John E. Berndt

President-AT&T International

“Our International Story”

Harvard Business School

Thank you, Alex.  I welcome the opportunity to be with you and share some observations about AT&T, its participation, and expectations in the international marketplace.

Let me first relate a story – a business parable, if you will – that best illustrates the moral “you can’t assume too much” when you’re dealing overseas.

Two years ago, our chairman Charles Brown, Bell Labs head Ian Ross, and my predecessor Bob Sageman, made a trip to the People’s Republic of China.  While in Beijing, they were invited to a reception hosted by the vice premier of China.

In due course, Brown, Ross and Sageman were introduced to the vice premier.  Pleasantries were exchanged.  In fact, the vice premier greeted Ian Ross like a long-lost relative, and they spoke at great length.  Finally, the vice premier turned to Charlie Brown and said, “We are well acquainted with Bell Laboratories and its president, Dr. Ross, but tell me, Mr. Brown, what does AT&T do?”

As we found out, what’s well known in the U.S. may not be a household name overseas.

The epilogue to this story is that Charlie returned to China two years later – in fact, it was last July – to open our first sales office in Beijing.  And, I have it on good authority that this time he didn’t have to explain what AT&T does.

* * *

I think what prompts the current interest in the international aspects of our business – the business of moving and managing information – are the profound changes that have taken place and continue to occur in our industry, changes that are altering forever the basic tenets on which we operate.

In some respects, it can be argued that technological advances were, and are, at the heart of all the changes in our industry: advances in microelectronics, photonics and software continue to drive down the costs of processing, storing, managing and transporting information.

Technological advances alone are not, of course, directly responsible for all of the change in the industry.  But, in a fundamental way, they represent the seeds from which most of the other important forces for change have grown.  These include government’s role in structuring the industry, growing competition and shifts in public policy.

As a result, the international area today is characterized by two important facts of life: growing markets and globalization.

Let’s look at markets first.

The international information movement and management market is expected to grow at a phenomenal rate.  Researchers from the Arthur D. Little Company predict that from $100 billion worldwide today, the market will grow to $350 billion in the next ten years.

While the specifics of demand vary country to country depending on economic conditions and industry development, people throughout the world want increased capacity to communicate and to use information.

The growth in telecommunications and data processing markets is, to a large extent, the direct result of the globalization of industries such as textiles, machinery, food, finance and petroleum.  Production systems in each of the industries – from R&D to marketing and sales – are spread around the world.  To work efficiently, the components of these systems must be tied together with rapid communications, access to common data bases and the sue of common information systems.

No matter what the business, the need for worldwide information systems is strong and growing.

It’s no surprise then that in 1980 AT&T re-entered the international marketplace in force after a 55-year hiatus.  In fact, as long ago as 1882, Western Electric, AT&T’s former manufacturing arm, established a facility in Antwerp.  Other plants and offices soon followed around the world in Asia, Africa, Australia and Latin America.  It was an impressive list.

By 1922, Western Electric International was handling about half of the telephone-apparatus business in those areas in which it was located.  Three years later, however, the company made a strategic decision to concentrate on development of the U.S. telephone network and sold many of its foreign holdings to the company that would later become ITT.

In mid-1980, with AT&T International initially organized, its sights set and broad goals defined, the work of making it succeed really began in earnest.

* * *

The first critical step in this new venture was, and still is, to understand the marketplace, a marketplace that is unlike the U.S. telephone business as anything could possibly be.

Significantly, the lion’s share of this opportunity comes from what I call a “triad-plus” set of countries including the nations of Eastern Europe, Japan, the Pacific Basin countries, Egypt and Saudi Arabia.  These markets are where AT&T is concentrating its efforts today and, as you would expect, so are our competitors.

There are over 400 of them, but about a dozen control some 50 percent of the total market.  Virtually all of them have a long tradition of international experience and, most important, proven performance.  The market is a very tough one to enter.

Another aspect that makes our markets unique is the role the information industry plays in national policy abroad.  Providing the best product at the best price is seldom enough for a new supplier.  Our markets are heavily regulated and politicized.  Even where the market is being opened to competition, governmental approval is still required through “type acceptance” and other procedures, many of which can be formidable market entry barriers.

In some respects, you might say that in the international arena we have left FCC regulation behind, but have gained potential involvement of dozens of foreign governments.

Nobody said it was going to be easy!  And it hasn’t.  But we’ve learned some important lessons over the past five years.  So, I’d like to share my view of the critical ingredients that will determine AT&T’s success in the global marketplace.

The first ingredient is our technology, which is and will continue to be the most valuable and sought-after asset we have.

Of course, you have to look very carefully at the life cycle of a given technology.  You have to know when to develop it, when to market it and when to transfer it once you’re sure you have the next generation on-line.  Either by itself or as accompaniment, technology is one of our most attractive qualities to prospective partners and customers.

