Tuesday, June 20, 1989

Innovation in Welfare Sweden

(A shorter version was published in the International Herald Tribune, a publication of the New York Times and Washington Post, in June 20, 1989. The entire article was published in Italian in Suecia l'Oggi in Italy 1991. )

Sweden, with a population of only eight million people, boasts an impressive range of internationally renowned companies such as Volvo, Saab, Ericsson, Asea (ABB after the merger with Brown Boveri of Switzerland), and Electrolux.
You would therefore expect to find an excellent climate for innovation in Sweden. However, its inventors, innovation researchers and others in the field, paint a more complex picture.

Swedes, like other people, want innovations, hence the need for innovative minds. But who would like to see their son or daughter marry an inventor?
-Remember that I am a researcher, not an inventor, says one Swedish creator of new technology, in a typical statement.
-I am sixty years old, but I cannot recall ever saying with pride that I am an inventor, says Olle Siwersson, Chairman of the Federation of Swedish Inventors.
The inventor is a risk-taker, and most people don't like taking risks. This is not an exclusively Swedish attitude, but through its welfare system, Sweden managed to eliminate risk-taking for the individual more than in most other Western countries.
Add to this the anti-capitalist and anti-technology trend that followed the rebellious year of 1968. However, with the eighties came a fundamental change of climate. A key factor behind this was the Swedish industrial crisis in 1977-78, which forced the nation to search for new industries and products to replace the faltering ones.
-Gone are the days when the technician was an easy prey for anti-business sentiments. We have also had a dramatic increase in the creation of new businesses, says a leading Swedish expert on innovation, professor Bengt-Arne Wedin, at the Royal Technical High School in Stockholm.

Today you find some 400 small start-up companies clustered around Sweden's technical high schools from Luleå in the North to Malmö in the South.
-We overcame the anti-technology mood. The attitude today is pro-technology, says professor Torkel Wallmark. He is chairman of Chalmer's Innovation Center, a partnership between Chalmer's Technical High School in Gothenburg and private interests, which aids the 135 start-up companies around the school.

Local authorities, sometimes together with retired businessmen, help inventors to create new businesses and new jobs. Yet another sign of this pro-innovation trend, is the growth of the Federation of Swedish Inventors. Ten years ago, there was only one local group. Today there are more than one hundred.
Mr. Siwersson, however, still worries about his country.
-The problem is that other countries are also very good, perhaps even better, at starting new production based on new ideas. Just take a look at Japan - it's scary!

This is of no minor concern. Sweden's industry and welfare system is heavily dependent on foreign trade. It exports almost 38 percent of its GNP, and half of its industrial production.
Many of its leading industrial enterprises grew out of 19th century technological inventions or innovations. But since World War II, hardly any major new company has been built on new technology.

The Social Democratic governments have tried to stimulate new technology and new industries with direct and indirect support.
-When I took up this trade twenty-one years ago, there was no National Board for Technical Development (STU) or public support at all, says Mr. Siwersson. If your invention wasn't ready when your money ran out, you were finished.

STU, founded in 1968, is the main public source of funds for new technology. Last year it spent 850 million Swedish Kronor (about 135 million US $) on about 3,000 projects. Forty percent was spent on technological research at high schools and research institutes, another forty percent on development and diffusion of new technology in industry. The rest was spent on individual inventors, small and mid-sized companies, and start-up companies. STU funds 80-85 percent of all new companies in Sweden.
-No other country gives as much state support per capita to its inventors, says Mr. Wedin.
Sweden's growing research and development (R&D) spending matches that of Japan's and the country now allocates three percent of its GNP towards R&D. Swedish industry, especially its big members, account for most of the R&D. The public share is small, but increasing.

Despite the R&D push, a surprisingly small portion of the industrial production - only seven percent - comes from the hi-tech sector. It is the low-tech, raw material-based industries that dominate the industry and employ half of the industrial workforce. This will continue to be the case, as long as the medium and high technology industries stagnate or shrink.

This is troublesome, as the high-tech industries show the fastest growth in the world market and the most job opportunities.
The Social Democrats have preferred large companies, rewarding them with generous tax breaks, as long as they reinvested their profits. The managers of Sweden's big corporations didn't mind this.
-As we don't have any home market, we have to get out into the world and fight with the dragons. That's why we have a comparatively concentrated industry says Hans Werthén, Chairman of Electrolux and a leading Swedish industrialist.

