Strategic Alliances: The Key to Canadian Competitiveness in the Coming Decades

Introduction

When the world thinks of Canada, what comes to mind? More often than not, we are identified by symbols which have come from our country's great wilderness--the hewers of wood and drawers of water. Or by climate: the winter; the winter; the winter.

But if there is any company that has contributed to changing that image it would be Spar Aerospace. The change began with Spar's Canadarm. First created for NASA's space shuttle, it fast became a symbol of national pride, and one that is recognized the world over.

Here was something that showed what Canada was really about--ingenuity. It should not be surprising, however, that Canadians should prove adept at creating something so technically advanced to function in a truly hostile environment. That is a Canadian tradition. We do it most winter mornings, just getting our cars started! We should be proud of the Canadarm because it is uniquely Canadian. No one has been able to duplicate its technology to date. Not the Europeans, not the Japanese, and not the Americans.

The Canadarm introduced Canada to a new era. It marked the beginning of a real effort to become the best in a very high-tech field. Today, Canada's aerospace companies are competing with the world at the forefront of the international space industry.

That success can honestly be attributed to the aggressive role that Spar has played in developing the industry in Canada, a role that was evident in the most recent space shuttle mission. Spar's space vision system was installed on the space shuttle, Columbia, to allow the Canadarm to perform at unprecedented levels of precision.

Today's guest speaker, Mr. John MacNaughton, has played a significant part in Canada's growth as a leader in aerospace and space engineering. Growing up in Western Canada--Big Sky Country--it is understandable that he would become an aeronautical engineer.

His first job in Canada was with DeHavilland's guided missile division. In 1962 he became the chief mechanical engineer of the company's special projects and applied research division.

When DeHavilland's Spar division became Spar Aerospace in 1968, John beamed over. Since then he has been directly involved in all of Canada's satellite projects, including the Alouette, Anik, and Hermes series. And he was instrumental in establishing Spar's remote manipulation division.

In 1989, John was appointed President and CEO of Spar. Throughout his career he has been recognized for his contributions to the field of aeronautical and space engineering.

To say that he is more than qualified to discuss the topic of re-establishing Canadian competitiveness in the 1990s is an understatement.

Ladies and gentlemen please join me in welcoming John MacNaughton.

John MacNaughton

This year baseball has given us some inspiring lessons about competition. Our World Champion Blue Jays won more than one game in the last few innings. And they worked hard for each victory.

Back in the 20s and 30s, the New York Yankees--with players like Babe Ruth and Lou Gehrig--showed the same fighting spirit. No wonder! The team was run by a Col. Jacob Ruppert, who had the highest of aspirations. He used to say: "My idea of a good ball game is one where the Yankees have a 13-run lead in the top of the ninth--with two outs and two strikes on the opposing hitter."

Ruppert didn't want the other teams to have a chance. And often they didn't.

Today Canadian business faces competition at least as tough. And--like Ruppert's Yankees--our competitors won't yield any innings, at least not gracefully. Nor should they.

The problem is that, as a country, we're doing worse than our Jays did. Much worse. We've got to find a new approach. One that strengthens our business team. One that gives Canadian companies the same advantages our competitors enjoy in other countries.

This afternoon, I'd like to discuss a new approach with you. If we want to flourish in the years ahead, if we want to hit the homeruns we need, if we want to be a winner in the field of global competition, then we must make a commitment to strategic alliances--strategic alliances that really bring together business, labour, education, and government.

This approach has been urged by several leading writers. And it makes sense to me because Spar and the Canadian space industry have had excellent experience with alliances. But before discussing solutions, let's examine the problem.

What are the challenges that we face in the world of the 90s and beyond?

At first glance, the answer might be: Why worry? Canada is a prosperous country. We have one of the highest standards of living in the world. And we have a strong set of social programs.

But a closer look at our economy makes clear that there is cause for concern. Serious concern. During the past decade, Canada had the lowest growth in productivity of any major industrial nation. Our unemployment rate, now in double dig its, is higher than most of the G7 nations.

Our federal and provincial debts are large and growing. Deficit financing has allowed us to preserve our social programs, but at what cost? Only at the cost of mortgaging our future. The federal debt in Canada is far higher, as a proportion of GDP, even than that of the United States.

Our trade deficit in finished goods is substantial. The imbalance is even greater in high technology--the very engine of economic growth in the 90s. And that, despite the success of companies like Northern Telecom, Bombardier, CAE Industries--and even Spar.

And most significantly, Canadians have not yet recognized or responded to the changed nature of their competition around the globe. Internationally, the most successful corporations have grown larger, stronger, more global, and more oriented towards long-term planning.

The unmistakable trend is toward fewer and larger. A study done at the Wharton School identified 136 industries--including aerospace and telecommunications--in which countries must compete globally to survive. The researchers predict a shakeout in each of these sectors before the year 2000. Only three to five key players will be left in each sector. Other firms will close their doors or scramble to find a niche.

