ETE 521: TelecommunicationBusiness and ManagementLec 09: Telecom Dynamics: History andstate of the Swedish telecom sector andits innovation system.
Sweden:Population: 9 mGDP: US$333 bGDP per capita: US$ 37,00Currency: SEK5.96 SEK = 1 US$Telecommunications,the automotive industry andthe pharmaceutical industriesare also of great importance.
The telecom sector has contributed substantially andincreasingly to economic growth in recent decades. Rapidtechnological development, innovation and diffusion haveturned telecom into a major growth generator, globallyand particularly so in Sweden. The Swedish telecom sector has been extremelydependent on the manufacturer Ericsson and its capabilityto generate innovations, and the success of Ericsson inmobile communications during the 1980s and 1990s hasbeen a major growth driver for the Swedish economy. The Swedish economy and its innovation system havebeen crucially impacted by the prosperity of one singlefirm – Ericsson – for better for worse.
The telecommunication sector is an importantpart of the Swedish economy and has beenincreasingly so during the 1990s. The contribution to economic growth (measuredas productivity improvements and value-addedgrowth) has increased to become almost half ofthe contribution of the industry in 2001. Theincrease in value added stems mostly from thetelecom equipment part of the industry (withtelecom-services contributions more marginal). Second only to Finland, Sweden is the OECDcountry most dependent on the telecom productsector of the ICT industry.
Telecom has also been the major driver of growthin the R&D component (as is also shown inpatenting statistics) of the Swedish nationalinnovation system, while the correspondingcomputing part has been relatively low. It may be hypothesized that, for telecom R&D,Ericsson’s growth, in particular in mobilecommunications, has played an imperative role. If so, the Swedish R&D system overly depends onthe success and failure of one product area of onefirm. This has been a strength for Sweden, but mayequally turn out to be a threat and weakness.
After a few decades of intense competition, ade facto monopoly was established in theSwedish operators’ market in the late 1910s. This monopoly of Televerket’s lasted until the1980s. In terms of penetration of telephony services,the state of technology implemented andquality of services, Sweden has been anadvanced market since the late 19th century. Compared to many other “PTTs”, a number offeatures rendered the position of Televerketunique.
It also had a division of equipmentmanufacturing, which meant that itcould develop its own manufacturingand R&D expertise, driven by agenuine engineering culture, andbecame a powerful purchaser.
The Swedish supplier industry has been heavilydominated by one firm: Ericsson. In 1970, there were afew minor suppliers, including Teli. By the start of thetime period investigated, Ericsson accounted for aroundthree quarters of the Swedish telecom manufacturingsector. The relationship with Televerket was one of collaborationand to some degree competition. The development of the AXE switching system(developed jointly by Televerket and Ericsson) becamecrucial to the future competitiveness of Ericsson. In this respect it was very much a result of collaboration,guidance and resource-sharing with an advancedcustomer, but not of public procurement.
In the Swedish telecom innovation system,Ericsson is in 2004 by far the most importantactor in terms of revenues, followed by thelarge operators. Around Ericsson, a vast number of companiessupplying components and services haveemerged. Based on statistics on the 500 most importantIT companies in Sweden, it was estimated thatthe telecom industry generated revenues ofbetween 300 and 400 billion SEK in 2002.
Industry has come to increasinglydominate the sector’s R&D funding, inparticular Ericsson. Following the downturn, effects onR&D spendings have been dramatic.In 2001, Ericsson contributed morethan 20% of the total R&D spendingin the country.
Innovation System: The most obvious way is of course tobegin with the functions of (a)developing/generating, (b) diffusing,and (c) using innovations.
The first is (i) the creation and diffusion of “new”knowledge. Possible sources may be R&D, identification ofproblems, search and experimentation, learning-by-doing/using and imitation. The second is (ii) the guidance of the direction of searchamong users and suppliers of technology. This functionincludes guidance with respect both to the growthpotential of a new technology and to the choice of thespecific design approaches (e.g. standards). It alsoincludes the supply of incentives for actors to engage ininnovative work, i.e. companies must feel that they get areasonable return on investments.
