Wiring the World / THE NEW AGE OF GLOBAL TELECOMMUNICATIONS : The Industry : Battling for a Piece of the Global Pie : Telecommunications is now the world's largest economic sector, with importance that surpasses that of oil, steel--even computers.


Seventy years ago, AT&T; was a trademark recognized around the world as synonymous with the telephone. Then regulators forced the communications giant to spin off its international operations and focus on building a telephone infrastructure for America.

Today, as AT&T; and other U.S. companies move out to take on the world market, they face a bittersweet reality. The once-sleepy telecommunications business has grown to be the world's largest economic sector, with a strategic importance that surpasses that of oil, steel or even computers.

And while U.S. companies were looking inward these past decades, fragments of the old AT&T; empire have emerged as leading world players. Alcatel of France is the world's largest supplier of telecommunications equipment--it has a 50% share of the rapidly growing Chinese market--in large part because of the assets it acquired from ITT, the international operation that was broken off from AT&T.; NEC Corp., Japan's leading communications and computer company, was once a subsidiary of AT&T;'s Western Electric.

These companies have strong footholds in world markets that are growing at an astounding rate in size and importance. Anderson Consulting, which counts most of the world's leading companies as its clients, figures the telecommunications sector will represent a $1.1-trillion industry by the year 2000, about double its current level.

"When you buy a shirt at the store, a computer automatically registers its color, style and size," says Ali Sabeti, chief of telecommunications for the World Bank. But that information is useless, Sabeti says, unless it can be sent over phone lines to the factory in Hong Kong so new shipments will arrive to replenish shelves while the item is still in demand.

"Cheap labor isn't enough to be competitive," Sabeti says. "Countries that don't have access to (telecommunications) networks can't participate in the global economy. They are just left out."


From China to the Czech Republic, from Mexico to the Middle East, nations are responding to this new reality. Advanced land-line, mobile and satellite telephone systems are being installed in record numbers. This year, as many as 100 million more phones lines will be connected to the expanding web that is the world telecommunications system.

"One of the major drivers for growth today is the realization of the importance of telecommunications to the economy," says Roger Dorf, president of AT&T;'s Caribbean and Latin American network systems operations. "People have discovered that there is more of a willingness and ability to pay (for telecommunications) than anybody ever imagined."

In China, which has only one telephone for every 100 people, people are shelling out $1,800 just to get on a two-year waiting list for phone service. That's many times the average annual salary. China wants to quadruple the number of phones it has in service by the end of the decade.

India has committed itself to spending $15 billion to modernize its telecommunications sector, although it is more reluctant than China to permit foreign competition. It has plans for a network of hundreds of satellite dishes to bring telecommunications to remote areas.

Industrialized nations such as Britain, Japan and the United States are taking the next giant step forward, making plans for massive investments in new interactive systems that can offer education, video on demand and home shopping as well as wireless telecommunications.

It is hard to judge just how much of a market this telecommunications boom represents to U.S. companies. Only six countries outside the United States have anything approaching open markets: Australia, Britain Chile, Japan, New Zealand and Sweden.

In France, only France Telecom can offer phone services. And it buys most of its phone equipment from national supplier Alcatel. The same is true of Deutsche Telecom, which has a virtual lock on the German market and buys most of its equipment from German supplier Siemens. Although Japan is nominally open, industry analysts don't expect much of its planned $200-billion-plus investment in a new information superhighway over the next two decades to go to foreign companies.


But freer world markets may be just a matter of time. Anderson Consulting figures that countries representing more than half of the world market have either begun the process of dismantling their old telephone monopolies or have concrete plans to do so in the coming years.

Those that delay too long may find major multinationals choosing to locate their operations in nearby countries where phone services are cheaper and better. Already, Britain has become a major communications hub for Europe, and Australia is emerging as a hub for Asia.

Even China, once the epitome of the centrally controlled economy, is beginning to introduce competition of sorts lest it be outflanked by upstarts like Vietnam. The government recently created a new telecommunications company made up of a handful of government ministries to compete with the Ministry of Post and Telecommunications-run phone company.

In Latin America and Europe, countries have begun to privatize their telephone systems to tap private capital and finance ambitious expansion plans. The schemes are working. As monopolies have gone private in Britain, Chile and Mexico, they have sucked money into this rapidly growing sector like air into a vacuum. International financier Alan Bond made a killing recently when he sold his 44% ownership in Chile's national carrier to Telefonica de Espana.

J.P. Morgan and Citibank are each major investors in two new private telephone systems established in Argentina. Mutual funds are pouring billions of dollars of investor money into newly privatized phone companies in places like Mexico and Singapore.

But as with every gold rush, it is the hardware suppliers who make money first. Research firm Dataquest, a technology research firm, estimates that the world market for telecommunications equipment will grow to $184 billion by 1997, up nearly 50% from $125 billion last year.

Alcatel of France and Siemens of Germany are the world leaders in the business of supplying big switches and other sophisticated gear required to make phones work. AT&T; comes in a weak third as a world supplier.

With extensive operations around the world and long experience dealing with overseas customers, the large European companies have a distinct advantage. When Alcatel tackles markets in Latin America, it can send employees from its operations in Spain or Portugal who are familiar with the former colonies and speak their languages.

"They have been around a while. They know which buttons to push to influence decision-makers," says John Dinsdale, associate director for telecommunications at Dataquest.