This is the new world in which Canadian firms must compete. And the outcome of this contest is more important for Canada than for most countries. Twenty-five per cent of our national product is exported--a higher percentage than for any of the G7 countries except Germany.

To compete successfully we must change the way we do business. And that brings me to solutions and strategic alliances.

The Japanese experience provides a useful starting point for a discussion of strategic alliances. Many of you are familiar with the concept of "Best Practices Companies." Companies that excel in an important area are targeted for comparison and they're closely studied. Well, for business organizations, Japan for the last few decades has been a "Best _Practices" country. Sure, they've experienced some ups and downs, but there is much we can learn from the Japanese experience.

Let me get very specific. Big business in Japan is organized around keiretsu ["kay-rhet-sue"], which means a business alliance. Firms belonging to these keiretsu account for almost 80 per cent of the value of all shares listed on the Tokyo Stock Exchange.

These alliances are the basis for Japan's steady growth. They make possible long-term planning. And they allow groups of companies to target new fields, like consumer electronics, or more recently, computers.

A typical keiretsu may bring together a bank, an automobile firm, an electronics business and other enterprises. It's not a conglomerate. But it's more than a friendly association, or country club. The companies in these alliances own many of each other's shares. They purchase from each other where possible. They help finance each other's businesses. And the CEOs meet regularly to plan long-term strategies.

Canada can learn from the Japanese and their system of business alliances. Gone are the days when a Canadian firm can stand alone against international competition. In more and more industries, globalization has put a premium on cooperation among firms. And the magnitude of capital outlays makes long-term planning imperative.

Yet, too few Canadian companies are in a position to look very far ahead. The 1991 World Competitiveness Report ranked Canada only 14th out of 23 countries for long-term strategic decision-making. All this suggests that Canada must change, and it must change fast. I strongly believe that strategic alliances are key. Already there is movement in that direction. For example, at Spar.

We are an export-oriented company, a pygmy in a world of giants. For Spar, exports are 45 per cent of sales. When we sell our products, we compete against corporate giants whose sales are in the hundreds of billions of dollars. Spar's sales are less than $500 million. We compete not through size, but through ability and alliances.

For example, we joined the telephone companies across Canada to form Alouette Telecommunications. Alouette, in turn, purchased Telesat, which provides satellite-based services to Canadians. Our involvement in Telesat connects us with most of the big telecommunications players in Canada. These include Bell Canada, Teleglobe, and Stentor.

Together these companies form what some of us call a "strategic cluster"--a powerful industrial family providing a critical mass that allows us to be competitive in telecommunications worldwide.

In another strategic alliance, we work with MacDonald Dettwiler of Richmond, B.C., and with Comdev in Cambridge, Ontario. Our managements meet several times a year to coordinate joint activities. And, of course, our specialists are in constant contact.

Together, we're building Radarsat, the world's first operational earth sensing radar satellite. And together we've formed a company--Radarsat International--that will sell the information Radarsat produces to international markets.

I can assure you there will be more clusters. Spar was one of the first companies in Canada to form such alliances, and we intend to keep building them!

Spar's alliances go beyond the corporate sphere. Spar is also involved in co-operative research--through the Canadian Institute for Advanced Research for example. The Institute includes researchers at Spar as well as scholars at prominent universities such as McGill, the University of Toronto, and the University of British Columbia. The Institute funds pre-competitive research shared by several firms.

For Spar, all these linkages, partnerships, and consortia are really very important. They allow us to leverage our own relatively modest resources and to profit from the strengths of other organizations and groups. It's a win-win situation. Spar benefits. Other companies and universities benefit.

And Canada benefits from the jobs, training, and from the exports that our space industry generates.

Each industry is different, but the Japanese example and our own aerospace industry--point in the same direction. The studies currently underway for the Ontario Premier's Council for Economic Renewal also support these conclusions.

Solutions are never easy, but they can be clear. And this one is as clear to me as are the stars in outer space. A simple, straightforward solution for Canada is strategic clustering--strategic clusters which will allow us to build strength-upon-strength. Let me suggest four guidelines for creating strategic alliances in Canada.

Firstly, we should begin on a small scale. Some Canadian companies are already actively involved in alliances. But for many others such co-operation means entering uncharted territory. This journey of a thousand miles, to quote a Chinese proverb, should be made one step at a time.

The Japanese, after all, built their keiretsu on long-standing business ties--ties that went back to the late nineteenth century. Our tradition here has been more individualistic.

Lester Thurow's recent book, Head to Head, praises the cooperative capitalism of Japan and Germany, and criticizes the individualism of U.S. business. Canadians are even more reluctant to move toward co-operation. But, as never before, we must confront the cultural deterrents that have kept businesses in Canada from working together.

