Chapter IV - The Birth of Alcatel NV
Et quel temps fut jamais si fertile en miracles.
(And what time was ever so fertile with miracles.)
The January 7, 1987 press conference marked the beginning of Alcatel NV in the media. The creation of this new company was the result of meticulous preparation and, of course, in the real world of men and business, it was the work of a group of brilliant colleagues who worked tirelessly during the latter months of 1986 and the first half of 1987. Jacques Ronze, Pierre Le Roux, Philippe Gluntz, Françoise Sampermans and Stephan Guérin all deserve to be thanked.
Each recognized the need to act quickly and with determination. The two entities to be brought together, coming from such different cultures and each with its own policies, lacked unity even within themselves. With respect to CGE, the recent merger of the activities of CIT and Thomson left a good number of rivalries between the employees as well as in the product offerings. In public switching the two digital systems, CIT’s E10 and Thomson’s MT20, which had been developed in parallel at the government's insistence, competed with each other in France and even more in the export market. The situation wasn't any better with respect to business systems: CGE offered, under the Telic name, a complete range of PABX and Thomson did the same with its Opus line. Another source of continuous conflict was the fact that Telic distributed its products through a network of distributors, whereas Opus distributed its products through its own agents owned by the company. It was easy for me to put things in order, having experienced these problems daily for two years. Pierre Guichet, a true leader, was given responsibility over CIT. It was up to him to react in the context of the organization of a new Alcatel. Being a man of action, character and experience, he was able to resolve with authority and competence the rivalry between the E10 and MT. The MT was abandoned, except for international transit exchanges, where it performed better. In fact it became one of the models in the E10 product line.
With respect to ITT we were inheriting an entity with the culture of a conglomerate which right away appeared to us to be over-managed from a legal and financial point of view while having insufficient structure with respect to the technical and commercial aspects of the business. This entity included some very significant companies, such as Bell in Belgium or Standard Electric Lorenz (SEL) in Germany, which had all the resources of independent companies: Research, development, manufacturing, sales for domestic and export markets. They demonstrated a great propensity to develop their own products, to personalize generic products of the group, and to develop their own international networks. On the other hand, the smaller, more dependent companies tended to seek safety in the protection of the bigger companies or to develop in business areas outside the general scope of activities of the group. In the United States the situation was particularly chaotic and fragile, for the businesses inherited from CGE and especially from ITT.
The group presented itself in the market with different products, particularly in the business communications (or business systems) area, and under a variety of different names: Bell and SEL, mentioned above, but also FACE and Siette in Italy, STR in Switzerland, SESA in Spain, STK in Norway, Kirk & Rovsing in Denmark, Iko in Sweden, Taisel in Taiwan, STC in Australia, Indetel in Mexico, Teletas in Turkey, Mietec in Belgium, and Qume, Courier, B&CC, ISD and Servcom in the United States.
It was clear that the unification and harmonization of this immense entity would take time, but it appeared to me that it would be necessary, at least symbolically, to quickly break with the past and to indicate clearly to each constituent company that success in the telecommunications world, which it was sensed would be globalized, would necessitate unity in policies and behavior.
It was with that aim that one of the first decisions made was to implement the use of the ECU (European Community Unit), predecessor of the Euro, for accounting, budget, and planning purposes. For the former ITT companies the change was insignificant because they had been working on the basis of the dollar for a long time. But for the French companies it was a significant break from the past I stood fast despite objections, due to natural laziness or, more seriously, to the hybrid status of the ECU (a simple accounting unit). Indeed, several years later, at the time of the creation of GEC Alsthom, based on the Alcatel success I was able to convince Lord Weinstock, GEC’s chairman, to agree that GEC Alsthom should also maintain its accounts in ECUs. The sacrifice was significant for him, as it was in 1987 for Rand Araskog, ITT’s chairman, both being used to working solely with the great, traditional currencies (the Pound Sterling and the dollar) which they tended to consider to be the exclusive universal reference.
