American Telephone and Telegraph Company and its Business in China - Case Study Example

AT&T in China Introduction: Successfully doing business in China for AT&T, a telecom carrier that has built its operations in a mature market as the United States must take into consideration the short-term and long-term goals of the company if it wants to gain a solid foothold in what could be largest economy in the world soon. Balancing the short-term and the long-term goals was crucial as the company was bereft of a first-mover advantage in many product-specific markets but had a high potential for capturing broad swaths of the telecom market due to its sophisticated total solutions strategy over the long-term. AT&T also needed to reconsider how its decentralized organizational structure could serve as a barrier in China where product pricing are mixed up with other factors in sealing contracts. Another barrier to be faced with a long-term view was that telecoms sector in China would probably remain a heavy regulated industry for a long-time. Like media and utilities, the telecoms industry is a sector that Chinese authorities would not trust wholly into the hands of foreigners because of its national security implications. It must be assumed that since AT&T already signed a Memorandum of Agreement (MOA) in February 1993 with the Chinese authorities allowing AT&T to offer its broad array of services in the country albeit jointly with the Chinese government meant that at even with the regulated aspect of the telecom industry, the company had been given room to negotiate terms in their undertakings. And even when the United States threatened to tie China's human rights record to the renewal of its Most Favored Nation Status - AT&T, being the America's biggest telecom firm was at an opportune time to use it to leverage its influence on the US government and use it to negotiate some favorable terms from the Chinese government. How to compete in China: To be able to compete in China, AT&T needed to address three fronts so as to keep up with the challenge - first, the heavy regulated aspect of the Chinese telecommunication industry, second, AT&T's competitors which had considerable first-mover advantage and third, AT&T internal adjustments to make its Chinese arm effective in the competition. Developing a competitive strategy for AT&T whose focus is to provide direct telephone services as could be seen in its primary operations in the United States was a challenge in China where providing actual telephone services was closed off to foreign companies. It must then re-focus on manufacturing and systems and network infrastructure build-up for the state enterprise agencies responsible for purchase of telecom equipment at least for the short term while actual provision of telephone services were yet closed off. The decision of whether to embark on a national manufacturing strategy must be deferred according to the set-up of the telecom industry in China, where economic decision making had been decentralized to the local government units.1 AT&T could focus building manufacturing plants on targeted locations based on which provinces or regions offer the best deals in terms of market access, tax breaks, availability of manpower, availability of competitive facilities and utilities, etc. But first it must explore venues to establish joint ventures with local Chinese companies especially in the field of 5ESS switch manufacturing, VLSI manufacturing, network management expertise, R&D with Bell Labs, optical transmission manufacturing, wireless manufacturing, customer premises equipment manufacturing, training, systems integration, and network service offerings.2 The strategy of having local Chinese partners would greatly help a foreign company such as AT&T to smoothen relationships with Chinese telecom regulators. Local partners would also offer valuable insights into the unique aspects of the Chinese market, with the special note that AT&T in 1993 had very few years of experience in terms of international or global strategizing. The importance of local partners takes an even more importance as the foreign companies needed to seek approval for their sales and marketing activities from three levels of regulators - from the Ministry of Post and Telecommunications (MPT) which was recognized as the sole national carrier down to its provincial and county arms. While establishing joint ventures may take care of establishing a foothold in China for the short-term and carving market shares in telecom equipment product lines - AT&T need not sacrifice its strengths that lie in software and systems integration. To be realistic, AT&T may not wrest market leadership from its niche-focused competitors such as Alcatel, Siemens, Ericsson and Motorola. Over the long term as the telecoms infrastructure got built and technologies got ramped up to more sophisticated levels, AT&T would be in a position to offer its integrated services, without considerable competition from existing telecom players. It would have a first mover advantage in terms of software and integrated capabilities. On the other hand, the problem of Chinese buyers not too keen on buying integrated telecom solutions would eventually be hurdled over the long run as the market got more discerning and the realization that superior services usually come from the ability of a supplier to integrate technologies. On the third front, AT&T must note that one of its competitors, Alcatel China had successfully adapted to the market and regulatory conditions of the country with relative autonomy from its European headquarters - by forming different subsidiaries that even competed with one another3. This meant that each subsidiary was independent in their ability to make decisions and to swiftly negotiate terms with Chinese buyers. On the other hand, AT&T was organizationally decentralized yet divided along "21 business units"4. If it wanted to perform its end of the bargain that was signed in the MOA of 1993 by which China welcomed it because of its total solutions or end to end capability - then AT&T must address the issue of becoming a solid team in China. Bill Warwick's Challenge of 21 AT&Ts The internal restructuring of AT&T into 21 independent business units was quite effective in as much as this was made in response to the deregulation of US telecommunications sector and made in the context in an economy where the telephone infrastructure was very much in place. China's telecommunication industry on the