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HIGH-TECH STAR

Last February, Northern Telecom Chairman and CEO Paul G. Stern was scouting for a European partner to establish a beachhead in the Continent's sizzling new market for digital mobile phone gear. When word came that France's Matra was looking for a partner, too, Stern wasted no time. He called Matra CEO Jean-Luc Lagardere and then headed for Paris on his Challenger jet. Although Matra was already entertaining bids from AT&T, Siemens, and Philips, Stern persisted. "He's been flying across the Atlantic like I cross the English Channel," says Lagardere, who hit it off with the indefatigable Stern.

On July 2, Stern's frequent flying paid off: Northern Telecom Ltd. announced it will pay about $310 million for up to 40% of Matra's communications division and a 5% stake in its parent. Their teaming up, Stern crows, "is just the beginning" of a broad European alliance that will span a whole range of telephone products.

BLOSSOMING OUT? Latching onto Matra is only the latest victory in Stern's continuing global assault. In the past two years, Northern has launched joint ventures in Poland and Spain, paid $2.6 billion for Britain's STC PLC, and won business from China to Turkey to Australia to Russia. It is the largest foreign supplier of telecom gear to Japan's ultracompetitive market. By decade's end, Stern predicts, Northern will grow into a giant with up to $30 billion in revenue, half from outside North America. "Our vision," he says, "is to be the leading telecommunications equipment company by the year 2000."

Not that many years ago, any suggestion that this Canadian company could challenge such giants as AT&T, Germany's Siemens, France's Alcatel, Sweden's L.M. Ericsson, or Japan's NEC would have seemed preposterous. Until 1962, it was an appendage of AT&T, controlled and 44%-owned by Western Electric. Alone, Northern seemed more likely to be swallowed up than to swallow.

But today, even competitors express admiration. Says Ryoichi Sugioka, Fujitsu Ltd.'s executive director for communications systems: "Northern Telecom is a great company, and we respect them enormously." Most think it will be among the few dominant survivors in a global industry whose sales will soar past $200 billion by the year 2000, from $102 billion last year.

What is Northern doing right? Its research is world-class. It has cut manufacturing costs to the bone. It adapts, chameleon-like, to the colorations of local markets, including Japan (page 57). Finally, under the demanding Stern, Northern has created a no-excuses culture that pushes employees to perform to their limits. "I have trouble relating to people who don't want to excel," Stern says, a bit ominously, in a videotaped message to employees. Indeed, Northern Telecom is charging so hard on so many fronts that its biggest risk is spreading its forces too thin.

The 53-year-old Stern is a self-made man driven by almost limitless ambition. He was born in Czechoslovakia and reared in Mexico City. After attending college in the U.S., he earned a doctorate in solid-state physics at Britain's University of Manchester. Stern made up his mind in prep school to become wealthy, he says in his 1990 book, Straight to the Top. He wrote: "I had a dream of getting to the top, a dream that would later become an obsession."

In Northern Telecom, Stern has found a vehicle for that obsession. When he was named CEO in 1989, he took charge of a company that had already grown spectacularly. After the 1984 breakup of American Telephone & Telegraph Co., Northern stormed the U.S. market, tripling revenues to last year's $8.2 billion. Previously, Northern had been all but shut out from the Bell System. Now, it threatens to surpass AT&T in the U.S. as the leading supplier of digital central-office switches, the high-tech heart of the phone system. Northern also is neck-and-neck with AT&T in the market for office phone systems bought by businesses. And Northern's new joint venture with Motorola Inc. in cellular equipment, launched in May, could easily grab leadership in that fast-growing market.

Northern still trails AT&T badly in transmission equipment, giving AT&T the lead in the overall U.S. equipment market. And AT&T says it's not conceding anything in switches, either. But the fact remains that Northern has made a deeper dent in AT&T's U.S. market share in central-office switches than MCI and Sprint have in long-distance service. Northern even beat out AT&T to supply a digital switch to the White House. Meanwhile, Northern retains a hammerlock on its native Canada.

CONSTANT SHUTTLE. Today, Northern is Canada's most successful multinational and perhaps the best example of a truly North American company. It is controlled by Canada's BCE Inc., which has a 53% stake and also owns Bell Canada. But Stern and many of the other top executives are American. They shuttle between almost identical office suites in the headquarters near Toronto and in McLean, Va., outside Washington. With operations in North Carolina, Tennessee, Texas, and California, Northern's U.S. employment has exploded to 22,000, nearly equal to its Canadian force. And the U.S. last year accounted for 50% of Northern's total sales, vs. 24% for Canada. Although many Canadians are distressed by their country's free-trade embrace with the U.S., Northern Telecom has thrived from it.