The utilization of the ECU set in rapidly at Alcatel and during eight years the accounts were presented in that way. In 1995 more than 80% of the businesses of the CGE group, which had become Alcatel Alsthom, were accounted for in ECUs. As will be seen, the management team that succeeded us decided to depart from this practice and to use the French franc as the unit of account, except at GEC Alsthom because, in the interim, the English stockholder had become accustomed to this practice. This reversion back to the French franc, difficult to understand, would seem inconsistent with an evolution towards the Euro which at the time was already very probable. The use of the ECU from 1987 forward indirectly enabled Pierre Bilger, chairman of Alsthom (the successor to GEC Alsthom) to assure, at the time of the listing of his company on the stock exchange more than ten years later, that the implementation of the Euro would not present a problem inasmuch as Alsthom had been using the ECU since its creation in 1990. As a brief historical point worthy of note: In 1987 the average exchange rate of the ECU and the dollar was $1.16 per ECU; 13 years later that was also the average exchange rate between the Euro and the dollar during the early weeks before its decline the following months. This shows that there’s no point in being right too early.
The second symbolic gesture to speed up the unification of the group was the choice of name. To satisfy the more rational minds, we began to search, without any predisposition and ultimately without success, for a completely new name. The choice quickly became obvious. We needed to use the name Alcatel, which seemed natural. It must be remembered that at the time, that name was relatively new for all parts of the group that was being put together—obviously for the former ITT companies and for the former Thomson businesses, but also for the former companies of Telic, Les Câbles de Lyon, Laminoirs Tréfileries, Câbleries de Lens, Kabelmetal, etc., and even for the former CIT companies. Alcatel originated with the 1968 acquisition by CGE of an Alsatian group as explained in the first chapter. The merger of its telecommunications activities with those of CIT wasn’t undertaken without difficulty and for a long time the CGE subsidiary continued to call itself CIT instead of CIT Alcatel.
The designation of the name Alcatel for the top holding company, which had been decided at the beginning of January, appeared therefore only natural and was easy to implement. On the other hand, putting the Alcatel name alongside the original name of each of the subsidiaries, as well as utilization of a common logo whose orange triangle had become well-known, provoked a lot of opposition. In certain cases it was necessary to bring things to a conclusion. Xavier Namy, head of the business systems sector, who refused to accept the new approach, resigned. Every subsidiary had to provide for the necessary by-law changes at their next annual meeting. The first subsidiary to completely adopt the new system, Alcatel Austria, provided me the opportunity, on April 28, 1987 (when it announced its new name), to present to the international press in Vienna my first message on the initial steps being taken to establish Alcatel. Other subsidiaries required more time and convincing. It wasn’t until three years later that the new name and logo lighted the sky over the SEL campus in Stuttgart and that an Alcatel logo, more or less conforming with requirements, could be spotted on cable reels in the streets.
Having implemented these symbolic measures of unification, it was of course necessary to act substantively. The new organization, which had been announced in the beginning of January, reconciled the traditional structure by country with the need to promote synergies in product lines. It was decided to provide for worldwide functional responsibility for finance, law, human resources, public relations, research and strategic planning, as well as responsibility for representation of Alcatel worldwide and the sale of products where Alcatel had no industrial unit and to divide the activities of the company into five product groups: Switching (Jo Cornu), Transmission (Jacques Imbert), Business Systems (business communications) (Georges-Christian Chazot), Cables and Contracting (Claude Bovis). Each product group was responsible for all of the subsidiaries in its line of business and for the development and marketing of its products, but the subsidiaries were responsible for sales and production. It was therefore a matrix organization which would, in subsequent years, evolve by the transfer of other responsibilities from the national companies to the product group staffs.
The most pressing concerns were to reduce trademark and product conflicts existing in numerous markets and then to generate savings by rationalizing offers, all the while reassuring the customers that we would respect our prior commitments. It was also necessary to rapidly limit losses in diverse subsidiaries and to reach conclusions concerning the future of numerous and costly business diversifications, particularly with respect to computer peripherals.