other hand is very much regulated and where the building of infrastructure had just been starting. A third factor was that China as a market, with over 1.2 billion people and growing and the thousands of companies that had established their presence there was virtually a market like no other in the world in terms of growth potential for a company like AT&T. So, by these considerations alone, Bill Warwick would not be in the wrong to propose to have organizational control of the 21 AT&T's under the company's China subsidiary. According to the contingency theory, there is no best way to organize, except always in consideration of the environment that the organization is in.5 The environment that was China in1993 made the 21 AT&Ts hard in maximizing opportunities where many product-specific competitors had already been ahead of the game in terms of marketing networks and in relationships with the Chinese buyers through joint ventures. AT&T's strength and its opportunities lay in its ability to offer end-to-end solutions and the only way to leverage this was if Bill Warwick's office had the power to negotiate with buyers by pitching hardware and software capabilities as synergistic components to Chinese buyers. The key rationale for giving power to AT&T China went beyond the compatible technology platform as some Business Unit-defenders at AT&T in the United States put it 6. The reason really had to do with the market itself - not a direct customer market, but a market that were the numerous government agencies that form the regulatory backbone of the Chinese telephone industry. In this situation, deals would not be closed with just a matter of pricing, relative advantages of the system and like, but the whole gamut of establishing long-term relationships with buyers that would be more over useful with other relationships or business dealings. On the other hand, giving negotiating powers to the AT&T China central office would not necessarily mean that Bill Warwick would totally suggest for the exception of the Chinese subsidiary from the BU concept of organization. Instead of AT&T China could maintain two functions, one as strategizing for the China market as a whole with inputs from the business units and two, serve as a sort of clearing house for the 21 Business Units when each unit encounter difficulties or demands from their transactions, and a dialogue could be set up among the concerned units. This setup would allow the China head office to have considerable responsibility but still allowed the independence of the business units. The advantage also would be to give a sense of one-ness or focus as far as conquering an altogether new market, with a different kind of customer for an aspiring multinational like AT&T. The issue over China's Most Favored Nation Status China in 1993 and for many years to come into the 21st century would still be considered a developing country and its cultural, economic and social make-up as a nation would still be different from that of the First World, where democratic ideals in politics and the economy are intertwined. Many multinational companies which had been in operation for a long time in overseas markets apart from their headquarters know first hand that to be able to operate successfully in local markets, one needs to adjust its operations to the country's way of doing business. So even after the aftermath of the Tiananmen Massacre, many multinational companies in China saw no reason to pull out of China, as AT&T had virtually done. The cost of the pull-out of AT&T had a heavy toll on its lost opportunities and allowed its competitors to move ahead. In the same manner, the United States move to link human rights record to China's renewal of its Most Favored Nation Status in the US would also take a toll on US companies operating in China if they didn't make a move to protect their business interests. China would surely retaliate on US-based companies that export to China and those operating in China if the US insisted on doing so. The most reasonable action for AT&T would be to use its influence on the US government to drop the condition for China's renewal of its MFN status. The lobbying of AT&T to drop the human rights record tie-up with trade would not be surely lost in the eyes of Chinese authorities and would interpret it as AT&T's willingness to do what it would take to stay and do business in China. In return, AT&T could lobby the Chinese government to deregulate its telecommunications industry, even if partly and gradually. But in the first place, even if a quintessential American company like AT&T with international ambitions would have to observe that in China, since the reforms initiated by Deng Xiaoping in 1978 - the economy is as free market- oriented as it could be and all indications pointed that the free-market policies would remain and would signal even more openness. The deregulation of the telecommunications industry in China would probably come gradually and AT&T would be wise to latch on every opportunity and not align its business decisions unquestioningly with that of US government. Conclusion For an American company that had a long history and experience in the telecommunications business, AT&T however had been primarily a domestic company, with little international or global experience in doing business. To establish a solid foothold in China, that is poised to be largest economy in the world soon, AT&T had to face an environment for which its ways and organizational set-up were acting as barriers to its own ability to compete. It has to work within the regulated set-up in the short-term, establish links with local authorities and form joint-ventures in key product lines where it would see more opportunities. The key would be to establish market presence in the short-term. The long-term benefits would have to be conquered in playing up its strengths when technologies get ramped up, and more integrated solutions would put AT&T at a superior position in the China. No company which has respectable international ambitions would get itself left out in China - and AT&T if it wants to be a global company had to be there, for the long-term. Sources: Eric Li and Gabriel Li, "AT&T China" February 1998 (original version), Copyright 2007 by the Trustees of the Leland Stanford Junior University Steffen Blaschske , "The Organization of AT&T: A Historical Contingency Approach", University of Texas at Dallas School of Management (Fall 2001) ( 5 December 2007) Read More