We Canadians are risk averse. We've built up a complex web of regulations that isolate companies, industries, and even the provinces from each other. And this regulatory net is confining us all, and frustrating the efforts of dynamic companies to grow beyond traditional boundaries.

As the Canadian writer, Hugh MacLennan, once said: "The trouble with this whole country is that it's divided up into little puddles with big fish in each of them."

Canadians need a new outlook to win in today's tough marketplace. But we cannot expect to change these deep-rooted values overnight. Hence alliances are best introduced around specific projects. The Premier's Council calls such groupings Innovative Business Enterprises. Each "cluster" could bring together several companies, government, universities, and a major financial institution.

All these Innovative Business Enterprises would build on areas where Canada already has great strengths, and where we can build even greater strength by broadening the scope of these enterprises.

Secondly, to help these alliances succeed, business must strengthen its ties with education. In countries like Japan and Germany, business and the schools work closely together--with splendid results.

Canada spends a higher percentage of its GDP on education than do these countries. But our results are very disappointing. We end up with a larger portion of students who drop out of school. And we have more students who graduate but are poorly trained for the workplace.

As Judith Maxwell, former head of the Economic Council of Canada, observed, business and education must be "partners in progress." Cooperative education, at the secondary and university level, should be expanded. Business must become more actively involved in curriculum and course design. In today's knowledge economy, well-trained, motivated individuals are absolutely crucial for success.

Thirdly, government must provide consistent, strong support for these business alliances. For many years we've stood by watching regulators keep companies from working together. Restrictions such as the Bank Act prevent strategic clusters from coalescing. Financial institutions are actively discouraged from ownership in other companies.

For example, banks, for many years, have been limited to holding no more than 10 per cent of the voting shares of other organizations. The same is largely true for insurance and trust companies. So the kind of co-operation that I'm looking for, the kind which will provide mutual benefits, is blocked. We must change the regulatory structure.

A new approach is needed. One that sees cooperation as a plus for all concerned--business, employees, and above all, Canada. Government should not be in the business of picking winners. But it can encourage broad, strategic directions that will create a climate in which winners can emerge and succeed. And it should support the forums that allow companies to share knowledge and plan together.

By the same token, governments should not undertake the research that needs to be done in Canada. But they should encourage links between business and universities. The Centres of Excellence and the business-university consortia that some provinces have established are a step in the right direction.

Fourthly, once in place, these alliances should be expanded in the direction of broader co-operation and long-term planning. It's unlikely that the Canadian model will closely resemble the one in Japan. Our geography, our smaller population, our particular set of federal-provincial ties, all suggest that only a made-in-Canada solution will suit us.

Indeed, different provinces and regions of Canada may develop their own approach to strategic alliances. Quebec Inc.--an alliance of business, labour, and government--demonstrates a different outlook than is evident in, say, Ontario.

But everywhere such alliances really should be strengthened. And they should move in the direction of increasing co-operation, greater sharing, more "patient" financing, and above all, long-term planning.

So to build these strategic clusters we must start off with small solutions, strengthen ties between business and education, get more positive support from governments, and gradually and steadily broaden these alliances.

To succeed, this concept must have the widest possible support. It must receive the backing of the leaders of government, of business, of labour, of education, and of the very communities where these alliances operate. This approach must span industries and sectors. It should be endorsed by those who direct our financial institutions and our knowledge industries. And it should be acclaimed by a public that has a broad understanding of the need for change.

Although I am anything but a visionary, I remember well the night the first Gemini manned spacecraft circled the earth. I was a young engineer immersed in the fledgling space industry. I was leaving work late one night and I looked up and saw a full moon.

I thought: "It's incredible, the things we have designed, touched, and agonized over are going there, they'll land there, and they'll become a monument to all of our efforts." I guess I am a romantic at heart.

I believe deeply in a world beyond the one we all see in front of us. Inspired as I was, I vowed to continue as part of this industry that had taken us into uncharted territory. And what a privilege it has been!

The space industry here in Canada has set the stage for still another inspiring adventure. An adventure of a different kind, here on earth. Strategic clusters. I'd welcome the opportunity to work with others who share this vision. I hope others will come forth to join me. I'd like to see a group of committed individuals come together, map out a program, and break down the barriers that still prevent such cooperative efforts. I, for one, would commit myself to such an initiative. Such an initiative would be a really great step forward for our country.

I opened with baseball and a tale of the mighty Yankees of the 20s and 30s. Our Toronto Blue Jays started out as a wobbly expansion team. But of late they haven't had much difficulty handling those Yankees. I see a lesson there for Canadian business.

I have great confidence that we can compete effectively in the new global economic order. And I know that strategic alliances will be key to our success. Let's build strength-upon-strength. Let's work together. And let's create some winning teams.

The appreciation of the meeting was expressed by Robert Baugniet, President and CEO, Berger & Associates Canada Inc., and a Director, The Empire Club of Canada.