In switching the market expected us to establish our policies with respect to the various switching systems that Alcatel NV had. We responded rapidly because it had become clear, as foreseen by the assessment made in the spring of 1986, that the System 12 had become operational and was being well received by many customers. As for the System E10, which had already been sold to numerous customers, it provided the additional advantage of being highly profitable. We announced therefore that the two systems would be maintained and that they would be progressively developed and improved with additional functions. Economies of scale would be sought initially by the standardization of components and sub-components and, over the longer term, by a common development (compatible with each of the basic systems) for the new generation of switches.
This message appeared very credible and, despite the doubts constantly reiterated in the press, the switching group (Public Network Systems or PNS) obtained excellent results for the first year: 2.51 billion ECUs in sales and as much in orders—that is, 21% of the total sales of Alcatel NV. From its first year of operation Alcatel NV made a name for itself as the world leader in digital switching for new sales as well as for installed.
The world market was divided into proportions of approximately 40% for the United States, 9% for Japan, 30% for Western Europe, and 21% for the rest of the world. Alcatel wasn’t present in the United States or in Japan. In Europe its market share was 43% and, for the rest of the world 18% on average, with strong positions in certain countries, such as Taiwan, Australia and Mexico.
Overall, 2.1 million E10 lines and 2.7 million S12 lines were delivered in 1987, bringing the number of digital lines already installed by Alcatel in the world to 21 million—17 million for the E10 and 4 million for the System 12.
In 1987 the group booked some very significant orders from key customers for the S12, for which delays had caused us to fear that penalties would be imposed: 518,000 lines in Germany; 960,000 in Belgium, to be delivered over three years; 400,000 in Norway where Alcatel, despite pressure from Ericsson, was confirmed as the exclusive supplier of digital switches; 150,000 lines in Italy; 310,000 in Portugal; and 168,000 in Spain. STR succeeded in getting the S12 qualified by the Swiss PTT and became the third switch supplier with 30% of the market. In Mexico the initial trials made in 1986 did not prove satisfactory. That was the reason for my first trip in January of 1987, and we succeeded in correcting the situation. Alcatel received its first order for 116,000 lines and subsequently became the principal supplier to Telmex.
The E10 experienced a prosperous year. Two million lines were ordered in France. Five hundred thousand lines were produced under license in the USSR and Poland in their two factories, one of which had been put into operation by Thomson in the Ural and the other by CIT in Poznan. One hundred fifty thousand lines were ordered for the Peking network, while 160,000 S12 lines were ordered for Shanghai.
But the year 1987 was also marked by the first experiments in public switching networks with ISDN, the first generation of simultaneous voice and data transmission. It was conducted by France Telecom in Northern Brittany with an E10 exchange provided by CIT, and the Bundespost did the same in Stuttgart and Hanover with S12 exchanges provided by SEL.
Alcatel NV was also present in value added networks and packet switching networks, areas in which Alcatel CIT received significant orders in 1987.
To back up these commercial successes, a solid technical development effort was pursued, as well as cost reductions. Digital switches required a lot less manpower per line produced than the analog switches which preceded it. This restructuring, which was already well underway in France and Belgium, still needed to be carried out in the other big switching factories, notably in Germany, Italy, Austria and particularly in Spain.
The agreement in principle obtained at the end of 1986 had to be broadened. At the end of June, a general agreement gave us room to hope for an end to the heavy losses incurred by the two Spanish subsidiaries. The first, Marconi SA (Mesa), the activities of which were very specific (in defense, for example), was sold. The second, SESA, was recapitalized in the amount of 100 million ECUs in exchange for a program for increased orders and a plan, approved by the government, involving the reduction of several thousand employees.
At the time the S12 was manufactured in 14 countries by Alcatel and sometimes in several factories in the same country. The preceding generations of analog switches were manufactured in almost as many countries. For the E10, four factories completed with each other in France. These figures show the magnitude of the restructuring program that it would be necessary to implement. Several tens of thousands of jobs would be lost.