Thirdly we have (iii) the function of supply of resources suchas capital and competencies. The fourth concerns (iv) the creation of positive externaleconomies, both market- and nonmarket- mediated. Itinvolves the facilitation of information and knowledgeexchange, and is aided by connectivity between differentactors in the system and the feedback loops between them. Finally, the fifth function is (v) the creation of markets. Sinceinnovations rarely find ready-made markets, these mayrequire stimulation or even creation. This process may beaffected by governmental actions to remove legislativeobstacles, by various organizations’ measures to legitimize thetechnology, and by incentives.
After scrutiny of these functions, andfamiliarization with the innovation systems inthe empirical cases, it was found that oneessential function seemed to be missing,namely (vi) providing incentives for innovativeactivity. These incentives could be financial(e.g. tax reductions, loans), related toappropriability conditions (IPR, revenuesharing among actors). Expectations are also an important incentivefor innovative activity
Innovation Maturity: (1) the formation or birth phase, (2)growth phase, (3) maturity phase and(4) a decline phase. They emphasize four features of thatprocess: (1) market formation, (2) entryof organizations, (3) institutional changeand (4) the formation of technology-specific advocacy coalitions.
Revenue Breakdown: Infrastructure Providers – SEK 167.8 billionin 2002 The infrastructure providers are the mostimportant actors in the Swedish telecominnovation system in economic terms,constituting 55% of the top 500 IT companies’revenues in 2002. Within this group, Ericsson of course stands outas the dominant player, alone generating 87%of the revenues among the group ofinfrastructure providers.
Terminal manufacturers – SEK 43 billion in 2003 As late as 1998, Ericsson was still the third largestterminal supplier, with almost 15% of the world market.The company lost much of its position in the followingyears. The terminal business was subsequently mergedwith 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 developmentcenters are located in Sweden – Kista and Lund – but theheadquarters are placed in London. In 2003, Sony Ericsson sold 27.2 million terminals.Although the company was profitable in H2 2003, theannual result was a loss of SEK 1.2 billion.Sony Ericssongenerated a total turnover of SEK 42.3 billion in 2003.
Operators – SEK 129.6 billion in 2002 Since the deregulation of the telecom servicemarket a number of operators have established afoothold on the Swedish market. The businessmagazine Veckans Affärer identified 27 operators– with a total turnover of SEK 129.6 billion. Themost important operators were TeliaSonera,Tele2 and Vodafone, between them generating92% of total revenues. The value of the fixedtelephony market reached SEK 25.8 billion in2002, 0.8 billion less than the year before.Mobile telephony generated revenues of SEK17.3 billion in Sweden in 2002, up from 16.2billion in 2001.
Consultants – SEK 21.6 billion in 2002 An extensive consulting industry hasformed around the telecom companies inSweden. Most can be classified as suppliersto the large telecom companies, assisting ine.g. product development. To this categorybelong companies such as TietoEnator,Teleca and WM-data.
Collaboration Ericsson-Televerketand the role of public procurement Recently, attention has been paid to the role of publicprocurement for innovation. The importance of an advanced domestic demand(Porter 1990) and lead users (whose needs laterbecome commonplace: von Hippel 1988) is by nowwell known. So is the role of public procurement, and its effects onlong-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 aboutinefficiencies because of a lack of competition.
An early form of cooperation between Televerket andEricsson was established in the early 1950s when theelectronics council was formed. Ericsson and Televerket had separately started exploringthe possibilities that opened up as a result of electronictechnology. It was difficult to recruit engineers, however, and theelectronics counsel was set up to coordinate the twoparties’ development work primarily in order to avoidduplication of development work and the misuse of scarceresources. In spite of this coordination, the two parties developedtwo separate SPC switches (A210 and AKE 12). Obviouslythe coordination did not work properly.
In 1970 Ericsson and Televerket instead formeda joint R&D company – ELLEMTEL. The companyhad as its task to develop and constructequipment for (1) electronic switches, (2)computer networks, (3) digital transmissionsystems, and (4) advanced telephones. Manufacturing was to be performed by eitherEricsson or Televerket. The major task was todevelop the computerized electronic switchingsystem (AX, later AXE).
