Telecom Dynamics-Swedis (ETE 521 L9)
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The Swedish telecommunications sector has historically been dominated by Ericsson and dependent on its innovations. Ericsson's success in mobile communications in the 1980s-90s drove significant economic growth in Sweden. However, the Swedish innovation system became overly reliant on one firm, Ericsson, which accounted for the majority of telecom manufacturing. While this strengthened Sweden's telecom sector, it also created vulnerabilities if Ericsson failed. Early cooperation between Ericsson and the Swedish telecom operator Televerket, including jointly developing switching systems, helped drive both companies' competitiveness.
Telecom Dynamics-Swedis (ETE 521 L9)
- 1. ETE 521: Telecommunication Business and Management Lec 09: Telecom Dynamics: History and state of the Swedish telecom sector and its innovation system.
- 2. Sweden: Population: 9 m GDP: US$333 b GDP per capita: US$ 37,00 Currency: SEK 5.96 SEK = 1 US$ Telecommunications, the automotive industry and the pharmaceutical industries are also of great importance.
- 3. The telecom sector has contributed substantially and increasingly to economic growth in recent decades. Rapid technological development, innovation and diffusion have turned telecom into a major growth generator, globally and particularly so in Sweden. The Swedish telecom sector has been extremely dependent on the manufacturer Ericsson and its capability to generate innovations, and the success of Ericsson in mobile communications during the 1980s and 1990s has been a major growth driver for the Swedish economy. The Swedish economy and its innovation system have been crucially impacted by the prosperity of one single firm – Ericsson – for better for worse.
- 4. The telecommunication sector is an important part of the Swedish economy and has been increasingly so during the 1990s. The contribution to economic growth (measured as productivity improvements and value-added growth) has increased to become almost half of the contribution of the industry in 2001. The increase in value added stems mostly from the telecom equipment part of the industry (with telecom-services contributions more marginal). Second only to Finland, Sweden is the OECD country most dependent on the telecom product sector of the ICT industry.
- 5. Telecom has also been the major driver of growth in the R&D component (as is also shown in patenting statistics) of the Swedish national innovation system, while the corresponding computing part has been relatively low. It may be hypothesized that, for telecom R&D, Ericsson’s growth, in particular in mobile communications, has played an imperative role. If so, the Swedish R&D system overly depends on the success and failure of one product area of one firm. This has been a strength for Sweden, but may equally turn out to be a threat and weakness.
- 6. After a few decades of intense competition, a de facto monopoly was established in the Swedish operators’ market in the late 1910s. This monopoly of Televerket’s lasted until the 1980s. In terms of penetration of telephony services, the state of technology implemented and quality of services, Sweden has been an advanced market since the late 19th century. Compared to many other “PTTs”, a number of features rendered the position of Televerket unique.
- 7. It also had a division of equipment manufacturing, which meant that it could develop its own manufacturing and R&D expertise, driven by a genuine engineering culture, and became a powerful purchaser.
- 8. The Swedish supplier industry has been heavily dominated by one firm: Ericsson. In 1970, there were a few minor suppliers, including Teli. By the start of the time period investigated, Ericsson accounted for around three quarters of the Swedish telecom manufacturing sector. The relationship with Televerket was one of collaboration and to some degree competition. The development of the AXE switching system (developed jointly by Televerket and Ericsson) became crucial to the future competitiveness of Ericsson. In this respect it was very much a result of collaboration, guidance and resource-sharing with an advanced customer, but not of public procurement.
- 9. In the Swedish telecom innovation system, Ericsson is in 2004 by far the most important actor in terms of revenues, followed by the large operators. Around Ericsson, a vast number of companies supplying components and services have emerged. Based on statistics on the 500 most important IT companies in Sweden, it was estimated that the telecom industry generated revenues of between 300 and 400 billion SEK in 2002.
- 10. Industry has come to increasingly dominate the sector’s R&D funding, in particular Ericsson. Following the downturn, effects on R&D spendings have been dramatic. In 2001, Ericsson contributed more than 20% of the total R&D spending in the country.
- 11. Innovation System: The most obvious way is of course to begin with the functions of (a) developing/generating, (b) diffusing, and (c) using innovations.
- 12. The first is (i) the creation and diffusion of “new” knowledge. Possible sources may be R&D, identification of problems, search and experimentation, learning-by- doing/using and imitation. The second is (ii) the guidance of the direction of search among users and suppliers of technology. This function includes guidance with respect both to the growth potential of a new technology and to the choice of the specific design approaches (e.g. standards). It also includes the supply of incentives for actors to engage in innovative work, i.e. companies must feel that they get a reasonable return on investments.