Alcatel’s situation in the transmission market also showed both strengths and weaknesses. Alcatel made 14% of its sales in this area. Its principal strength was in the availability of a complete range of products. Alcatel was the sole manufacturer operating simultaneously in the field of transmission by underground cables, by microwave, by undersea cables and by satellite, manufacturing loads for satellites and ground stations. In comparison with switching, the transmission market was more volatile. A telecom operator could easily change its supplier. Customers weren’t won, only contracts. Moreover, the products changed rapidly. A product generation didn’t last more than three or five years. The market itself was more extended because, besides public networks, private companies (pipelines, railroads, television, oil prospecting, etc.) disposed as well of their own transmission systems, not to mention the military.
At the time of its creation, Alcatel had a complete product range (except under American standards) but with many redundancies. In all, factories in more than ten countries manufactured and sold transmission equipment. It was necessary to take radical reorganizational measures right away, while leaving to each unit the sales and after-sales servicing functions for its traditional customers using an integrated product catalogue.
Alcatel brought in significant orders right from 1987. In the fiber optic transmission area, for example, contracts were signed for Peking (for a limited rate of 34 Mb/s, pursuant to restrictions on strategic exports); for Indonesia, Peru, Mexico and the United States for a 140 Mb/s rate; and even at a 560 Mb/s rate for an experimental link between Brussels and Antwerp. Digital microwave orders at 140 Mb/s were obtained in Indonesia (Jakarta-Bali link), in North Yemen, in Gabon, in Senegal, in Egypt, and in Turkey, as well as for a Shell drilling site private network. >Satellite orders were received from France Telecom (Telecom 2 satellite), from the French Defense Ministry (Syracuse 2 satellite), as well as for Eutelsat and the European Space Agency. Orders were also received for ground stations in Spain and various African and South American countries.
The cable sector posed fewer problems in connection with the creation of Alcatel NV and was not one of my preoccupations. Right after being named as CGE’s chairman, I had given the responsibility for that area to Claude Bovis, a close colleague in whom I had total confidence and whom I had been able to observe during our eight years together at Les Câbles de Lyon. He was completely familiar with the business and had tremendous leadership abilities. This choice turned out to be particularly fortunate and enabled us to intensify spectacularly the internationalisation of that sector. In 1987 the cable group brought in 21% of Alcatel's sales and employed 19,000 people in 85 plants spread out over numerous countries. It was the world leader and was active in all markets. I have already described CGE’s development and internationalisation in this sector. The contribution of ITT strengthened it. The new units (Sweden, Norway and Spain) would easily find their place in this group which appeared to be the most structured of the Alcatel product groups, each operational unit being a profit center.
That same year the cable group pursued its development beyond the ITT acquisitions. In December of 1987, but taking effect retroactively to January 1, 1987, it acquired the majority control (50.48%) of Thomson Cuivre (Thomson Copper), with the remaining shares being purchased the following year. Thus, it completed what it had started in 1983, when it had taken over Thomson’s power cable business and then LTT (telecommunications cables). In addition to its wiredrawing factory and enamelled wire production units, Thomson Cuivre owned (in equal shares with the Zambian mining group copper producer) SCCC, which operated the second line of continuous casting copper wirerod production. After its acquisition in 1979 of La Société Lensoise du Cuivre, Alcatel Cable controlled all of the copper wirerod production capability in France and became a major player in the European copper market.
On the other hand, in Australia we sold the minority interest that our subsidiary STC had in Austral Standard Cables, a company controlled by our leading competitor in the European market—the British company BICC.
In the United States the subsidiaries of the cable group would provide the management framework for the new structure that Alcatel was going to put in place.
In Germany SEL’s limited cable and fiber optic activities were transferred to Kabelmetal, and SEL took over Kabelmetal’s transmission equipment business, which had been started in a particular niche by Kabelmetal and would prove to be very profitable in the coming years. To facilitate relations between the two German subsidiaries, the chairman of Kabelmetal’s supervisory board, Erhard Falk, was named to head SEL’s supervisory board as well. His mission was difficult because Baden-Wurttemberg obviously isn’t Lower Saxony and the electronic industries consider themselves more worthy than the copper metallurgical industries. But in that case, as well, I stood fast.