The second ingredient, market know-how, is crucial.  Most countries have national objectives that put a high priority on the introduction of new technologies.  They make no bones about insisting on the very latest technologies, sharing technical skills in-country, creating new jobs and often requiring some export commitment.  All this creates a real challenge for AT&T – to support our own business strategies for market entry and, at the same time, protect our technology from competing with itself.

To put it more bluntly, what we at AT&T can’t avoid if we want to be a force in the global marketplace is full participation in the industrial life of its target markets.  While deregulation has begun to gain momentum overseas, there is noting to suggest that the purchasing and type-acceptance decisions of the postal, telephone and telegraph agencies will be significantly less political over the next ten years.

Thus, satisfying local requirements practically everywhere is the price for doing significant international business.  This characterizes not only the network market but the office automation and component markets as well, as governments use all the powers they have to induce would-be market participants to create jobs, transfer technology, increase exports and reduce imports. 

Because these political realities prevail in most important foreign markets, it is fair to say that the international market as a whole demands significant investment by any company determined to become, and stay, a market leader.

An analysis of the 100 largest U.S. multinationals, including our competitors, suggests that roughly one dollar in foreign assets is required to produce one dollar in foreign revenue.  While the ratio seems simple, the reasons are complex.  They include investments to provide low-cost manufacturing operations; industrial participation to satisfy government procurement policies; overcoming trade barriers; and achieving proximity to markets.

The third ingredient concerns market entry and whether one chooses “going it alone” or partnering with local companies.  Once again, it is clear that in many countries, local practice, as well as government policy, demand participation as the price for entry.  Where local conditions are suitable, complementing national objectives through joint ventures is an excellent way to go.

* * *

Of course, no company can do it all in the information management business.  You need good partners, and for the past five years we have been particularly busy building alliances at AT&T.  The challenge always is to find the right match, the right chemistry.  Unfortunately, any number of firms approach us with the same basic offer: “You just ship us the technology and the products – we’ll do the rest.”

If only it were that simple.

But the advantages of joint ventures aren’t difficult to deduce, as outlined by Kenichi Ohmae, author of a book that I’m sure many of you have read called Triad Power.

For one, joint ventures hasten the process of entering a distant market by as much as three to five years, besides saving the substantial time, money and effort that would have to be spent in developing the closest equivalent, subsidiary operations.

The overseas partner also brings specialized knowledge of the market, as well as access to distribution systems and other local resources – including human resources.

Frequently, too, the partner is the only channel to eventual government approval of the investment.

Finally, there is the fact that such ventures eliminate duplication that once was described as simply wasteful but that now, with today’s precipitous costs, can only be termed disastrous.

 A fourth observation I’d like to offer concerns staying power.  The costs and skills associated with producing new technologies – such as silicon components – are becoming so high that they are forcing the very structure of the international electronics community to change.

An example of this can be found in the race to develop more powerful memory chips.  Today, we have teams of scientists from different companies in expensive facilities in the U.S., Germany, France, Japan and the U.K., all leading to a cost in people and equipment that is simply becoming impractical.

Thus, staying power implies finding new ways to reduce costs, conserve capital and yet maintain a quality reputation.

* * *

With those principles in mind, AT&T is building a framework that we believe will make it a leading global provider of information movement and management products and services.  The framework is based on three key strategies.

First, by creating an overseas family of alliances, joint ventures and wholly-owned facilities, we are quickly gaining an effective local presence around the world, as well as building essential customer and market knowledge.  Our objective is to create overseas units that are regarded as responsible, vital citizens in the countries in which they reside and that share a common understanding of AT&T’s values and vision.

Second, we are continuing to globalize our product line – through AT&T Bell Laboratories and our domestic business units, as well as through our joint venture with N.V. Philips in network systems, our partnership with Olivetti in office automation, our part- or wholly-owned subsidiaries UNIX Europe and UNIX Pacific in software development and AT&T Microelectronics in component development and manufacturing.

Our third strategy is to make selective, disciplined investments to ensure cost-effective development, manufacturing, distribution and sourcing.  Such investments signal to customers our intent to participate in the economic life of their countries and establish a long-term presence based on commitment, product quality and service excellence.

* * *

They always tell you in sales never to talk about your competitors, but for the purposes of our discussion I think it’s worthwhile to spend some time talking about who AT&T is playing against in the global arena.

If  I were to name a “big six,” they would be ITT and IBM from the U.S., Japan’s NEC, Swden’s Ericsson, West Germany’s Siemens and Northern Telecom from Canada.

Of the six, ITT was the leader last year in world market share of telecommunications equipment sold outside of a home market.  They are old hands in the international game, particularly strong in Latin America and Europe, with development, manufacturing and distribution facilities in 34 countries.