Now, Stern is out to transform Northern into a global company. He has little choice. While North America represents a third of world telecom sales, its importance will shrink as markets elsewhere grow faster. Last year, Northern managed to get 26% of its revenue from outside North America, up from just 9% in 1989 (chart).

Stern is well-prepared to lead Northern into this battle. While studying for his doctorate, he forced himself to work seven days a week, earning the degree in half the normal four to five years. Soon after, he gave up research for management. During seven years at IBM, he received five promotions. Still unsatisfied, he jumped ship for Braun, the German consumer appliance company, where he became CEO and was known as the "German American," for his flawless German.

BIG CHANGES. After four years at Braun, Stern yearned for a bigger stage. He found it at Burroughs Corp., where in 1982 he became president. When Burroughs merged with Sperry to form Unisys Corp. in 1986, Stern became Unisys' first president. But he clashed with CEO W. Michael Blumenthal and resigned at the end of 1987. The next year, Stern joined Northern's board, and in March, 1989, he was named CEO.

At Northern, Stern has pushed radical change from day one, wiping out three layers of bureaucracy and recasting upper management. "Most of the old school is gone," says Alan G. Lutz, president of the Public Networks division. "Paul has kicked this place in the pants."

Lutz should know. When his division lost a $100 million Nynex Corp. switch order to AT&T in late 1990, Stern called Lutz before the executive committee. It was a summons Lutz dreaded. Indeed, as he stepped to the podium, others in the room muttered bad jokes at his expense. Stern quieted them, saying: "We're not here to crucify anyone." But he added, pointedly: "We're here to find out what we did wrong so we don't do it again." Lutz took heed.

Stern is personally directing a "Vision 2000 Leadership Campaign" aimed at Northern's 57,000 employees. Organized like a political campaign, it has been to some 20 Northern locations since last August. At rallies, smiling workers march around carrying banners and shouting the campaign's slogan: "One team, one vision."

To push globalization, Stern reorganized the company last year to eradicate geographic fiefdoms, ordering that the development and making of products be managed globally. Simultaneously, he boosted marketing, Northern's weakest suit, by wrenching it from the hands of production executives who had little idea of how to sell the products they created.

To direct this marketing thrust, Stern recruited a savvy veteran from IBM: Edward E. Lucente, who had been Tokyo-based president of the $12 billion IBM World Trade Asia Corp. Lucente, now executive vice-president, is rapidly expanding Northern's foreign sales force, another weak spot.

BIG EDGE. Northern is also becoming more adept at the political side of cracking foreign markets. In Spain, the company tapped a former Foreign Minister to head its joint venture. That paid off in June, when Telefonica de Espana ordered Northern data-network equipment.

The company's dual identity as Canadian and American proves to be an unusual advantage. When dealing with a government that might be unenthusiastic about giving a big deal to an American company, Northern plays up its Canadian identity to distinguish itself from AT&T. That also can work well with foreign phone companies, especially since AT&T is competing with those foreign carriers in providing some services. But in Japan, Northern has stressed its U.S. ties. Moreover, Northern has steered clear of the misalliances that plagued AT&T. Says Michael Arellano, an analyst for McGraw-Hill Inc.'s Northern Business Information: "They have learned from AT&T's mistakes."

Most of Northern's overseas gains have come in Europe, where revenues have mushroomed fivefold, to $1.4 billion, since 1989. And most of that growth came from the March, 1991, acquisition of STC. The deal was a near-perfect fit. STC strengthens Northern's presence in transmission equipment and makes it a major player in undersea fiber-optic cable systems. STC also gives Northern a solid entree to British Telecommunications PLC, now its largest customer after Bell Canada.

On the Continent, Northern has done well in such niches as packet-switching gear for data transmission. So far, though, Northern hasn't landed many big-ticket sales. Even with STC, it has only 5% of the transmission market, far below leader Alcatel's 30%. "The French and German markets have been verydifficult for us to crack," concedesLucente.

The newly minted joint venture with Matra should help. By mating Matra's radio gear with Northern's switches, the companies will be able to compete for business from cellular network operators across Europe. In France, the Matra-Northern alliance will now be the supplier to beat in office phone systems.

ON THE ROAD. Stern is showing the flag in Europe, running full-page image ads in European newspapers and sponsoring a recent tour by the Montreal Symphony Orchestra. He visits Europe every two or three weeks, each time visiting four or five customers with Desmond F. Hudson, CEO of Northern Telecom Europe Ltd. That's important for a new player. Says Hudson: "Getting the chairman out here is critical to building broad relationships with these countries."