The cable group was also charged with running Alcatel Submarcom, which was responsible for the undersea telecommunications cable activities (which included both fiber optic cables and the repeaters placed along the cable to regenerate the signals). Traditionally the cable group was responsible for sales and marketing and CIT (then called Alcatel Transmission) was responsible for the system and repeaters. Alcatel Submarcom obtained several significant orders: The Emos-1 cable connecting Italy and the countries to the east of the Mediterranean; a 60 mile link without repeaters between Wales and Ireland, a first at the time; and particularly the Tasman 2 cable which linked Australia and New Zealand and which constituted the first leg of the link which would tie Australia, Asia and the United States.
I had to go quickly to Australia because the acquisition by a French group of STC Australia, the principal telecommunications company of the country, and its New Zealand subsidiary, provoked a lot of criticism in the press. The recent sinking of the Rainbow Warrior in Auckland served as a pretext for the campaign, which denounced the risk of having French secret agents control the communications of the country. That campaign added to the one brewing against French nuclear tests in the Pacific. In March 1987, after having stopped in California to visit the companies acquired from ITT (which had an uncertain future), I pursued my trip to Australia (with a layover in French Polynesia where Alcatel had some activities, including for example at the Mururoa test center). During a stop over in Papeete, I had the pleasure, and I dare say the honor, to be greeted by my son, looking splendid in the white uniform of a young lieutenant serving on a French Navy patrol vessel based in Polynesia.
In Sydney I got to know STC. Under the leadership of Gerald Page-Hanify and his second-in-command, Ron Spithill, I received a warm welcome which in the times ahead would never be proved false, and then I stopped in Canberra, where I paid a visit to government officials. I explained to them that Alcatel made it a principle to conduct itself as a loyal citizen in each country in which it did business. With respect to Australia, our intention was to reinforce our presence, particularly by promoting our group's products, because one of the paradoxes which I came to understand during my visit was that STC manufactured and sold products under licenses granted by our competitors (Ericsson, for example, for switching). I indicated also our strong interest in the undersea cable market in the Pacific, which until then had been reserved to the Japanese and Americans. I promised that if we were retained for a significant part of the future trans-Pacific link, we would build a factory in Australia for the manufacture of undersea cables, and, in that way, we would become the third logical supplier for this market, which promised to be immense. I didn’t avoid the problem of French nuclear tests. I pointed out in an amicable way that Mururoa was further away from Sydney and Canberra than the Chinese test center which hadn’t yet raised any controversies. Overall, this first trip was fruitful and, for me, confirmed that Alcatel should rely on Australia for its development in that part of the world, despite the distance and the sleepiness of the economy which I sensed would pick up again.
The order having been obtained, the promise was kept. Alcatel constructed a magnificent factory for the manufacture of undersea fiber optic cables in Botany Bay, near Sydney, not far from where La Pérouse had set foot in the 18th century. On May 2, 1990 I had the pleasure of ceremoniously inaugurating this manufacturing facility with Robert Hawke, Australia’s Prime Minister. It would mark the inescapable Alcatel presence in the gigantic trans-Pacific cable market from that time forward.
Alongside the cable sector there developed in several countries a specific business involving the laying and connecting of cables, which occasionally extended into more complete installations. It developed first with high voltage cables, a delicate product which the supplier hesitated to have installed by third parties. The customer preferred to have one responsible party and to buy its cable installed. In addition, the laying of undersea cables required a special expertise—for power cables because of their weight and rigidity, and for telecommunications cables because of the depth of the oceans and the precision required in their positioning. This activity of laying cables also required specialists for ground connections over a great distance. With respect to exports we saw large markets develop for turnkey installations of systems to connect subscribers to telephone networks. In certain countries the development of cable television networks also constituted a significant activity for these crews. I always thought that these activities, which fell more within the category of business than industry, should be held in separate operating units. The work methods and the profile of its managers differed greatly from the industrial world. In that field profit or loss was made on the job site and depended, first of all, on the leadership and organizational and motivational competencies of the managers, who by necessity were left to their own devices. At Les Câbles de Lyon I had already placed these activities in a separate business unit by separating them out from the power cable and telecommunications department.
