Northern Telecom Limited

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Northern Telecom Limited

3 Robert Speck Parkway
Mississauga, Ontario L4Z 3C8
Canada
(416) 897-9000
Fax: (416)275-1143

Public Company
Incorporated: 1914 as Northern Electric Company Limited
Employees: 49,039
Sales: US$6.77 billion
Stock Exchanges: New York Toronto Montreal Vancouver London Tokyo

From its base in Canada, Northern Telecom Limited has grown steadily during its long history to become a leading global supplier of telecommunications systems. In the United States, for example, Northern Telecom was in the early 1990s the second-largest manufacturer of telecommunications equipment after American Telephone and Telegraph (AT&T). Northern Telecom sells its products in more than 80 countries and operates 42 manufacturing plants in the United States, Canada, France, Australia, Thailand, Malaysia, the Republic of Ireland, and the People’s Republic of China. Its products include telephones, networks, wire and cable, telecommunications and transmissions systems, fiber-optic cable and equipment, and other equipment for both public and private communications networks.

To reach such a position, Northern Telecom implemented bold and aggressive economic strategies throughout its history. During four years alone, from 1981 to 1985, the telecommunications giant’s net profit margin jumped by 30%, and its sales doubled. In 1985 sales were US$4.3 billion.

Northern Telecom’s origins can be traced back to 1880, four years after Alexander Graham Bell invented the telephone in 1876. In that year Bell Telephone Company of Canada (Bell Canada) was founded. To develop adequate telephone equipment for the fledgling company, Bell established its mechanical department on July 24, 1882, in Montreal, Canada, with a staff of 3 that soon expanded to 11. Success came early to the company, and five years later the mechanical department moved to a larger facility to accommodate a staff that had increased to 54.

The growth led to Bell Canada taking out a charter in 1895 for a separate company to take over the mechanical department’s work. On December 7 of that year, Northern Electric & Manufacturing Company Limited was incorporated under the dominion charter. With C.F. Sise as president, the company called its first general meeting of stockholders on March 24, 1896. By 1902 Northern Electric employed 250 people and occupied a 48,000-square-foot plant, which it leased from Bell Canada. That plant had expanded to 241,000 square feet in 1912, the year Northern Electric and Bell Canada worked out a deal whereby Northern would become the storekeeper and purchasing agent for Bell.

In 1895 C.F. Sise had bought a small plant from Alexander Barrie that was involved in manufacturing rubber-coated wire for the fast-growing electrical industry. In turn, Sise offered the company to Bell Canada for what it had cost him. Bell Canada accepted the offer, and on December 19, 1899, the Wire & Cable Company, as the enterprise became known, was granted a province of Quebec charter. Sise was appointed president and Barrie superintendent. A big success, the Wire & Cable Company replaced its provincial charter with a dominion charter in 1911 and changed its name to Imperial Wire & Cable Company.

By then both Northern Electric and Imperial Wire & Cable were playing vital roles as Canada’s major suppliers of telephone equipment. In many operational areas, however, their needs and interests overlapped. The management of both companies realized that to increase efficiency and to reduce overhead, the two enterprises should amalgamate. On July 5, 1914, they consolidated under the laws of Canada into Northern Electric Company Limited. While the general sales division continued to be located in Montreal, the company established supply and repair divisions for western Canada in 1929 and for the Maritime region in 1944. Despite the Great Depression, which forced Northern to cut back production, the company still managed to grow. It established the electronics division in 1931 and expanded its base of operations by purchasing a majority interest in Amalgamated Electric Company Ltd. in 1932 and, in 1935, by launching Dominion Sound Equipment Ltd., a wholly owned subsidiary that supplied Canada with electric sound equipment, acoustic and sound proofing supplies, radio and broadcasting sound equipment, and other lines of electrical equipment.

When the Depression ended, Northern became involved in Canada’s World War II effort, converting 95% of its operation to war production. By 1944 most of the company’s 9,325 employees were engaged in this activity. Soon after the war’s end in 1945, Northern immediately began a flurry of construction to meet the expanding communications needs of Canada’s growing communities. As a measure of its continuing growth, Northern’s work force expanded to 12,775 by 1948.

The company was gradually losing its independence. By 1956 the U.S. company Western Electric, the manufacturing arm of AT&T, owned 40% of Northern Electric, an economic situation that forced Northern to operate much like a “branch plant.” During this period, the company had a small research and development staff, and its sales efforts were confined to Canada. As its main function was to manufacture Western Electric products for Bell Canada, Northern Electric’s product line generally lagged behind Western Electric’s by two to three years.

