BUSINESS/ECONOMY

Riding the rails of success

Bruce Wallace May 13 1985
BUSINESS/ECONOMY

Riding the rails of success

Bruce Wallace May 13 1985

Riding the rails of success

BUSINESS/ECONOMY

Bruce Wallace

For Laurent Beaudoin, the youthful chief executive officer of Montreal-based Bombardier Inc., a heady pastime is spiriting a Formula Plus snowmobile across the hilly terrain of the Eastern Townships near his home in Knowlton, Que. “Last year my wife and I put at least 1,500 km on our snowmobiles,” the 47-year-old Beaudoin recently told Maclean’s. “We love to spend entire weekends on our machines.” Imagining a more appropriate pursuit for the head of Bombardier would be difficult—the company’s SkiDoo trademark and the term snowmobile have been interchangeable to a generation of Canadians. But since introducing the recreational snowmobile in 1959, the family-owned firm has been transformed into a world-class manufacturer of mass transit rail equipment and military vehicles. Last week Bombardier announced that sales in 1984 topped the half-billion-dollar mark.

Now, the company is preparing to improve on its already impressive sales record in Canada and abroad. Bombardier spokesmen say they expect to supply the subway cars for the planned $423-million expansion of the Montreal subway system. At the same time, officials at Via Rail Canada Inc. in Montreal have indicated that the company will purchase new passenger cars from Bombardier for transcontinental use. And just 15 weeks ago, after 30 months of negotiations, Bombardier landed a $50million deal to sell 2,500 half-ton litis four-wheel-drive vehicles to the Belgian Army, opening up the possibility of future contracts to other North Atlantic Treaty Organization armies. Said Jon Reider, an investment analyst with Lévesque, Beaubien Inc., a Montrealbased brokerage firm: “With good earnings growth and the potential for several more lucrative contracts, Bombardier is on a roll.”

The major obstacles to Bombardier’s progress may be political developments that threaten the company’s export base. Currently, Bombardier sells more than half its products abroad and has manufacturing plants in the United States and Austria. But U.S. President Ronald Reagan proposed in his February budget to cut $2.5 billion in transit subsidies to U.S cities, lessening the

ability of municipalities to buy Bombardier’s goods. As well, rumors have been circulating in official circles in Ottawa that the government may reduce the role of the Export Development Corp. (EDC), a Crown agency that subsidizes Canadian exports. That action would directly affect companies such as Bom-

bardier, which rely on the EDC for lowcost financing to win contracts from foreign buyers.

The critical role of exports in the company’s buoyant profits is evident in its sales figures. Bombardier earned $10.1 million on sales of $515.5 million in 1984, up from $6.3 million on sales of $491 million the year before. The increase was partly a result of the returns from a $l-billion contract to deliver 825

subway cars to the Metropolitan Transportation Authority (MTA) of New York by 1988, the largest Canadian mass transit export contract ever won. And last September Beaudoin signed an agreement in principle to manufacture 2,000 Elan snowmobiles in China.

With Bombardier’s long-term health dependent on export sales, Beadouin has been vocal about his concern that the federal Conservatives may tamper with the EDC. Addressing Toronto’s Canadian Club at the city’s Royal York Hotel two weeks ago, Beaudoin said that Bombardier’s export success depends on aggressive marketing backed by low-cost government financing. (In November, 1982, the EDC loaned MTA of New York City $750 million at 9.5 per cent for the purchase of the company’s subway cars.) Declared Beaudoin: “Without the financing guarantees made by our government, the New York sale might not have occurred.”

Apart from its highgear exporting drive, Bombardier has succeeded because of its strategy of buying and adopting proven technology rather than developing its own—a tactic adopted in the late 1970s. The Superliner passenger cars from Bombardier were designed by Pullman Transportation Co. Inc. of Chicago. The Iltis was created by Volkswagenwerk AG of Germany. And the subway cars destined for New York are designed by Kawasaki Heavy Industries Ltd. of Japan. Added Beaudoin: “There is no need to reinvent the wheel.”