The creation of Alcatel NV was the occasion to give these activities more recognition. A special group (OLP or Outside Line Plant) was created and headed by Umberto Ferroni. He was given direct responsibility over the only subsidiary already separated out (Siette in Italy) and functional responsibility over all activities of this type incorporated into other national units. Later, these activities were reorganized completely. ALCO (Alcatel Contracting) was established. Under the dynamic and creative management of Jean Swetchine, the former head of Sedim whom I had known since I first joined the group, contributed greatly to maintaining the exports of network cables, because these products were no longer sold except as part of large turnkey projects.
The Business Systems Group (BSG), which encompassed business communications, was responsible for 24% of Alcatel NV’s sales, making it the leader in Europe and the second in the world for corporate switches (PABX for Anglo-Saxons) with two million lines manufactured. But its broad product line lacked homogeneity.
The principal activity of this group was with private business switches. As already indicated, two models were inherited from CGE, covering the entire product line, from the smallest installation with several secondary lines to large systems with several hundreds, if not thousands, of lines. With respect to the ITT companies, several systems coexisted and were developed in Belgium, Germany, Italy, Austria, Australia and the United States, and a new product line was being developed in connection with the “Office 2000” project. It goes without saying that reorganization was urgently needed.
The group was also, with ten million units, the largest telephone set manufacturer in the world, whether for public networks or for specialized networks sold with PABX. The multiplicity of models and the diversity of manufacturers could not have been greater. Practically speaking, factories in each country participated in this market and especially those in France, Belgium, Germany, Italy, the United States and Australia. However, these products, involving simple manufacturing techniques, were threatened by low cost producers in the Far East and often were only maintained as a result of national protections resulting from particular standards imposed by local operators. This fragile and not very profitable line of business called as well for quick decisions.
Business communications (the Business Systems Group) also included a lot of other products used in the office and at home. Telex, fax, videotex (Minitel), answering machines, pay telephones, and mail room equipment. In these areas Alcatel’s position, being dependant on licensing, was a lot more fragile. It only had a small part of the market, except for the Minitel, of which 700,000 units had been sold essentially in France (10% abroad). At the time, a lot of hope had been placed on possibly exporting this system, which had been invented and promoted by the French PTT. Despite the fact that it was certified in certain countries, nationalism was such that all of the major telecom operators would block its development by inertia. It wouldn’t be until the internet generation that videotext would become, outside of France, a service really open to the general public.
Particular mention must be made of the radiotelephone. At the time Alcatel only provided private analog systems used by companies and public service providers (firemen, policemen, etc.). Public systems were based on national standards which prevented their use in a foreign country. Telecommunications authorities decided to establish a single digital system for all the countries of Europe, to be installed by 1991. Alcatel therefore decided to form a consortium, ECR 900, with AEG and Nokia to develop, manufacture and sell cellular telephone systems based on the future standards called GSM. The system was to be compatible with both Nokia and Alcatel switches and radio base stations would be manufactured in common. Alcatel therefore wanted to enter the world of mobile and personnel communications, which was a new area for Alcatel but which seemed to be very promising.
A first step was taken in 1987. Alcatel was retained to furnish Compagnie Générale des Eaux the system for which it had just obtained the right to open a second public mobile telephone network. The system was based on analog transmission, but it was Alcatel’s first experience with a radiotelephone system open to the public.
Business Systems also included a group of computer-related activities inherited from ITT—the sale and/or manufacture of workstations, IBM-compatible personal computers and various types of specialty terminals. These activities were only slightly profitable or, frankly, incurred losses. The principal companies were in the United States but all the European subsidiaries were urged to sell these products.