- 13. Thirdly we have (iii) the function of supply of resources such as capital and competencies. The fourth concerns (iv) the creation of positive external economies, both market- and nonmarket- mediated. It involves the facilitation of information and knowledge exchange, and is aided by connectivity between different actors in the system and the feedback loops between them. Finally, the fifth function is (v) the creation of markets. Since innovations rarely find ready-made markets, these may require stimulation or even creation. This process may be affected by governmental actions to remove legislative obstacles, by various organizations’ measures to legitimize the technology, and by incentives.
- 14. After scrutiny of these functions, and familiarization with the innovation systems in the empirical cases, it was found that one essential function seemed to be missing, namely (vi) providing incentives for innovative activity. These incentives could be financial (e.g. tax reductions, loans), related to appropriability conditions (IPR, revenue sharing among actors). Expectations are also an important incentive for innovative activity
- 15. Innovation Maturity: (1) the formation or birth phase, (2) growth phase, (3) maturity phase and (4) a decline phase. They emphasize four features of that process: (1) market formation, (2) entry of organizations, (3) institutional change and (4) the formation of technology- specific advocacy coalitions.
- 17. Main Growth in the Telecom Sector:
- 24. Ericsson and the supplier industry:
- 29. Revenue Breakdown: Infrastructure Providers – SEK 167.8 billion in 2002 The infrastructure providers are the most important actors in the Swedish telecom innovation system in economic terms, constituting 55% of the top 500 IT companies’ revenues in 2002. Within this group, Ericsson of course stands out as the dominant player, alone generating 87% of the revenues among the group of infrastructure providers.
- 30. Terminal manufacturers – SEK 43 billion in 2003 As late as 1998, Ericsson was still the third largest terminal supplier, with almost 15% of the world market. The company lost much of its position in the following years. The terminal business was subsequently merged with Sony’s terminal company, and the new company – Sony Ericsson – had a market share around 5% in 2003. In 2004, two of the remaining product development centers are located in Sweden – Kista and Lund – but the headquarters are placed in London. In 2003, Sony Ericsson sold 27.2 million terminals. Although the company was profitable in H2 2003, the annual result was a loss of SEK 1.2 billion.Sony Ericsson generated a total turnover of SEK 42.3 billion in 2003.
- 31. Operators – SEK 129.6 billion in 2002 Since the deregulation of the telecom service market a number of operators have established a foothold on the Swedish market. The business magazine Veckans Affärer identified 27 operators – with a total turnover of SEK 129.6 billion. The most important operators were TeliaSonera, Tele2 and Vodafone, between them generating 92% of total revenues. The value of the fixed telephony market reached SEK 25.8 billion in 2002, 0.8 billion less than the year before. Mobile telephony generated revenues of SEK 17.3 billion in Sweden in 2002, up from 16.2 billion in 2001.
- 32. Consultants – SEK 21.6 billion in 2002 An extensive consulting industry has formed around the telecom companies in Sweden. Most can be classified as suppliers to the large telecom companies, assisting in e.g. product development. To this category belong companies such as TietoEnator, Teleca and WM-data.
- 33. Collaboration Ericsson-Televerket and the role of public procurement Recently, attention has been paid to the role of public procurement for innovation. The importance of an advanced domestic demand (Porter 1990) and lead users (whose needs later become commonplace: von Hippel 1988) is by now well known. So is the role of public procurement, and its effects on long-term technological investments and innovation, when private industry otherwise would under-invest. However, there can be negative effects as well; e.g. stable procurement relations may also bring about inefficiencies because of a lack of competition.
- 34. An early form of cooperation between Televerket and Ericsson was established in the early 1950s when the electronics council was formed. Ericsson and Televerket had separately started exploring the possibilities that opened up as a result of electronic technology. It was difficult to recruit engineers, however, and the electronics counsel was set up to coordinate the two parties’ development work primarily in order to avoid duplication of development work and the misuse of scarce resources. In spite of this coordination, the two parties developed two separate SPC switches (A210 and AKE 12). Obviously the coordination did not work properly.
- 35. In 1970 Ericsson and Televerket instead formed a joint R&D company – ELLEMTEL. The company had as its task to develop and construct equipment for (1) electronic switches, (2) computer networks, (3) digital transmission systems, and (4) advanced telephones. Manufacturing was to be performed by either Ericsson or Televerket. The major task was to develop the computerized electronic switching system (AX, later AXE).