Northern Electric ceased operating like a branch plant in 1956 when Western Electric signed a consent decree with the U.S. Department of Justice in which it agreed to relinquish its interest in Northern Electric. Bell Canada acquired most of Western Electric’s interest in Northern Electric in 1957 and the remainder in 1964. With no product line of its own, and with management knowing that it must start one to remain competitive, Northern Electric stepped up its research and development efforts, establishing Northern Electric Laboratories— with a staff of 30 to 40 people—in 1958. In 1965 the company made a commitment to develop a switching device known as SP-1, stored program switch system, which it believed would meet the needs of the Canadian market and spur economic growth. From 12 researchers in 1965, the product development team working on SP-1 grew to more than 100 by the end of the decade. The commitment paid off when Northern put its product on the market. By 1975 not only had every major telephone company in Canada bought the switch, but 25% of all sales were being made in the United States.

Northern Electric’s research and development division had become a conglomerate itself, mushrooming to more than 2,000 employees, and eventually incorporating as a separate entity. On January 1, 1971, Northern Electric’s subsidiary, Bell-Northern Research Ltd. (BNR) was formed. In the early 1990s, BNR operated research and development facilities in ten cities: four in Canada, five in the United States, and one in the United Kingdom. In 1973 Bell Canada sold a portion of Northern Electric’s shares to the public, while retaining a majority holding.

During the 1970s the company established many new subsidiaries, such as Northern Telecom (International) B.V. in Amsterdam, and Northern Telecom (Asia) Limited in Singapore and Hong Kong, both established in 1974. These subsidiaries reflected its increasingly strong presence in the international marketplace. In 1976 the company’s name was changed to Northern Telecom Limited (Northern) to reflect the great advances it had made in manufacturing modern telecommunications equipment.

The same year Northern introduced the first fully digital switch. Although AT&T did not immediately authorize its affiliates to buy the switches, independent U.S. telephone companies quickly did, and by 1978 Northern sales had jumped by 130% from the previous year. The demand for the company’s digital switches received a big boost in 1981 when AT&T approved the purchase of the switches for its affiliates. In 1984 the U.S. government broke up AT&T, and sales of Northern’s digital switches skyrocketed, and volume increased by 1,200% over that of 1976.

Northern had ignored conventional business wisdom and taken chances to get where it had arrived. As one company official said, “When we started to work on the digital central office switches in the 1970s, we were advised to follow AT&T and continue making old analog switches since digital switches would be too expensive.” Fortunately for Northern, it did not, and the introduction and marketing of the switch proved to be a major milestone in its history. By 1990 one research firm estimated that the company held close to one-third of the U.S. market for the digital switches.

Northern’s fortunes, however, began to change by the mid-1980s. While AT&T was making a comeback with its own switch, Northern made a technological blunder. It began selling new software to provide its phone company subscribers with advanced service capabilities based on new technology. Poor marketing, bugs in the software, and the fact that the processor in Northern’s switch could not keep up with all the new tasks the expanded software had to do alienated many company customers. One disgruntled business executive told Business Week in 1987, “Their software and capacity problems are still driving us wild. We’re giving our orders to AT&T.”

Northern launched a public relations campaign to reassure its customers that it had solved the software problems. It also announced the availability of Supercore, a new processor that cost $50 million to develop. “[Supercore] will double the capacity of our switches and eventually increase it to whatever we want,” maintained Northern President David G. Vice.

Many in the telecommunications market remained skeptical, however, and rival telecommunications companies like Japan’s NEC, Sweden’s Ericsson, and Germany’s Siemens began to make a move for Northern’s markets. Despite the setbacks, Northern had become one of the giants in the telecommunications industry. Consolidated revenues for 1989 were US$5.41 billion, up from US$4.44 billion in 1986.

Northern repositioned in 1988 because of concerns that the intense global competition combined with the money it had invested in product and market development had affected its financial performance. Under the newly elected chairman, chief executive officer, and president, Paul G. Stern, who took over in March 1989, Northern embarked on a program to restructure the corporation.

Stern’s association with Northern began in April of 1988 when the company elected him to its board of directors and to membership on the executive committee. He brought to the job a strong background in advanced-technology company management and a reputation for making tough cost-cutting decisions at large corporations. He had previously served as an executive for Burroughs, Unisys, IBM, and Rockwell. Within nine months after Stern assumed the helm, Northern had reshuffled management, cutting 2,500 jobs; closed 4 of its 41 plants, selling one-fifth of the plants to employees; and changed its bonus system, tying employee incentives in each business unit to company performance.

The dramatic changes caused a stir in Canada. Northern’s plans to move its research and development operations from Toronto to Texas and California made Canadians wonder if the company would move its headquarters as well. As of 1991, however, it was still a Canada-based company.