It's easy to understand the urgency that existed to simplify and structure this enormous group of activities, especially in the United States. In a nutshell, Alcatel had inherited from ITT four business systems entities in the United States with total sales of $650 million, but with a loss of $30 million: Qume, located in San Jose ($130 million), which manufactured printers and, especially, printing heads but relying on a Japanese license for new laser technology; Courier, located in Phoenix ($250 million), which manufactured specialized computers (workstations) and other terminals and its subsidiary Servcom, a maintenance and service company; B&CC ($195 million), which produced PABX’s and telephone sets, located principally in Harrisburg, Pennsylvania and Corinth, Mississippi; and ITT Information Systems ($80 million) located in San Jose, which sold personal computers (ITT-Xtra) and had significant losses.
Alcatel started out by reorganizing its U.S. activities by combining them with those already owned by CGE in order to benefit from the management structure, and then to urgently undertake a program to limit losses, particularly through divestitures. The various activities would be regrouped after July 1, 1987 into three entities: Alcatel N.A. Inc., the former subsidiary of Les Câbles de Lyon, to which the transmission activities were transferred; Alcatel Business Systems; and, finally, Friden Alcatel, the former CIT subsidiary for postal automation. We wanted to get out of computer peripherals, a business in which Alcatel didn't have the necessary size. Qume, Courier and ITT Information Systems were sold under difficult conditions in 1988. Only B&CC remained. Corinth's telephone set activities, adversely affected by the opening up of the American market, was formed into a company and later sold to its employees. After two years practically nothing remained in Alcatel of the American ITT companies. We had sensed the weak condition of those companies when we were renegotiating the agreement with ITT but I remember that ITT had refused to separate them out and, at any rate, we were bound by the preliminary agreement to take them. I believe that overall Alcatel got out from under these difficult businesses pretty well, as was the case with respect to the Spanish subsidiary and of Christian Rovsing, a Danish software company involved in major litigation over its default on the delivery of a major information system for airlines. Christian Rovsing was sold in 1988.
These results were obtained as a result of the expertise, dynamism and total devotion of Stephan Guérin, who was responsible for the company's legal affairs, and of the team that he put together. After the initial restructuring, it was he who led (successfully, as will be seen) all of the acquisitions and divestitures of the CGE group. He deserves a lot of credit for his role in the building of Alcatel Alsthom.
Other significant transactions were carried out or undertaken from 1987 forward. In Italy Alcatel took complete control of Dial (a national distributor of which Alcatel already held 24%), reinforcing its position in the business communications market.
Alcatel also sold its shares in two French software companies at the insistent demands of their managers who—erroneously, in my opinion, and as the future would show—didn’t see their future as part of a large, industrial group, whose own software needs, as well as those resulting from its business activities, would have seemed significant. But in businesses such as these involving “gray matter,” experience told me that it was not possible to impose solutions on the principal managers who are, in fact, the only real assets in these types of companies. It was too late to win them over to Alcatel. As a result, GSI was sold to its employees, but the dream would be achieved ten years later when the company was bought out by an American company. Sesa was sold to Cap Gemini, one of its stockholders, and, I’m afraid, lost a little of its creativity in that big company. Alcatel possessed two other software companies (TITN Answare and ISR). Having learned from that misadventure, I paid close attention during all my years at the head of the group to make sure that the autonomy essential to motivating the specialists in this area was maintained.
We also decided, in the early months of 1987, after visiting the factories involved and evaluating the possibilities for improvement or strengthening, to sell the consumer electronics line of business that ITT had developed, principally in Germany but also in the United Kingdom and Portugal. These activities involved the manufacture of television tubes and speakers, as well as television set assembly. With sales of 590 million ECUs, ITT held only a modest position in this market. The leaders were Thomson and the Japanese. Thomson, to which we first offered to sell, still suffering from the stirs created in Germany by the acquisition and reorganization of Telefunken several years earlier, declined. After a good number of difficulties, owing to the fact that SEL’s general management was not favorably disposed to the sale of this line of business despite the losses that it generated, we succeeded in convincing Nokia. The transaction was finally concluded, effective January 1, 1988, owing to the dedication of the German director of this division, Ludwig Orth, and the persistence and expertise of Stephan Guérin.
