Cracks in the heart of a cluster
The Financial Times
By Bernard Simon
Growing pains: RIM’s success has helped transform the Kitchener-Waterloo region into a thriving business and academic community
Ian McLean had no hesitation swimming against the tide last month when Research In Motion shocked investors by slashing its profit outlook and warning of job losses at its sprawling operations in Waterloo, Ontario.
Undaunted by a steep slide in RIM’s share price, Mr McLean, president of the Greater Kitchener-Waterloo chamber of commerce, invested all his spare cash – totalling almost C$10,000 ($10,300, £6,500) – in the BlackBerry maker’s shares. “In the long term, it’s a good bet,” he says. “With the innovation and entrepreneurial spirit that is within that company, they are going to surprise people. I’m convinced of it.” He is banking on a hefty return to fund his children’s education.
Mr McLean’s decision shows how tightly RIM’s wellbeing is inter-twined with the 400,000 residents of Waterloo and neighbouring Kitchener, an hour’s drive south-west of Toronto.
As the BlackBerry’s popularity has spread around the world over the past 15 years, RIM has helped transform Kitchener-Waterloo from a quiet manufacturing centre best known for its Mennonite community and Oktoberfest celebration into a thriving technology cluster.
Ideally, businesses that comprise a cluster feed off each other’s skills and resources to improve productivity, stimulate innovation and bring new products to market. The process takes place through myriad networks, from chance encounters in the pub to joint training schemes and philanthropic ventures.
Iain Klugman, chief executive of Communitech, a non-profit organisation, estimates that 800 technology companies now call Kitchener-Waterloo home. Communitech, which supports start-ups and champions collaboration among local businesses, universities and government, owes its own existence to a drive by local businesses – including RIM – that raised C$107m over four years.
The question now is whether the cluster can withstand RIM’s troubles, should they persist.
The BlackBerry, once the smartphone of choice for corporate executives, politicians and Hollywood celebrities, is struggling to maintain its edge against Apple’s iPhone and handsets using Google’s Android operating system, among others. RIM shares have lost more than half their value in the past six months. Its market value has shrivelled from a peak of $77bn in mid-2008 to $14.8bn.
Jim Milway, executive director of the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management, says the sustainability of an economic cluster hinges on the extent to which other companies have adopted outward-looking strategies. “They’ve got to cut the bonds from the mother ship,” he says. “Otherwise, it’s not really a cluster. It’s just one firm with a lot of suppliers surrounding it.”
Mr Milway points to Houston’s oil and gas services industry as an example of a cluster that has thrived despite the decline of nearby oilfields. By contrast, Montreal’s economy suffered a big setback when several of Canada’s big banks and insurance companies moved their main offices to Toronto as Quebec separatism flared during the 1970s.
RIM’s influence on Kitchener-Waterloo is pervasive. As Jim Balsillie, co-chief executive, put it during a conference call last month: “The reduction of our head count is an incredibly difficult decision, and [co-CEO] Mike [Lazaridis] and I appreciate the impact on our employees, their families and the community.”
The company occupies 25 buildings in an area nicknamed RIM City, and employs about half of its 17,500 workforce in Kitchener-Waterloo
Four factors for building a successful hot-spot
Harvard’s Michael Porter, the pioneer of economic cluster theory, has identified four factors critical to the success of a cluster: local history and culture, which determine how companies interact with each other, their workers and government; availability and quality of natural resources, labour and other production inputs; local demand for related products; and presence of suppliers and successful competitors to encourage both collaboration and rivalry.
Oft-cited successes include California’s Napa Valley and the Silicon Fen high-technology sector outside Cambridge.
Failures also abound. Glasgow’s shipbuilding industry (above) was too inward-looking and failed to diversify. Similarly, complacency among Swiss watchmakers and German camera makers exposed them to lethal competition from Japan.
Mr Klugman and others put their faith in the diversity of economic activity, noting that RIM is just one of 800 technology companies in the area, albeit by far the largest. RIM posted revenues of $19.9bn last year, almost 20 times more than Open Text, a leader in digital document management that is the area’s next biggest technology-sector employer.
Others with little if any direct dependence on RIM include Desire2Learn, whose educational software is used by millions of teachers and students around the world.
The optimists note that Kitchener-Waterloo is home to a variety of other industries. It has drawn several insurance companies. One of Toyota’s two Canadian assembly plants is in nearby Cambridge. The Japanese carmaker earlier this month announced that it would spend more than C$500m to upgrade the plants.
The University of Waterloo boasts Canada’s biggest engineering school and has become a prime recruiting ground for Silicon Valley.
“Our hallmark is this capacity to pull together,” says Mr Klugman. Communitech and several of the start-ups it has spawned now occupy part of a former tannery in downtown Kitchener. Google’s engineering division also recently moved in.
Ginny Dybenko, a former Toronto telecoms executive who now oversees strategic planning at Wilfrid Laurier University, acknowledges that “this would be a very different community without RIM ... It will have huge and devastating effects if it sinks.” But, she adds, “any inclination to be putting up a headstone for RIM at this stage would be very premature”.
RIM’s two chief executives have spearheaded the creation of an institute of theoretical physics and a public-policy think-tank respectively that have attracted talent from near and far and brought an extra dimension to the cluster. The director of the physics institute, Neil Turok, is a former chair of mathematical physics at the University of Cambridge. The Balsillie School of International Affairs, a joint venture between the think-tank and the area’s two universities, is due to open in September.
RIM’s contribution to the two local universities is equally impressive. Every MBA student at Wilfrid Laurier receives a BlackBerry courtesy of RIM and one of its distributors. The university is in the throes of launching a master’s degree in technology management, modelled on a programme it developed for RIM executives.
Mr Balsillie and Mr Lazaridis “are really in and of the community” says Ms Dybenko. “They’re just Jim and Mike.”
Locals are overwhelmingly confident that RIM will rebound, and even if it does not, that Kitchener-Waterloo will continue to prosper. Much of the optimism rests on the area’s history. “This community has no particular claim to fame,” says Larry Smith, an economics professor at the University of Waterloo. “But it has been an early adopter of almost every commercial development of the past century.”
Ford Motor had barely begun production of the Model-T when entrepreneurs in south-western Ontario started producing car parts. The Seagram liquor empire, subsequently split up between Diageo and Pernod Ricard, had its roots in a Waterloo distillery. The tannery, whose building is now occupied by Communitech, was once the biggest in the British empire. “The technology sector here is a continuation of a long trend,” Mr Smith says. “The community organises itself to do things. It does not wait to be prodded from outside.”
As with many other clusters, collaboration between business, academe and government is a key ingredient in Kitchener-Waterloo’s success. A prime example is the University of Waterloo’s pioneering “co-op” programme, under which students spend at least four months a year working for a company, government department or non-profit agency.
“Every company goes through growing pains. Apple went through that not long ago,” says David Beaton, a former high-school mathematics teacher whose company, Formulating Change, has developed a programme enabling credit-card holders automatically to donate part of each purchase to a charity of their choice. Echoing Mr McLean’s confidence, Mr Beaton adds: “I tend to look at [recent developments at RIM] as a positive – as a buying opportunity.”