Northern, however, quickly saw positive results from the tough measures it took. In 1989 company expenses fell 18.5% from the year before, while profits jumped 18% on a 13% increase in sales. The company was making a push to garner a bigger share of the market outside the United States, not only by increasing sales of its switches, but by marketing a line of fiber-optic transmission systems and a network design concept called Fibre World. “Invariably, [customers] buy a product because a supplier has an uniqueness,” Stern said. “When you’re first, the perception lingers.” Introduced in February 1989, the concept and its systems are based on a set of international standards established in 1988 called synchronous optical network, or Sonet, which, Northern officials said, would assure compatibility among equipment from different manufacturers, thus permitting the establishment of extensive networks and improving the speed and volume of information that telecommunications systems could carry.

To maintain its position in the highly competitive world of communications technology, Northern continued to invest heavily in research and development. Northern was spending more on research and development than any other company in Canada, and through its subsidiary, Bell-Northern Research Ltd., it had become the biggest employer of telecommunications research professionals in the country; it hired each year between one-quarter and one-third of all available electrical engineering doctoral graduates of Canadian schools. In total, Northern was employing more than 6,100 research and development staff. “For us, there is no question that the major opportunity before the telecommunications industry today is to develop innovative solutions that can link different manufacturers’ equipment in public, private and hybrid networks,” said Greg Sakes, president of Bell-Northern Research Ltd.

Northern’s pioneering work in telecommunications during the 1980s was illustrated by the development of the international services digital network (ISDN), the company’s control switching system. Two years after using the technology to make the first ISDN telephone call in North America in November 1986, Northern introduced the technology commercially throughout the continent.

By 1990 Northern was the world’s sixth-largest telecommunications company, but corporate management publicly stated that it was preparing for an even more ambitious goal—to become the world’s leading supplier of telecommunications equipment by the year 2000. Soon after, it took a major step in that direction when it purchased STC PLC, a large British telecommunications company in January 1991 for about US$2.6 billion. The acquisition put Northern in third place behind Alcatel NW of Belgium and the United States-based AT&T. Northern had already owned 27% of STC PLC when it made the deal.

The purchase increased Northern’s total debt to C$4.3 billion, 50% of its equity, compared to 29% before the buyout. Northern said, however, that it planned to help relieve the debt using the C$1.6billion from the sale of STC’s computer’s division, ICL Ltd., to Fujitsu Ltd. of Japan.

In February 1991 Northern and Motorola, the world’s largest supplier of cellular transmission gear, formed a cellular equipment alliance. Observers saw the alliance as the first step in a joint venture to market and develop equipment in the United States and overseas. In preparation for its international push, Northern also announced at the same time that it had undertaken a significant reorganization of its operations.

Among other changes, the marketing, sales, and service activities of Northern were divided into four geographical areas: the United States; Canada, including activities in Mexico, the Caribbean, and Central and South America; Europe, including Africa and the Middle East; and Asia and the Pacific Rim.

Northern dubbed its globalization campaign to become the world’s leading supplier of telecommunications equipment Vision 2000. President Stern said the company wanted to increase annual revenues to C$30 billion by the year 2000, a figure that is about five times its 1990 sales. Some observers saw Northern’s goal as overly ambitious, as the company would need more than phone switches to improve its international performance.

The skeptics have not deterred Northern Telecom, which has built a strong foundation to take on future challenges. Past performance has shown that it has every intention of following Stern’s words: “For us, history is just the beginning.”

Principal Subsidiaries

Northern Telecom Inc. (U.S.A.); Northern Telecom Canada Limited; Northern Telecom World Trade Corporation; Northern Telecom Electronics Limited; Bell-Northern Research Ltd. (70%); STC PLC (U.K.); Northern Telecom PLC (U.K.); BNR INC (U.S.A.); BNR Limited (U.K.); Brock Telecom Limited; Netas-Northern Electric Telekomunikasyon A.S. (T\irkey, 31%); NorTel Australia Pty. Limited; Northern Telecom (Asia) Limited (Hong Kong); Northern Telecom International Finance B.V. (Netherlands); Northern Telecom (CALA) Corporation (U.S.A.); Northern Telecom Europe Limited (U.K.); Northern Telecom Finance Corporation (U.S.A.); Northern Telecom GmbH (Germany); Northern Telecom Industries Sdn. Bhd. (Malaysia); Northern Telecom (Ireland) Limited; Northern Telecom Japan Inc.; NT Meridian S.A. (France, 69.5%); Prism Systems Inc. (51%); Tong Guang-Nortel Limited Liability Company (China, 55%); STC Properties Limited (U.K.); STC Technology Limited (U.K.); STC (Northern Ireland) Limited; Computer Consoles Inc. (U.S.A.); STC Submarine Systems Inc. (U.S.A.).