Shriveled BlackBerry Has Canada Needing Research Driver
Robert Baker can’t wait to finish his electrical engineering degree at the University of Waterloo and get away from the withering Canadian technology company down the street that used to draw the top students -- BlackBerry Ltd. (BB)
Joining BlackBerry after graduation “was always a dream job,” said Baker, 21, munching on a bag of carrots at the engineering school about 70 miles (112 kilometers) southwest of Toronto. “Not so much anymore,” he said, adding he plans to head to California after graduation.
Canada’s reputation as a technology innovator was diminished after the smartphone maker announced last month a surprise $934 million pretax writedown for unsold phones, and said it would fire 4,500 workers -- almost 40 percent of its employees. The world’s 11th-largest economy is already short on research drivers like Nortel Networks Corp., which filed for bankruptcy and was broken up and sold in parts to foreign tech companies. BlackBerry’s current woes may further crimp spending budgets that haven’t returned to levels of a decade ago.
BlackBerry accounts for “a big chunk of what remains of total research and development spending in that information technology industry,” said Michael Burt, director of industrial economic trends at the Conference Board of Canada in Ottawa. Losing the company “would certainly curtail productivity growth in that particular industry and it’s possible it may have a larger net effect on total productivity in Canada.”
The company formerly known as Research In Motion Ltd. is Canada’s biggest spender on research and development over the past 12 months at C$1.49 billion ($1.44 billion), according to data compiled by Bloomberg, more than four times the amount of the second-place company, Montreal-based Bombardier Inc. Without BlackBerry, Canada wouldn’t have a company among the world’s top 300 R&D spenders on research and development. The firm said Sept. 27 it cut such spending in the first six months of its fiscal year by 2 percent from a year earlier, to $718 million.
“During this transition period, we are refocusing our business to ensure we have the right investments and resources in the right places so that we continue to innovate and stay competitive,” the company said in an e-mail in response to a question about whether its research budget would be cut more.
Canada’s technology companies outperformed the rest of the economy since 2007 by largely escaping the 2009 recession. The industry has accounted for 7.5 percent of Canadian output growth since 2007, and its employees earn 50 percent more than the economy-wide average wage, according to Industry Canada data.
Canada will rely on these types of companies “to conjure up new products and services, to find novel uses for existing products and to develop new markets,” according to a 2011 panel report on business innovation for the government that was led by Tom Jenkins, chairman of Open Text Corp., a business software company based in Waterloo that draws its name from a text-search technology developed through a University of Waterloo project. “These fruits of innovation are the tools that will ensure Canada’s success in the twenty-first century.”
Economic expansion has slowed since late 2011, hobbled by weak global demand for the country’s exports. Bank of Canada Senior Deputy Governor Tiff Macklem cut the bank’s growth forecast for the rest of the year earlier this week, and said a rotation of growth toward investment and exports has proved “elusive.”
For policy makers like Macklem and Finance Minister Jim Flaherty, BlackBerry is a company that had been doing all the right things -- spending on innovation and focusing on faster-growing emerging markets like Indonesia and Brazil. Even there, sales have soured. Revenue from Latin America plunged 62 percent last quarter from a year earlier, and sales in the Asia-Pacific region tumbled 28 percent.
In its prime, BlackBerry produced a smartphone so cool and addictive it was nicknamed the “CrackBerry,” with high-profile devotees like U.S. President Barack Obama. Its stock peaked at $147.55 in June 2008. The company created high-paying jobs in Waterloo, where almost 9 percent of the city’s adult population earned C$100,000 or more in 2010, more than triple the country’s median income.
BlackBerry’s hometown, Waterloo, has a population of just under 100,000. The city and surrounding region has grown 15 percent in the past 10 years according to Statistics Canada, faster than the country’s 11 percent growth. Employment has risen 10.6 percent since the end of the recession, compared with a national average of 5.7 percent.
Now, Fairfax Financial Holdings Ltd., BlackBerry’s largest shareholder, has made a tentative offer to buy the company for $4.7 billion, or $9 a share, and take it private. Fairfax, led by Chief Executive Officer Prem Watsa, has not disclosed the names of any of its partners in the bidding consortium, and hadn’t secured financing for the deal at the time it was announced Sept. 23.
BlackBerry shares were down 0.5 percent to $7.69 at 4 p.m. in New York, more than a dollar below the offer price, reflecting investor concerns the deal may not get done.
“It is a Canadian icon and that is what makes it more difficult for people,” said Eric Hoskins, Ontario’s economic development minister. “It’s pretty difficult to create a BlackBerry.”
Waterloo and its sister city Kitchener lie in the rolling farmlands of southwest Ontario, part of a region known as the Golden Horseshoe, a reference to the circular shoreline of Lake Ontario. The area has been known for its agriculture, its auto plants, and more recently, its technology. Besides BlackBerry, the city is home to Open Text (OTC), which has seen its stock gain 38 percent this year in Toronto trading, and Descartes Systems (DSG) Group Inc., which is up 28 percent. BlackBerry shares are down 35 percent in New York.
Over a foosball table in the engineering school’s non-profit snack bar, across a parking lot and over a chain-link fence from BlackBerry headquarters, students Stephen Arsenault and Nikhil Ramakrishnan agree BlackBerry is down, and say they hope that other Waterloo startups can sustain the region’s industry.
“It wasn’t where I bet all my eggs on,” said Arsenault, a second year computer engineer who wanted to work for BlackBerry for his first co-op work term and took an offer from another company instead. “BlackBerry has been going downhill for a while.”
BlackBerry workers may find jobs at other smaller technology companies that have sprung up, said Daniel Schwanen, a researcher at the C.D. Howe Institute, a Toronto-based research organization that says it promotes “economically sound public policies.”
“The talent isn’t necessarily leaving Canada; in fact, most of it is staying,” Schwanen said in a telephone interview. “Let the talent migrate to other opportunities.”
One opportunity is Industry Corp., which is developing video games including ones featuring Steven Jackson of the National Football League’s Atlanta Falcons and Hanley Ramirez of the Los Angeles Dodgers baseball team.
“We always want to be going for the next cool thing, so I think in five years we will be certainly a name brand in the entertainment industry,” said Andrew Matlock, 26, CEO of the company that has 15 people on staff.
Industry Corp. was helped by using space in the Communitech Corp. technology startup incubator, which is housed in an old Kitchener tannery that also includes offices of Google Inc. and Desire2Learn Inc., an 850-employee maker of educational software. Iain Klugman, the site’s CEO, said the companies that have sprung up around BlackBerry are enough for a sustainable industry to hire many fired workers.
“You can’t drive down the street without seeing a university building or a research institute or a hospital wing that hasn’t felt the impact of BlackBerry,” Klugman said. “It really was dominant here for a chunk of our history in the mid-2000s, but what happened is there’s a whole next wave of entrepreneurs that came behind.”
While Canada waits for the next BlackBerry or Nortel to emerge, the economy feels the impact of BlackBerry’s woes.
“When you lose a company like that that’s a global player on a global stage, that’s really a black eye,” said Startup Canada Chairman Adam Chowaniec, a former Nortel engineer and founding CEO of Tundra Semiconductor Corp. “The repercussions are much bigger than just the job numbers themselves, it really is a hollowing out of our ability to compete globally in technology.”
To contact the reporter on this story: Greg Quinn in Ottawa at email@example.com