This is perhaps the most fundamental fact of the climate of innovation in Sweden. In the United States there is a huge internal market and a multitude of different companies. Japan is more dominated by big corporations, but they are much more diversified than Sweden's. This gives the inventor more freedom to expand into different areas.
-If you have talked with one company in Sweden, you may have talked to the whole market, says Curt Andersson, Director at the Federation of Swedish Industries.

He claims that the industry today is much more open to new ideas than before, even though the main interest is in those innovations, which supports its core business.
How you feel about being inventor or innovator in Sweden, therefore depends on whether or not you are in the mainstream.
The large companies will probably support you if you are in the right field. You then have the chance of making a small fortune by selling your company.
-Many start-up companies are being bought by big companies, says Sören Sjölander, a researcher at the Department of Innovation Research at Chalmer's Technical High School. We showed in a research report that these companies actually grew faster after having been bought.

This doesn't mean that you have to sell out to survive.
-An independent innovator can do things of great interest to Sweden's core business, says Mr. Andersson.
This is made easier with the spread of powerful and affordable personal computers and workstations.
-Suddenly, you can develop incredibly fine solutions, in a way that was not possible before. There are many more interesting and potentially dangerous ideas out there, and I believe the industrial managers understand this, says Mr. Andersson.

Perhaps they do, but are they are really looking for inventions?
-They want innovations; they want an invention that has proven itself on the market. They want to bet on the horse after it has won, says Mr. Siwersson.

What if you are not within the mainstream or if your invention is totally new?
This was the case for Torbjörn Lagerwall and his American colleague, Noel Clark, at the Chalmer's Technical High School. They developed a radically new display technology, based on a scientific discovery in the field of liquid crystals (a technology used in lap-top computer screens, digital watches and pocket TV's). After having courted the Swedish industry for a long time, the two researchers finally turned to Japan for help. Last year Canon presented a prototype of a ferro-electric liquid crystal (FLC) screen with ultra high performance.
-Sweden is an extremely narrow-minded country, says Torbjörn Lagerwall. You are supposed to have to the same opinion as everybody else, whether it concerns theater, literature or physics. You should stick to what is already being done, to what is already known.
-The Swedish industry defends itself by saying that Sweden is a very small country. Why is it then that the Finns, who also belong to a small nation, can be so open-minded? They showed much more interest in our work than the Swedish industry did, he says.
To set up a factory that can produce FLC-screens would cost at least 100 million Swedish Kronor (about 15 million US $). That is too much for a start-up company in Sweden. It would take a company the size of Ericsson, but they were badly burnt when they tried to get into the personal computer business. Since then it has been "back to basics".

It is hard to argue that Ericsson should not focus on telecommunications, but for Sweden such a strategy presents a dilemma.
-Here we have a potentially gigantic market, but we don't have industries working on it, says Sven Ingmar Ragnarsson, responsible for the FLC-screen project at STU.

This is not an isolated case. Spine Robotics with its innovative robot products was recently sold to a Japanese company, although Sweden's Asea Robotics is a world leader in the field.
-I don't believe Sweden can do without specialization, says Mr. Sjölander. We are a very small country and we cannot afford a highly diversified industrial structure. Instead, we need a built-in mechanism to detect changes early and quickly adjust to them.

The key word here is flexibility.
-What is the point of being number one in mechanical cash registers, when the world has gone digital, says Lennart Ståhl, in charge of innovation at STU.

Sweden must find new industries to replace those who becomes obsolete, but how? The big corporations are fully occupied with their core business.
-We have very little of the American model where new technology leads to new enterprises, as was the case with Apple, Compaq, Control Data, Digital Equipment, Data General, Intel and so on, says Mr. Wedin.
-The large companies are not good at handling products based on new technology. That is why we need small enterprises, says Mr. Ståhl.

New ideas pop up all the time, but without a good climate for small start-up companies, they will all to often pop out of the country.
STU helps out in the early stages of the innovative process, but in the later, more costly stages, the Swedish inventor runs into trouble.
He needs capital desperately, but he has no product to sell yet. What he needs is an investor who is willing to risk money for a long enough time to get the business going. He needs venture capital.
More importantly, he needs the knowledge of the venture capitalist.
-The entrepreneur, a rich person who works with and acquires knowledge about how to start companies based on new technology, has a tremendously important structural function, says Mr. Sjölander.

