The Great Wall comes down

AT&T is first foreign communications company in China market With surprisingly little fanfare, AT&T last week became the first foreign company in decades to take a stake in a mainland China communications company.

Through a $25 million investment, AT&T and Shanghai Telecom and Shanghai Information Investment Inc. will form a joint venture to provide broadband IP value-added services to the enterprise sector. The venture, Shanghai Symphony Telecommunications, will first offer services in the fast-growing Pudong New Area, Shanghai.

STC will own 60% of the company, with AT&T taking a 25% stake and SII 15%. Executives and members of the board of directors will come from the three founding companies.

For China, allowing entry by AT&T into its markets is a move toward the competition required for membership in the World Trade Organization.

Foreign presence in Chinese markets is so rare that the Chinese government has yet to formulate any guidelines for foreign investment, said Minister Wu Jichuan of China's Ministry of Information Industry. But AT&T worked on this agreement for six years, an effort that enabled the deal to be finalized.

"They made an exception in this case," said an AT&T spokesman in Hong Kong. "It's an indication of the way the Chinese government is treating joint ventures. It's a useful exercise in preparation for entry into the WTO. This is all new to them."

One of the main benefits of the deal for AT&T is an actual stake in network infrastructure, especially considering that the company handles significant amounts of international traffic entering China, said Gary Jacobi, a director in telecom equity research for Deutsche Banc Alex Brown. "Anything they can do in a foreign country to help them terminate... traffic will be a big help," he said.

Nevertheless, the deal itself is hardly a blockbuster. Rather, its real value is in the foothold the company gains in China, the world's most populous country with 1.27 billion people.

"The deal itself isn't really big and definitely won't have an impact on AT&T, but it gets it's foot in the door. It's certainly a huge market," said Michael Hodel, a stock analyst for Morningstar.

The exact value of this market remains in doubt, however - especially for foreign companies because no one is sure how the Chinese government will handle foreign competition.

In the past, outside communications companies' investments that technically stayed within Chinese law through carefully written contracts have resulted in poor relationships with Chinese officials, said Adam Quinton, managing director and head of telecom research in the U.S. for Merrill Lynch.

"The history of foreign telcos in China has been a very difficult one in the joint ventures.... They fell afoul of the MII and increased focus on those joint ventures."

Through its unambiguous stake in a venture that likely will be scrutinized by WTO officials and with China's official imprimatur, however, AT&T should find it easier to reap the benefits of this venture.

Whether the U.S. telecom giant picked the right time to make such an overseas investment may be questioned by those who believe the company should focus its efforts on resolving its considerable domestic problems. But Jacobi sees AT&T's development of foreign markets as a legitimate strategy for the company to hedge its bets.

"Clearly the international expansion is partly because they see great opportunities overseas and partly to reflect the fact that, right here in the U.S., they have problems," he said. "Maybe you can't fix those problems... and you seek opportunities in other markets."

At the same time, the venture's structure and limited size should prevent it from being a serious distraction to AT&T, allowing the carrier to continue to focus on its breakup in the states, Hodel said. "They're not going at it alone.... They have a significant local partnership there, which should help them," he said.

With AT&T having broken the China barrier, companies in all segments of the communications industry likely will clamor for a piece of the world's largest market.

But questions remain about how much cooperation and support future ventures will receive from China. With domestic competition just beginning in the country, regulators naturally will be more sympathetic to homegrown businesses, such as utilities that already have some infrastructure in place, Quinton said.

"There are competitive carriers which are Chinese in nature and Chinese in ownership which are developing quite fast.... I would not bet my life on any major foreign carrier having a big slice of China's services. I think the focus of the Chinese authorities is going to be development of their own industry."