Becoming a global giant

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The stainless-steel shovel that props up an ornamental tree in the corner of John Roth’s office is more than an unusual piece of office decor. It also symbolizes Northern Telecom Ltd.’s commitment to research and development–the life-blood of the telecommunications industry. Roth, the company’s executive vice-president for product line management, used the shovel at a sod-turning ceremony for a $30-million advanced-technology laboratory near Ottawa. Although the ceremony took place a decade ago, most of the research conducted at the lab is still several years away from being applied in the outside world. That kind of long-term thinking made the 96-year-old, Mississauga, Ont.-based company the world’s sixth-largest telecommunications company last year, with sales of $5.6 billion in the first nine months of 1990. Now, the company’s executives are training their sights on an even loftier target–to become the world’s leading supplier of telecommunications equipment by the year 2000.

Northern has already taken a series of major steps towards achieving that goal. In October, 1989, it became the world’s first company to launch a complete family of telecommunications equipment based on fibre optics, a method of voice and data transmission that uses hair-thin strands of glass rather than bulkier copper wires. And last November, the counpany announced plans to take over control of STC, PLC, a British telecommunications company, for $3 billion. The planned acquisition, to be completed this week, will boost Northern’s revenues by a projected $2 billion this year, lifting it into third place among telecommunications manufacturers. The top-ranked company is Alcatel NV of Belgium, with sales of $16 billion, followed by New York City-based American Telephone and Telegraph Co. (AT&T), with sales of $15 billion.


Already, Northern spends more money on research and development than any other company in Canada–a total of $840 million in 1989 alone. But to overtake its rivals, Northern will have to strengthen its efforts in another key area: marketing. The company’s stated objective is to increase its share of the world market for telecommunications equipment to about 10 per cent by the year 2000, compared with its current level of six per cent. That would require Northern to grow by 15 per cent a year for the rest of the decade. Robert Price, a consultant with the Toronto-based Transition Group Inc., says that Northern is headed in the right direction. Said Price: “They’ve made all the right moves lately. And there seems to be no upper limit to the growth of the industry.”

Northern’s globalization campaign is the latest step in the company’s evolution. From its start as Northern Electric Manufacturing Co. in 1895 until the 1960s, the company’s main activity was producing Canadian versions of U.S.-designed telephones, clocks and lamps. Later, it became a leading manufacturer of complex business communications systems, which can connect hundreds of users in offices around the world. Said Roth, 48, who joined the company in 1969: “In the 1970s, we learned how to do our own design and, in the 1980s, we became a North American company with two-thirds of our sales in the United States. The era we’re entering now will see us become an international company.”

The man who is leading that effort, chairman Paul Stern, is himself a product of several cultures. born in Czechoslovakia and raised in Mexico before attending school in the United States, Stern speaks fluent German and Spanish, as well as English. Before joining Northern in 1988, he served as president or chief executive officer of three multinational companies, including Braun AG of Germany.

One of Stern’s first steps at Northern was to search for ways to cut costs in order to boost profits. Among other things, he reduced the workforce by five per cent, to 49,000. Of those, 23,000 work in 72 Canadian locations. According to Roth, Stern’s international background makes him well suited to the task of transforming Northern–53 per cent of which is owned by BCE Inc. of Montreal, with the rest distributed among almost 9,500 shareholders–into an international giant. He predicts that Stern will increase Northern’s overseas presence by buying more of its competitors. Says Roth: “We need more market share.”

So far, the reaction to Northern’s takeover of STC has been mainly favorable. Michel Guite, a telecommunications analyst with Salomon Brothers Inc. in New York, for one, says that the acquisition is “a significant achievement” for the Canadian firm. Guite says that it will put Northern, which already owned 27 per cent of STC, in a better position than most of its competitors to bid for large overseas contracts. Over the next few years, dozens of countries, ranging from Germany to South Korea, intend to launch multibillion-dollar programs to upgrade to install modern telecommunications systems. At the same time, STC’s expertise in manufacturing transmission equipment, especially undersea fibr-optic cables, complements Northern’s traditional expertise in switching equipment, according to Susan Kalla, director of research at Northern Business Information, a New York-based research firm. Kalla adds that the purchase of STC represents Northern’s best chance to break into the potentially lucrative European market. “The only way to penetrate new markets is to buy an existing player,” she says.


Still, some analysts say that Northern’s stated goal of becoming a world leader may be overly ambitious. Although the company is strong in the United States, where it ranks second in sales, and has made important inroads in Japan, only five per cent of its total sales are outside North America. In Addition, Northern’s purchase of STC has increased the company’s total debt to $4.3 billion, 50 per cent of its equity, compared with 29 per cent before the purchase. Roth said that Northern plans to reduce its debt by using money generated by the $1.6-billion sale of STC’s computer division, ICL Ltd., to Fujitsu Ltd. of Japan.

The company’s prospects for increased sales also appear mixed. Northern is the world’s leading seller of central office switching equipment. But that market is already well served and is likely to grow by only two to four per cent annually, said Mark Lawrence, a telecommunications analyst with Toronto-based Midland Walwyn Ltd. He added that he doubts Northern will be able to maintain its existing lead over AT&T in systems based on fibre optics. Said Lawrence: “It’s not likely that AT&T is goint to lessen its defences.”

Roth himself is clearly aware of the obstacles that lie ahead. “In the 1990s” he says, “it will be tougher to move up in the pack.” But he added that the company is developing new products that it hopes will give it a competitive edge over its rivals in the United States, Europe and Asia. Much of that work is being carried out in the Nepean, Ont., lab where Roth turned the sod 10 years ago. Researchers there are experimenting with a semiconductor compound known as gallium arsenide, which can transmit light waves 10 times faster than the silicon-based glass threads currently used in fibre optics. If Northern manages to bring that new technology to the marketplace before its competitors, its bid to become the world’s number 1 supplier of telecommunications equipment may well succeed.

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