Sweden saw the growth of a venture capital market in the early eighties. But it was more capital than venture, says Ingemar Ahlandsberg at the Ministry of Industry. When the quick results didn't show up, the market collapsed.

To a certain extent the big corporations act as venture capitalists in Sweden by supplying capital, their competence and knowledge of production and markets.
-It is very hard to develop new products in Sweden with venture capital, says Peter Weisglass, head of the Swedish Institute of Microelectronics in Stockholm. I have looked at balance sheets of start-up companies in the US and not one of them I examined would have survived in Sweden.
-The profit is taxed more than once down the line to the stockowner in Swedish companies, which is why it is extremely unfavorable to cash in the profit, says Mr. Wedin. The owner is better off if his company re-invests the capital in old activities that yield a moderate profit, than if he withdraws his money and invests in something that yields a higher profit.

Not surprisingly, the venture capitalist is rare in Sweden. Why take big and long-term risks if you cannot get big rewards?

The sharpening international competition is now turning this question from a moral one to a practical one: How to avoid the threat of losing world market shares?
A recent report from a government think-tank, Statens Industriverk, stresses the need to improve the business climate, both for the big and increasingly trans-national corporations, and for small start-up companies.
This reflects the growing insight that this time it is "Moder Svea" (Mother Swede) who has to charm the industry - large and small - and not the other way around.

This looks like a good sign for Swedish inventors.

Hans Sandberg

Sunday, June 4, 1989

Success in Beijing's Silicon Valley

(Written for the International Herald Tribune after my third visit to China. It was scheduled to be published on June 4th, but this did not happen due to the Chinese government's crackdown on the student rebellion.)

Wan Runnan, founder of Stone Group, and a
"most wanted" fugitive after June 4th, 1989.

In Beijing's Silicon Valley, the spirit of freedom and enterprise has given rise to new kinds of Chinese companies and leaders. The Stone Group, nick-named "China's IBM", is one of them.
-Our success is the success of market economy. For China, Stone's way is a way out, says its founder Wan Runnan.
China's new entrepreneurs challenge the country's ossified economic system as radically as the students challenge its ossified political system.

A group of researchers left their secure jobs at the Chinese Academy of Science (CAS) in 1984. With a 20,000 yuan loan they started up their own company employing 64 persons. The first product was a computer printer made by the Japanese firm Mitsui to which Stone added computer software to handle Chinese characters. Soon they struck a deal with Mitsui where the Japanese supplied the hardware and the Chinese the software. It worked out well and in the summer of 1987 the two companies started a joint-venture.

Stone's most famous product is an electronic typewriter which can handle both Chinese and English. Stone controls 80 percent of the Chinese market by selling about 20,000 units a year. An electronic typewriter may not sound like much, but just imagine a country where almost everything has to be written by hand! This was the case in China until recently, and the promise of Chinese character word processing was one of the reasons why the Microcomputer Revolution became so popular here.

Stone Groups headquarters in Beijing's Haidian District.

Like International Business Machines (IBM), Stone started outside the field of computers. Today Stone is one of China's leading computer companies. It is a mother company with 20 specialized subsidiaries, four joint ventures with foreign companies and three joint ventures with domestic companies. Two thousand people work for the Stone Group - half of them in Beijing.

The reputation of its management has grown so much that it was offered to take charge over the largest computer and electronics company in the Yunnan province, the Yunnan Electronics Factory (YEF) with 900 employees. And so it did last February. Stone gets 40 percent of YEF's above-plan profit.

The core of the emerging Stone conglomerate is Stone Group Ltd, which employs about half of the total staff. This company had a turnover of 317 million yuan in 1987 which more than doubled in 1988, when it reached 700 million yuan.

It is also one of China's new stock companies and recently began sell stocks to the public.
-We are aiming for the world market and want to attract investments, says Li Yichuan, Stone's P.R.-manager. It is a better way of managing the company and the public supervision leads to better management. The ownership will also become clearer.

This ownership question poses a problem, according to Mr. Li. He explains that it is difficult to piece it into the accepted formula for a "non-government collective enterprise".
-It is owned by all employees. We are trying to solve this sensitive question through stocks as you cannot come out and say that it belongs to a "so-called non-government collective".