- 36. In the case of mobile telephony the role of “public” procurement by Televerket was more clear-cut. It is unlikely that Ericsson would have entered into cellular mobile telephony had it not been for Televerket’s leading role. Televerket had built up a position as a competent developer, operator, standardizer and procurer of mobile telephony equipment. It increased the attention and resources spent on mobile telephony at Ericsson and in particular SRA, while at the same time influencing critical technological choices, in particular adapting the AXE switch for mobile use.
- 39. Ericsson’s sales came to a drastic halt in 2001, following a long period of steady growth. As seen in Figure 4-29, R&D investments have also been cut, but increased as share of total sales. This implies R&D spending being cut back less than other expenditures. Still, the reliance on Ericsson as a major contributor to the Swedish R&D investments seems burdened by a great risk, considering how close the company came to bankruptcy following the drastic market slowdown.
- 40. Supply of incentives to innovation creation and exploitation Apart from the advancements on the international scene, which set the pace also for the Swedish actors, the interest shown by Televerket was an important reason for the escalation of the Ericsson commitment in the 70s. This interest persisted in the 80s although Televerket still had no direct need for more capacity. The basic incentive for Televerket was rather to invest in order not to renovate its old copper network. As the Swedish market is relatively small, an increasing international market in the area was probably an additional incentive for the escalating operations of Ericsson.
- 41. During the 1970s and 1980s, Televerket played an important role in the Swedish telecommunications R&D system. With the monopoly situation, Televerket was commissioned by the government to perform long-term R&D. Until the de-monopolization in 1993, Telia (or Televerket) funded both research and development of telecommunication equipment. As discussed earlier, in the cooperation with Ericsson, Ellemtel, the AXE switch was jointly funded and developed.
- 42. With Ericsson and TeliaSonera decreasing their R&D investments, R&D in small firms often funded by venture capital could play a more important role in the Swedish innovation system. The development of the venture capital market will therefore (and for other reasons) be assessed in the following section.
- 43. During the banking crisis in the early 1990s, the government made SEK 6.5 billion available for venture investments through two new investment organizations, Atle and Bure, and stateowned venture capital organizations. This was the start of a period of new growth in the industry.
- 44. Telecom-related research and development: The telecom industry is knowledge-intensive with complex systemic products. The nature of the products calls for large R&D investments in order to stay at the frontiers of technological developments. Throughout the period large investments have been made in the field, both with public funds and with corporate R&D investments. Since the shift from electromechanics to electronics in the 1970s the industry has slowly but surely converged with the computing industry, often using the same basic technologies and components. Thus, it is difficult to identify public research projects purely dedicated to telecom research. Due to the importance of the telecom industry in Sweden, we make the assumption that a large share of electronics R&D has been invested in areas important for the industry.
- 45. Public R&D:
- 47. Industry R&D: As shown in Figure 4-28, industry has played an increasingly important role in R&D in recent years; perhaps more so in the IT field than in other areas. Some estimates indicate that 90% of all IT-related research was carried out in the industry in 1987, and only 3% of total university research funds in 1990 were allocated to IT-related fields. In 1993, costs for ICT research were almost SEK 12 billion for industry-related R&D, compared with around 450 million available for academic R&D programs. This corresponds to around 25% of all R&D funds in the country in 1993. In most large-scale public R&D programs, industry has provided up to half of the funds.
- 48. During the whole period, the telecommunications industry has had an influential role in Swedish R&D. In the late 1980s, telecommunications equipment made up 58% of the electronics production in Sweden. R&D expenses in the Swedish electronics industry were also focused on the telecommunications area; of the SEK 19.9 billion invested in electronics R&D in 1999, 10.8 billion were invested by the telecom products companies. In 1999, the electronics industry in Sweden had a total turnover of SEK 190 billion, with electronics products making up SEK 164 billion. Of the total electronics production, communications equipment constituted 84%.
- 49. The importance of Ericsson in the Swedish R&D system is illustrated by the fact that the company spent SEK 43 billion on R&D in 2001, equivalent to half the total Swedish R&D investments. Although the share spent on R&D in Sweden is only roughly half the total sum, Ericsson had great relevance for the Swedish ICT R&D. As a rough estimate, 20 of the 43 billion SEK were spent in Sweden, which would amount to more than a fifth (>20%) of the total R&D in Sweden. Obviously the well-being of this one firm and its decisions regarding R&D will have effects on the Swedish National Innovation System.
- 50. Sweden carefully nurtured the development of highly knowledge based telecom equipment maker: Ericsson. Ericsson has taken the role of nurturing Sweden as a highly knowledge based economy.
- 56. How is Sweden benefiting?