AT&T's Struggles in the East

The telecom giant is hoping China will loosen restrictions. But even in India, where the company has more freedom, growth has been slow

Forrest E. Miller's debut trip to China as group president of AT&T (T) must have been more than a bit frustrating. Miller is responsible for the company's global network, enterprise, and consumer operations. And after visiting Beijing last week, he came away wowed by the extent of growth -- and wondering how AT&T could get a bigger piece of it.

Since March, 2001, AT&T has owned a small stake in a Shanghai joint venture called Shanghai Symphony Telecom, which uses the brand name Unisiti. Miller says that Unisiti is doing O.K., but he and the company want a lot more. Miller says his question is: "Can we participate in a more complete way in the growth we are seeing in China?"

The answer, in a word: No. With Chinese President Hu Jintao set to travel to Washington on Apr. 20 to meet with President Bush, China's willingness or lack thereof to open its market to U.S. telecom operators might be one of many difficult trade issues that the U.S. and China will be addressing in the weeks ahead.


  A lot has changed since AT&T received Chinese government approval for its joint venture in China back in 2000. The first of its kind for a U.S. company, the alliance was going to be just the beginning for AT&T in China, which had kept its telecom market closed even as Beijing had opened other parts of the economy to foreign investment.

With Unisiti, AT&T could offer a variety of telecom and network integration services to corporate customers. With a 25% equity stake, AT&T was the No. 2 partner, behind the Shanghai branch of China Telecom (with 60%) and an arm of the Shanghai city government, which owned the rest.

Since then, China has joined the World Trade Organization. As part of its WTO commitment, the Beijing government has liberalized and eased restrictions on foreign investment in telecom. Another big change, of course, is at AT&T itself. The company was acquired by SBC and is now in the process of absorbing Bell South (BLS), two of the Baby Bells.


  Amid all the changes, though, there's been one thing that has stayed more or less the same: AT&T today is still no closer to a big breakthrough in China than it was when the joint venture got up and running in 2002. For that, the company can thank the Chinese government, which has managed to maintain enough barriers to entry to keep the Chinese telecom market largely closed to AT&T and other foreign players.

While Beijing has lifted some restrictions, for instance, on foreign investment, it still caps foreign ownership of telecom operators at 49%. Moreover, getting a telecom license is pricey, says Steve Lowe, the Hong Kong-based vice-president of AT&T Business Asia Pacific.

China's Ministry of Information Industry, which regulates the telecom industry, has mandated that a foreign company that wants such a license must pay $250 million. Compare that to India, where a comparable license costs $1 million. "It's a big price tag," says Lowe.


  Not surprisingly, AT&T is now moving faster in India. For years, the government in New Delhi took a backseat to nobody when it came to protecting local operators. But under the Congress Party coalition that took office last year, the government has dramatically changed its policy. Not only is it willing to sell an operating license to a foreign company for just $1 million, it also allows foreigners to take majority control.

The limit now is 74%. "India has started the [liberalization] process quite aggressively," says Miller. "They have decided to make it easier for foreign companies." Because of earlier restrictions limiting foreign ownership, AT&T has a 10-year-old partnership with VSNL, the big Indian operator.

Miller says that the American company isn't about to dump that deal. The Americans have not had an easy time of it in India: A cellular partnership with two of India's biggest business families, the Tatas and the Birlas, has struggled. The partnership with VSNL hasn't wowed anyone, either.

But AT&T, taking advantage of the new rules, has formed a subsidiary that it controls, AT&T Global Network Services India, and Miller and Lowe says that they are excited about the ability to serve customers in India without any middleman. "For the first time, we will get more freedom and flexibility in what we can do," says Lowe.


  Of course, AT&T isn't giving up on China. The company is lobbying the Bush Administration to make telecom market liberalization more of a top priority in trade talks between the two countries. "Part of our work is to get [the issue] on the right place on the U.S. government's agenda," says Miller.

AT&T won't reveal the revenue figures for its Chinese joint venture, although Miller says that the number is growing and the joint venture is profitable, with over 200 customers using services like Unisiti's virtual private network. One hundred and seventy six of the customers are foreign multinationals; among the Chinese customers there's state-owned airline Air China and shipping giant Cosco. AT&T is forming another partnership, opening a new Internet data center in Shanghai that will provide web hosting for corporate customers.

The pace of change in China is frustratingly slow. But Miller says that a company the size of the new AT&T has no choice but to keep trying. Following the SBC takeover and with the BellSouth deal in the works, the new AT&T will have revenues of $120 billion, he says. "If you're going to grow on a base like that, you need to look globally," says Miller. "That's one of the reasons we are here."

Before it's here, it's on the Bloomberg Terminal.