Who really controls the company? Is it the president or the Communist party secretary?
-We don't keep two parallel systems. The president is also the leader of the party, says Mr. Li. We don't have any labor unions, because we have harmonious relations within the company.
An employee at Stone makes about twice as much as other workers in this country who earn an average of 120-400 yuan per month.

What more than anything else separates Stone from other Chinese companies is its corporate culture. The published annual report (in itself a rare thing in China) reflects this vividly:
-Stone's superiority lies in its independent and responsive policy and management which takes market trends and needs as its guide. Furthermore, resources are allocated to where the economic benefit will be the greatest, and our personnel are placed where they can be put to maximum use.
-State-run enterprises have few or none of these characteristics, the report continues.

And under the headline "The key to success" we read "At Stone any mistake is tolerable except that of suppressing talent".

43 year old Wan Runnan is the man behind Stone's philosophy. After graduation from the famous Qinghua University in 1970 he was assigned to work for the department of Computer Science at CAS. He has studied this subject in both Japan and the United States. According to one report, he is good for 30,000 yuan per year, making him one of China's best paid managers.
-Stone group has three advantages, says Wan Runnan, when asked about the secret of its success. We have a rice bowl made of mud instead of the iron rice bowl, that is, everybody in my company has to work hard to get a good salary.
-Secondly, we put great emphasis on the market. It is still controversial in China whether we should have market economy or planned economy. Stone's success is the success of market economy. Stone's way is a way out for the Chinese economy.
-Thirdly, we pay great respect for talented people. We have a lot of them in China, but they are held back by the old system, which makes them stupid and lazy. With us, however, they are clever and hard working.

Would you like Stone to be like IBM?
-IBM is very successful, especially in computers. I went to an IBM seminar before I started this company. I was greatly impressed by their management methods and products, but we have specific conditions in China and cannot copy them. We must have our own understanding.

Stone Group is based in the Haidian District, north-west of Beijing. I visited the area for the first time in May 1985 although there was no talk then of a Silicon Valley. Professor Wu Jikang, who built China's first computer in 1958, took me for a walk down Haidian Road. We visited a couple of unimpressive computer stores which sold imported personal computers, home-made IBM PC-clones and Chinese manuals for computer software. I was more impressed by an advanced mainframe built by the Institute of Computing Technology (ICT), which he was heading.

Professor Wu Jikang and the writer in May 1985.

A computer store in Beijing's Silicon Valley 1985.

In March of this year I again visited the Haidian district and could hardly recognize the place. There were computer and electronicscompanies not only along Haidian Road, but as far as the eye could see. According to the official magazine Beijing Review, this is now the country's largest computer market.

The Central Government last year passed new laws giving new companies in the Beijing New Technology Industrial Development Experimental Zone (BEZ) considerable tax breaks.

The interest in this area is nothing new. The government has invested ten billion yuan (1 dollar=3.71 yuan) here since 1949. As a result you find 80,000 researchers and technicians as well as 50 universities and 138 research institutes within the zone.

What is new, however, is the effort to break through the walls which prevent productive cooperation between research and industry in China. Many scientists start up new businesses or work for new institutes dedicated to the commercial exploitation of scientific research. No less than 11,000 researchers and technicians are working in the area's 640 hi-tech companies, compared to 3,800 and 150 respectively about a year ago.

The turnover of the area's companies was 18 million yuan in 1984. It reached 900 million in 1987 and last year it leaped 56 percent to 1.4 billion yuan (380 million dollars). Exports quadrupled in 1988 to 13 million dollars.

There are, however, those who dislike the talk about Silicon Valley. One of them is Li Yun, the reform-minded president of Beijing's Computer Factory No. 3, located in eastern Beijing.
-Silicon Valley?! Hah! They just sell something that they bought abroad from some other sellers. Silicon Valley (In California) produces and develops products. Here they don't develop or produce anything, says Li Yun.

But Gao Jian Yu, vice manager for Syntone Corporation, one of the leading computer companies on Haidian Road, defends Beijing's Silicon Valley.
-In the beginning we had very little experience, so we had to start by getting into the market. Now we have developed more than 80 different new products, and one of them, a sensor, won a gold medal at a Technology Fair in West Germany in 1987.

Hans Sandberg

Footnote 2007: Wan Runnan landed on the Chinese government's "most wanted" list after the crackdown on June 4th because of his support for the student protest, but he managed to flee the country.