At&T Reaches Way Out For This One

American Telephone & Telegraph Co. may be the best-known communications company in the U.S., but it's hardly a household name abroad. Boosting AT&T's international standing is a long-held goal of Chairman Robert E. Allen, mainly because that's where most of the growth lies for both phone services and equipment. In the past few years, the company has launched a flurry of ventures overseas, particularly in the former East bloc.

Now, AT&T has taken another great leap abroad--its riskiest and most expensive yet. On Feb. 23, AT&T announced a sweeping agreement to help modernize China's creaky phone system. It's the largest foreign venture ever for the phone giant, says AT&T Vice-Chairman Randall L. Tobias, who negotiated the pact with the Chinese government.

HUGE PAYBACK? AT&T is pulling out all the stops. The deal "touches on virtually every part of AT&T," Tobias boasts. The company will set up a joint venture in China to build high-tech phone switches, the computerized heart of modern phone systems. AT&T also plans to help China make equipment for cellular and business phone systems. It proposes to show the Chinese how to make the microelectronics that go into the phone gear. It even plans to establish a Chinese branch of the famed AT&T Bell Laboratories to conduct research. AT&T won't put a dollar figure on the investments, scheduled to unfold over a number of years, though they could run into hundreds of millions of dollars.

The payback could be huge. AT&T figures it should reap billions in revenues over the next decade as China expands its inadequate phone system. Today there are only about two phone lines per 100 people, and in Beijing residents line up at special booths to make international calls. The government's drive to have 40 lines per 100 people by 2020 could make China the world's fastest-growing phone-equipment market.

But AT&T shouldn't count on a quick payoff. International agreements curb high-tech exports to China, such as the most-advanced phone transmission systems. AT&T will need waivers or a relaxation of restrictions to pull off its plan. Also, China and the U.S. remain embroiled in a trade dispute, in part due to human rights concerns. Moreover, it may be risky to make a deal with China's aged leadership, whose position is tenuous as the nation appears to be moving toward a free market. Tobias isn't worried: "I'm very confident that there is enough certainty and stability in the direction China is going," he says.

Besides, AT&T had to act fast. Competitors such as France's Alcatel, Canada's Northern Telecom, Sweden's L.M. Eric-sson, and Japan's NEC are way ahead of AT&T in the Chinese switch business. Several already have joint ventures to make or install these expensive devices. "Alcatel is very aggressive, and so is Northern. This agreement gives AT&T more of a foothold in the market," says Cheryl Russell, an analyst with market researchers Northern Business Information, a division of McGraw-Hill Inc.

More than a foothold, say apprehensive competitors. While China can still buy equipment from other suppliers, the agreement puts AT&T "in a very enviable position," says an executive of a rival company. Considering the huge investment AT&T plans, it may need most-favored-supplier status to get its payback.

          Venture                    Signed
      --A 20% stake in Canadian            JANUARY
      long-distance provider Unitel         1993
      Communications Inc.
      --An 80% stake in Poland's          NOVEMBER 
      Telfa, which makes phone              1992
      switching gear and other 
      --A 60% investment in                OCTOBER
      Chinese fiber-optic-cable venture     1992
      --A 50-50 venture with Tata           JUNE 
      Telecom Ltd. to make phone            1992
      transmission equipment in India
      --A 68% stake in a joint            FEBRUARY
      venture with Dalnya Sviaz of          1992
      St. Petersburg to sell phone 
      --A 19.5% stake in a joint           JANUARY
      venture to design, build, and         1992
      operate Ukraine's long-distance 
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