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 intocellular mobile telephony had it not been forTeleverket’s leading role. Televerket had built up a position as a competentdeveloper, operator, standardizer and procurer ofmobile telephony equipment. It increased the attention and resources spent onmobile telephony at Ericsson and in particular SRA,while at the same time influencing critical technologicalchoices, in particular adapting the AXE switch formobile use.
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 beencut, but increased as share of total sales. This implies R&D spending being cut back lessthan other expenditures. Still, the reliance on Ericsson as a major contributor to theSwedish R&D investments seems burdened by a great risk, considering how close the companycame to bankruptcy following the drastic market slowdown.
Supply of incentives to innovationcreation and exploitation Apart from the advancements on the internationalscene, which set the pace also for the Swedish actors, the interest shown by Televerket wasan important reason for the escalation of the Ericssoncommitment in the 70s. This interest persisted in the80s although Televerket still had no direct need formore capacity. The basic incentive for Televerket was rather to investin order not to renovate its old copper network. As the Swedish market is relatively small, an increasinginternational market in the area was probably anadditional incentive for the escalating operations ofEricsson.
During the 1970s and 1980s, Televerket playedan important role in the Swedishtelecommunications R&D system. With the monopoly situation, Televerket wascommissioned by the government to performlong-term R&D. Until the de-monopolization in 1993, Telia (orTeleverket) funded both research anddevelopment of telecommunication equipment. As discussed earlier, in the cooperation withEricsson, Ellemtel, the AXE switch was jointlyfunded and developed.
With Ericsson and TeliaSoneradecreasing their R&D investments, R&Din small firms often funded by venturecapital could play a more important rolein the Swedish innovation system. The development of the venture capitalmarket will therefore (and for otherreasons) be assessed in the followingsection.
During the banking crisis in the early1990s, the government made SEK 6.5billion available for venture investmentsthrough two new investmentorganizations, Atle and Bure, andstateowned venture capitalorganizations. This was the start of a period of newgrowth in the industry.
Telecom-related research anddevelopment: The telecom industry is knowledge-intensive with complexsystemic products. The nature of the products calls forlarge R&D investments in order to stay at the frontiers oftechnological developments. Throughout the period largeinvestments have been made in the field, both with publicfunds and with corporate R&D investments. Since the shift from electromechanics to electronics in the1970s the industry has slowly but surely converged withthe computing industry, often using the same basictechnologies and components. Thus, it is difficult to identify public research projectspurely dedicated to telecom research. Due to theimportance of the telecom industry in Sweden, we makethe assumption that a large share of electronics R&D hasbeen invested in areas important for the industry.
Industry R&D: As shown in Figure 4-28, industry has played anincreasingly 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-relatedresearch was carried out in the industry in 1987, andonly 3% of total university research funds in 1990 wereallocated to IT-related fields. In 1993, costs for ICT research were almost SEK 12billion for industry-related R&D, compared with around450 million available for academic R&D programs. This corresponds to around 25% of all R&D funds in thecountry in 1993. In most large-scale public R&Dprograms, industry has provided up to half of the funds.
During the whole period, the telecommunicationsindustry has had an influential role in Swedish R&D. In the late 1980s, telecommunications equipment madeup 58% of the electronics production in Sweden. R&D expenses in the Swedish electronics industry werealso focused on the telecommunications area; of the SEK19.9 billion invested in electronics R&D in 1999, 10.8billion were invested by the telecom products companies. In 1999, the electronics industry in Sweden had a totalturnover of SEK 190 billion, with electronics productsmaking up SEK 164 billion. Of the total electronicsproduction, communications equipment constituted 84%.
The importance of Ericsson in the Swedish R&D system isillustrated by the fact that the company spent SEK 43 billionon R&D in 2001, equivalent to half the total Swedish R&Dinvestments. Although the share spent on R&D in Sweden is only roughlyhalf the total sum, Ericsson had great relevance for theSwedish ICT R&D. As a rough estimate, 20 of the 43 billion SEK were spent inSweden, which would amount to more than a fifth (>20%) ofthe total R&D in Sweden. Obviously the well-being of this one firm and its decisionsregarding R&D will have effects on the Swedish NationalInnovation System.
Sweden carefully nurtured thedevelopment of highly knowledgebased telecom equipment maker:Ericsson. Ericsson has taken the role ofnurturing Sweden as a highlyknowledge based economy.