When the U.S. Justice Department broke up AT&T; a decade ago, it took away AT&T;'s last stranglehold on selling telephone equipment, the domestic market. The seven new regional phone-operating companies, once exclusively supplied by Western Electric, sought cheaper suppliers overseas.

Newly emerging companies have also looked overseas for suppliers. McCaw Cellular, the cellular phone giant in the process of being acquired by AT&T;, buys almost all of its equipment from the Swedish company Eriksson. AT&T;, meanwhile, has faced largely closed markets overseas.

Nevertheless, AT&T; and other U.S. companies like Motorola and Northern Telecom are making an aggressive foray into the international market. As recently as seven years ago, AT&T; had only 100 employees overseas. Today it has 56,000 overseas employees. And it is learning to move fast. When Argentina wanted a cellular company that could quickly establish phone services, it turned to a consortium that included AT&T;, GTE and two local companies.

The consortium signed a contract March 28. By the end of May, by pulling in 250 engineers from its operations worldwide, AT&T; had installed a $250-million cellular system accessible to 22 million potential customers. The system is expected to go into commercial service soon and will offer many Argentines their first access to telephone service.

"We're catching up pretty quickly," says Dorf, the AT&T; official for the Caribbean and Latin America.

U.S. companies don't have the advantage of captive markets that European companies like Siemens and Alcatel do. But as markets gradually open, the U.S. companies' experience operating in a competitive rather than a regulated market may give them an important advantage.

"Northern Telecom and AT&T; are the product of a deregulated market," says James Long, head of Northern Telecom's international operations. To be competitive, North American companies have been forced to keep adding new features such as 1-800 services, call forwarding and conferencing that are not available in Europe or Japan. Much of this involves writing sophisticated software, an American strength.

U.S. companies will also have an edge in building next-generation broad-band networks for video on demand and other applications because of their early investment in this technology. AT&T; has won major multibillion-dollar contracts from Pacific Telesis and Bell Atlantic to build such systems.


And after years of watching in frustration as competitors won international contracts with the backing of their governments, U.S. companies are now receiving similar help.

In May, AT&T; won a a $4-billion deal to build a modern network in Saudi Arabia. Strong support from the Clinton Administration helped to clinch the deal. When Motorola faced obstacles getting fair access to the Japanese market, U.S. trade negotiators intervened, assuring the company a major stake in a market expected to quintuple in seven years.

U.S. companies are beginning to reap the harvest of such efforts. Northern Telecom's international sales last year accounted for a quarter of its sales, up from just 8% four years ago. Motorola has built or is in the process of installing 150 mobile systems in 18 Chinese provinces, establishing itself as a leader in the mobile area, says Tom Hinton, general manager of Motorola's cellular operations in China.

U.S. exports of telecommunications equipment climbed 24% last year to $9.7 billion, giving the nation a telecommunications trade surplus for the first time in 10 years.

But while equipment sales are where the opportunities are today, in the long term it is the service area that will have the greatest growth. Dataquest sees the services market growing to $680 billion in 1997 from about $500 billion last year.

Most of that growth will come in markets filled with acronyms such as VANs (value added networks), VPNs (virtual private networks) and ISDN (Integrated Synchronous Digital Networks). While the market for POTS (plain old telephone service) is likely to remain flat, the Yankee Group, a Boston-based research firm, expects that new areas involving sophisticated packages of data, voice and video communications to multinationals will more than double in three years, making it a $17-billion market.

It is in this package market that America's strength is most apparent. The world's major players have broken up into three teams, each centered around a market-savvy U.S. player. The MCI-British Telecom team has an early start, but AT&T; is quickly building up a formidable alliance that could include dozens of large telecommunications players. Sprint's deal with the French and German telephone companies may not go through unless the phone markets are opened up wider in France and Germany.


Among the newer and more aggressive faces in the international arena are America's regional telephone-operating companies. Pacific Telesis has stakes in cellular systems in Japan and Korea, two of the world's fastest-growing markets. Southwestern Bell and France Telecom have major stakes in Telmex, Mexico's successful phone company. Bell Atlantic spent $1 billion for a 42% share of Iusacell, a cellular operator in Mexico.

US West has been among the most aggressive, investing $2.5 billion in cellular, cable and phone systems in Russia, Britain, Hungary, France, Norway and Sweden. The company says its goal is to put together the building blocks for systems that can offer multimedia capabilities including wireless, telephone and entertainment, a goal that it is close to approaching in Britain.

It is a model the company thinks may be appropriate for developing countries as well. The company has proposed to the Indian government a plan that would begin by offering basic telephone service using easily installed cellular base stations. As wire lines are installed, the cellular phone system would be moved farther out to offer services to another population while wire line would take over in its existing area. The idea is to ultimately have a full multimedia system with video service, telephones and wireless.

Experts agree that unlike other industries where it is often reasonable to use cheaper intermediate technology, in telecommunications it makes sense to put in the latest technology available. New digital switches are often the cheapest per subscriber and the easiest to maintain.

"They are going from the 19th Century to the 21st Century," says John Clarke, analyst for the London office of Daiwa Research Institute. "They need top communications services."

What Is It?

* tel-e-com-mu-ni-CA-tions n . 1. Sometimes, telecommunication. ( used with a singular v .) the transmission of information, as words, sounds or images, usually over great distances, in the form of electromagnetic signals, as by telegraph, telephone, radio or television. 2. the science and technology of such communication. 3. telecommunication, a message so transmitted. --adj. 4. of or pertaining to telecommunications.

--Abridged from several dictionaries

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