That approach, Beaudoin said, is a direct result of Bombardier’s setbacks with the Light, Rapid and Comfortable (LRC) passenger train. The LRC was first developed in the early 1970s by a consortium of Canadian companies, and the technology was purchased and refined

further by Bombardier. The sale of 71 LRC trains to Via Rail in 1978 was intended to lead to future export sales. But the LRC became an embarrassment for Bombardier. A Canadian Transport Commission study released last year said that during a six-month trial period ending in February, 1984, the LRC had “the worst miles-per-defect record of any diesel locomotive operated by Canadian National.”

Bombardier blames the poor record of the LRC on inadequate maintenance and on the usual “debugging” process associated with new technology. According to analyst Reider: “Bombardier was forced to rush the LRC into service without proper testing.” Said Reider: “They just took whatever came off the production line and attached it to the existing rolling stock.”

Company executives insist that the LRC will be running trouble-free by 1987. But it is clear that the technological difficulties have discouraged potential buyers. Said Beaudoin: “We are better off to avoid research and development and instead buy proven technology.”

A series of technical and political problems caused by the New York transit deal have proven easier to deal with. During a 30-day test run of 11 prototype cars last March, subway operators said that, in comparison with the Japanese machines after which they were patterned, the Bombardier cars’ brakes were “soft and mushy.” The problem was resolved two weeks ago by reworking the cars’ electronic circuitry, and New York transit officials said that delivery of the vehicles would resume “within days.” Beaudoin has also successfully deflected criticism that many of the jobs created by the New York subway contract will be situated in the United States. The contract with the MTA stipulates that the trains must be manufactured with 40-per-cent U.S. content, Beaudoin says.

Still, the closing of the huge New York deal was a giant step from the company’s early days as a small family firm. J. Armand Bombardier —Beaudoin’s father-in-law—was an inventor who liked to work in his garage near his

home in Valcourt, 80 km east of Montreal. Bombardier built the first snowmobile in 1922, when he was only 15. A converted car engine with a propeller mounted on skis, the vehicle could traverse Quebec’s nearly impassable rural roads during the winter months. Bombardier continued to refine his idea, and by 1935 he had designed a snowmobile with rubber-cushioned drive wheel and track, the basic system still used. In 1942, L’Autoneige Bombardier Ltée. (Bombardier Snowmobile Ltd.) went into business.

The company’s first export sales took place in the mid-1950s, and Beaudoin, who was born in the town of Laurier

Station just outside Quebec City, joined the company as controller in 1963 and became its president three years later at 28. A trained chartered accountant, he marketed the snowmobile as a recreational vehicle—a tactic that by the late 1960s resulted in huge profits. Said Beaudoin: “We created a new sport in skidooing.”

But by 1971 the company was competing for sales with 106 snowmobile manu-

facturers, and the energy crisis was cutting into snowmobile use. In response, Beaudoin decided to diversify the company’s operations. In 1974 Bombardier began manufacturing mass transit equipment, encouraged by the Montreal Urban Community, which was looking for local contractors to build subway cars for the city’s expanding Métro line.

When the $117-million contract was finished, an absence of domestic customers for mass transit vehicles forced Beaudoin to aim at the export market. In 1979 he recruited an international marketing expert, 55-year-old Carl Mawby, from the federal department of industry, trade and commerce. Mawby, now a marketing vicepresident, developed a sales network extending through Latin America, Asia and Africa and quickly won mass transit contracts in Portland, Ore., Mexico City and New York City.

Mawby’s move to Bombardier was one more public indication of the company’s close ties to various levels of government. For example, in a rare effort on behalf of Canadian business, former prime minister Pierre Trudeau lobbied to win Bombardier a transit contract during a 1983 state visit to Singapore. Said David Schulman, director of institutional research for the Montreal-based brokerage firm Geoffrion, Leclerc Inc.: “They have been very astute in cozying up to government.” Bombardier is also taking steps to improve its leverage in the United States by opening an office in Washington later this month. Company officials say that they hope that effective lobbying will help protect their outlets in the U.S. market, which now accounts for more than half of Bombardier’s urban

transit sales.

Despite the threat of export financing problems, Beaudoin says he is eagerly anticipating rich new contracts that will help the company maintain its upward momentum. Last week Bombardier shares closed on the Toronto Stock Exchange at $29, up from $19 in February. That is a clear signal that investors at least think Bombardier’s snowmobileriding president is on the right track.