It's a start, anyway. With plenty of strong homegrown companies in place, Northern may require another major acquisition or two to meet Stern's goal of $5 billion in European revenue by the late 1990s. One reason is that the locals are fighting back. Both Alcatel and Siemens, for example, argue that Northern and AT&T should be excluded from the open bidding on public phone network contracts that the European Community has scheduled to start next January as long as they continue to be exclusive suppliers to, respectively, Bell Canada and the long-distance service arm of AT&T. "There's a strong recognition in Europe that the U.S. and Canada are playing by double standards," says Josef Cornu, Alcatel's executive vice-president.

Asia is an even tougher nut to crack. Stern says he wants 10% of the huge Japanese market, and a big presence elsewhere in the region. But the Japanese market remains dominated by NEC, Fujitsu, Hitachi, and Oki Electric, and may be for some time to come. Stern says he's fascinated with the idea of teaming up with a Japanese company to help Northern "get to a much bigger size" in Japan. Hitachi Ltd., which has been consummating lots of joint ventures recently, is a potential partner. So is Oki. On the Asian mainland, China has bought about 15% of its digital network switches from Northern.

All his global plans hinge on Stern's ability to maintain his position in North America, which last year provided 89% of Northern's operating earnings. Stern aims to increase U.S. revenues 10% to 12% a year, twice the industry pace.

COMEBACK. One key to winning in North America's slow-growth market will be cutting-edge technology. In the '80s, Northern's pioneering of the digital switch changed it from a small Canadian supplier to a global giant. Now, Northern hopes to lead another revolution: the conversion to fiber-optic technology in transmission equipment. Backed by a $1 billion research budget, Northern engineers hope to leap from also-ran to leader in transmission gear. Last year, Northern's revenues in switches were five times greater than in its transmission business, which captured only 7% of the U.S. market. Says Lutz: "I won't be satisfied until our transmission business is the same size as our switch business."

Northern also intends to come from behind in cellular and wireless equipment. Because it was preoccupied with digital switching, Northern missed the beginning of the cellular revolution. But now it has teamed up with Motorola: a union that consultant Herschel Shosteck calls "a marriage of convenience destined for passion."

The engine of new-product development is Bell-Northern Research, the company's Ottawa-based research arm. It may lack the Nobel prizes of AT&T Bell Laboratories, but BNR's developmental work is state-of-the-art. Its projects range from testing phone gear in echo-proof rooms that resemble medieval torture chambers, to custom-building devices for making specialized chips that go into fiber-optic transmission gear.

Northern's rivals, including AT&T, often scoff that the company wins big orders only because it's the low bidder, not because it has superior quality. In some cases that may be true--but it merely highlights the importance of Northern's focus on becoming a low-cost manufacturer. Frederick Scott, director of the Boston University Manufacturing Roundtable, calls Northern's switch factory in Research Triangle Park, N. C., "one of the top manufacturing operations in the world."

Most workers in Research Triangle Park belong to self-directed work teams, set their own shifts, and chart their own productivity. Workers are paid salaries, ranging from $18,000 to $30,000. None of Northern's U.S. production workers are unionized, compared with nearly 100% of AT&T's. Larry Cohen, director of organization for the Communications Workers of America, calls the North Carolina plant a "sweatshop," but he concedes that workers there might not vote in favor of a union if given the choice.

AT THE TOP. The push to drive down manufacturing costs is typical of Stern's regimen. Despite his long-term vision, he has never lost sight of the bottom line. He boosted Northern's gross margins to 42% last year, from 39% in 1989, by brutally trimming costs. Northern posted 11 straight quarters of record earnings through the end of March. Although the company was expected to announce lower second-quarter sales and operating earnings on July 21, partly because of the sale of some STC operations, analysts still expect increases for the full year.

Northern still faces enormous challenges. As Stern is fond of pointing out, a decade ago 25 major equipment suppliers operated worldwide. Today, he figures, seven are left--and most observers expect further consolidation. Outside North America, Northern still lacks on-the-ground experience. Some of its rivals, such as Siemens, get more help from their home governments, such as low-interest loans to customers in developing countries. Northern also is going up against diversified enterprises with huge revenue streams: AT&T, for example, with long distance, computers and financial services, had total revenue of $63.1 billion last year, nearly eight times that of Northern.

All that said, Northern has never been in better shape. It's at the top of its industry in research, technology, and manufacturing ability. With AT&T, it dominates North America. And since Stern's arrival, it has made big strides overseas. Realistically, Northern probably won't be the largest global player by decade's end: Alcatel and AT&T are both too far ahead. But even if Stern's obsession doesn't make Northern Telecom No. 1, the company that came down from Canada is clearly headed for a major role on the world stage.William C. Symonds in Toronto, with Jonathan B. Levine in Paris, Neil Gross in Tokyo, and Peter Coy in New York


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