These intense efforts enabled Alcatel NV to report impressive and surprising results in the beginning of 1988 for its first fiscal year. Sales were 11.197 billion ECUs; operational profits were 635 million ECUs; and net profits were 346 million ECUs, of which 31 million for minority interests. Net profits, at 3.1% of sales, surpassed by 50 percent the forecast given at the time of the privatization.
Our quick response in selling the loss-producing lines of business which didn’t play a part in the core activities of the new Alcatel appreciably reduced, after 1988, the proportion of these diverse activities to total sales. Sales for these activities went from 2.44 billion ECUs in 1987 to 1.590 billion ECUs in 1988—that is, from 21% to 14% of total sales, which contributed to the improvement of the company's profit-making capacity and to bringing 1988 net profits to 3.8% of the sales.
I think that the most surprised by Alcatel NV’s success during the early months of its existence was ITT itself, which didn’t wait until the end of the year to make that known. In September it appeared desirable, in order to avoid any conflict of interest, that CGE contribute to Alcatel NV the 34.5% that it had maintained in Telic Alcatel. That contribution, valued at 285 million ECUs, was going to reduce mathematically ITT’s share in Alcatel NV. Our American colleagues preferred to contribute 160 million ECUs in cash to avoid having their share diluted—proof of their confidence when one thinks of the fierceness with which they continually defended during the 1986 negotiations the amount of cash that they wanted to take out of the initial transaction.
Even though these very positive early results facilitated our lives with respect to customers, shareholders and personnel, we couldn’t let it go to our heads because the biggest challenges still lay ahead of us. It would now be necessary to demonstrate that Alcatel, the transformation of which was well underway, could become a truly innovative and highly profitable company and establish itself as an unquestionable leader in the telecommunications industry.
The first year results and this ambition were not overlooked by those who attended the world telecommunications exposition held in Geneva in the fall of 1987. This highly celebrated forum brought together the world's telecommunications suppliers and operators every four years. Reservations for stands were made almost as far in advance as the preceding exposition—that is, in 1983 for the 1987 exposition. We had space at the 1987 exposition because we inherited not only the reservations made by CIT and ITT, but also by Thomson—a symbolic summary of the road already travelled by Alcatel!
This conference, held every four years, mischievously marks out for me the evolution of my responsibilities: In 1979, the first time that I went, I easily took note of the several displays afforded Les Câbles de Lyon in CIT’s stand. In 1983 Les Câbles de Lyon had its own space, but it was very modest next to that of LTT in the Thomson area, the company that we were going to buy. In 1987 it was for a new Alcatel that we had to improvise a presentation. In 1991 Alcatel, unquestionably having become the world leader of the industry, would present its activities in a stand which, by its size and architecture, would rival, in the main hall, those of the American company AT&T, the Japanese company NEC, and the German company Siemens. In 1995 it was the same—in the very same space and with the same notable presence; but to find my way through the Alcatel stand, I was no more than a simple visitor who disturbed the place, so I only made a very brief visit.< “Sic transit gloria mundi!”
It was also during that period that the agreement negotiated in 1985 and 1986 with AT&T had its unfortunate ending. The know-how of AT&T and Alcatel didn't compare with that of the Matra group, which was supported by Ericsson. The government decided in their favor with respect to the sale of CGCT, which it appeared would come under French control but several years later it would come under the control of the Swedish company. Refusing to give up on the possibility of concluding an agreement with AT&T, I stayed in contact with Jim Olsen, its chairman; and, after allowing several months for the disappointment from the failure on the French market to heal, I proposed a larger agreement for bringing together Alcatel and the part of AT&T's activities that would later become Lucent Technologies. These activities, very similar to those of Alcatel on the industrial front, perfectly complemented the Alcatel operations geographically, thereby presenting the likelihood of strong synergy if the necessary restructurings were undertaken. We made progress with the idea. Unfortunately, Jim Olsen died several months later and his successor, Bob Allen, a pure product of AT&T’s telephone businesses, categorically rejected the idea.