquarters in Switzerland with 100 other professionals, our power and our people are really at home around the world.

I had an interesting experience in France when I tried to convince the prime minister that we really were a French company. He thought I was an American because of my poor French. Since he was once the Minister of Agriculture, he began to complain about American agriculture. I came to the defense of America and said they have fewer subsidies than France and the Common Market. I then declared: "I am really living in Zurich, Switzerland." Then he said: "You are the worst of all in agriculture. The highest per-capita subsidies and the highest food costs in the world." He was right. However, I defended the Swiss Alps, the tourist industry and the country's farming tradition. He continued his complaints. As my final defense I said, "I'm really a Swedish citizen." He paused and said, "You have nothing to be proud of with regard to agriculture." He then asked, "How many countries do you call home?" I answered, "Twenty-two. And I defend them all."

We have organised ourselves in a matrix in which we have 50 global business areas. One man sitting in America is responsible for boilers worldwide, one in Southeast America is responsible for metres, and there is a person responsible for transformers working in Germany. Each such person at each location makes the charters for all ABB companies that are involved in the production of their respective products. These charters involve who should make what, export what, develop what, so we get the advantages of size and economies of scale, globally. At the same time there is a country manager. For example, a country manager in Canada has from 15 to 20 units under him. He has line responsibility and runs the business here, but only within the charters that have been assigned to him by the global managers. The result is 5,000 profit centres worldwide, each with a balance sheet.

To avoid the negative qualities inherent in any big organisation, we created many small companies inside ABB to encourage productivity, entrepreneurship and efficiency. For example, transmission and distribution represent some five to six billion dollars in revenues for ABB. With 750 profit centres, each centre averages about $8 million in revenues and employs 42 people. We try to have it both ways, so to speak, with small units within a global structure.

We also employ a flat organisational structure. There are only two to three layers between the top and the lowest level of management. The potentially negative effects of this structure are a very broad span of people and fewer promotion possibilities upward. But I believe these potential problems are more than made up for by strong communications within the corporation. I have seen too many messages lost in the bureaucracy of a traditional hierarchy. When you set out to change an organisation you have to have good communication to ensure everyone is with you.

Our headquarters staff has been reduced to a minimum. Whereas we used to have 1,600 people in Germany, we now have 100. Switzerland went from 4,000 people to 200. Whenever possible the people have been moved out to service units. The issue is not only cost. Head office staff typically ask for reports, and field people, who need to be running the manufacturing and selling activities, get distracted with a lot of non-essential reporting activities.

Perhaps the most important factors in the success of a global enterprise are the identification and cultivation of global managers. A global manager does not simply sit upon an established empire. He has to gain respect and be seen with integrity and competence. He has to be fluent in English and speak, ideally, one other language. Such managers must have flexible minds, be adaptable, not be turf people, and they must accept the fact that there are two ways to do things. They must not be competitive, but supportive. The country manager supports his companies and the global manager helps out in the global dimension with expertise and quality purchasing.

We believe ABB's organisational structure is ideal for taking advantage of emerging opportunities around the world. Our matrix management structure allows us to achieve global co-ordination while responding to, and taking advantage of, local requirements. As international regulatory and political barriers disappear, this approach will provide us with an increasingly important strategic advantage.

Finally, let me reiterate a few key points from my previous remarks. The emerging economies of Eastern Europe and Asia, combined with increasing levels of regulatory harmonisation, present significant opportunities for Western business. To realize the full potential of these opportunities, today and in the future, corporations must re-align themselves to facilitate both global co-ordination and local-market management. Such a new corporation will be led by global managers whose skill and vision transcend national and political boundaries. To continue to plan and to act as a largely domestic, or even simply as a multinational company, is to take a very near-sighted view of the world economy. The opportunities are great, and they are here today.

Thank you.

The appreciation of the meeting was expressed by Bill Laidlaw, Director, Government Relations, Glaxo Canada Ltd.