Their System 12 switch is competitive with our 5ESS, although they apparently have a problem in converting its original European design to American standards.  It’s been reported that over the past 10 years they’ve poured close to a billion dollars into its development.

IBM, with its ownership positions in Rolm, Intel and MCI, is positioning itself as the dominant provider of new data and voice services.  Its entry into the communications service market is concentrated in Europe, where it is trying to forge ties with the postal, telephone and telegraph agencies.  The lesson from IBM is a familiar one – you’ve got to have full systems capability and strong market and technology positions in three areas – network, data and components.

Our third major competitor, Siemens, is ironically also a partner in a project we’ve undertaken in West Germany.  But, as a strategic competitor, it is looking to either source or manufacture a PBX that will fit into a full-service network and is working with what one might call “second-tier” competitors including Plessey, Thomson and Italtel to standardize all four companies’ digital switches.

Ericsson is a company we frequently compete against on any number of bids.  Their strategic advantage is in low-cost, local production, particularly for the AXE switch.

With such established companies as I’ve just mentioned, overseas manufacturing, outside of their home markets, has positioned these competitors as indigenous suppliers, thus securing for them a strong market position.  Their manufacturing bases also provide economies of scale, capacity and low labor-cost advantages.

We also face competitors who are strong in their home markets, and who want to pursue global positions – especially the Japanese.  In Japan, there are four firms to watch: Hitachi, Fujitsu, NEC and Toshiba.  Their threat is strongest in the component market, where their dominance has produced volume production, low costs and price competitiveness in network and end-user products.  To improve their positions, these suppliers are expanding operations to microprocessors and semi-custom integrated circuit segments.

NEC is particularly strong among the Japanese companies.  It’s using its NEAX-61 digital switch and its fiber optic capabilities to provide a total network package.  It’s also relying heavily on Japanese government export support to achieve low pricing and penetrate developing markets in the Pacific Basin.  We hear that they, like ITT, are wrestling with the complexities of getting their digital switch to do what it’s told.

Northern Telecom is well poised to expand beyond its established base in North America.  Its marketing approach is to enter developing network markets with its DMS switch and strengthen end-user marketing efforts in their PBX line.

* * *

With all this competitive activity, I’m sure you’d like to know how we’re doing.

As an international long-distance carrier, AT&T is the preeminent player.  We were the first to demonstrate the feasibility of overseas long-distance in 1923.

Our role as an international carrier has kept pace with a rapidly growing demand for international communications.  That growth is represented by a four-fold increase in international voice revenue over the past decade and, according to the Yankee Group, that revenue will double again by 1990.

The bottom line is that two-way international long-distance revenue will be in the neighborhood of $10 billion by 1990, about $4 billion of which will be the U.S. share.  At one time, AT&T analysts could have accurately predicted our portion of that revenue.  But, that’s no longer the case.  The competition for international long-distance revenue is intense and expected to become more so.

In product sales, we are making steady progress.

We now have 24 sales offices spread over five continents, distributorship agreements in over 90 countries and nearly 15 overseas joint ventures and manufacturing facilities.  In Japan alone this year, we have entered into three alliances with Toshiba, Ricoh and Japan ENS – the last being a consortium of large Japanese firms that are deploying enhanced network services in that country.

We’ve made a wide variety of sales this year in a number of countries – electronic switching in China, Singapore, Great Britain and the Netherlands.  Directory publishing in Thailand.  General contractor for a satellite earth station in Saudi Arabia.  Multiple sales of uor high-end PBX switches in Canada and Great Britain.  In fact, our international orders, after just five years in the ballgame – are approaching a billion dollars. 

However, we recognize that AT&T still has a long way to go in order to become a leading global supplier.  We have three major challenges:

• We must overcome protectionist sentiments or measures in our international markets.  One way to accomplish this is to demonstrate our long-term commitment to the countries in which we do business.
• We must continue to develop market presence, distribution channgels and global products.  This can be achieved by continued long-term planning, by selective investments and by a firm focus on the needs of our customers.
• We must effectively manage joint ventures with our new partners through proper planning, staffing, marketing and controls.

* * *

I’ve spoken at length today about how AT&T intends to thrive, not just survive in the international marketplace.

Perhaps most important in attaining that goal is a sense of vision that must be shared both within and outside the company.

It’s a vision of the impact of making information and communications technology as abundant and as universal as telephone service in the U.S. is today – a vision of how that development will affect not only business and commerce, but education, medicine and virtually all forms of human endeavor, a vision that sees clearly how technology can liberate the human mind and spirit.

We intend to sell our products and services – but we also intend to foster that vision.

Thank you so much for having me here today.  I’ll be happy to take your questions.

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