Deutsche Telecom to Privatize

THINK about the German autobahn. The name implies no limits. It conjures up images of speed and smooth performance.

There are plenty of German economic analysts who wish the same could apply to the building of the country's proverbial ``information superhighway.'' Instead, the communications revolution here is getting off to a jerky start.

The German parliament took a significant step July 8 to lay the foundation for the information superhighway, approving the privatization of Deutsche Telekom, the state-operated telephone company that enjoys a monopoly in the German market.

But many analysts and some politicians say privatization is not enough. Telecommunications in Germany must be demonopolized if Deutsche Telekom is to succeed in becoming a major player in the world market.

``If privatization had been delayed, Germany would have become isolated in the global economy ... but more has to be done,'' says Hermann Otto Solms, a leader of the Free Democratic Party, which champions deregulation.

After 2000, telecommunications will be more important to the German economy than the auto sector, predicts Volker Goergen, a communications analyst at the German Industry and Trade Council in Bonn.

``The next five to 10 years will be very important,'' Mr. Goergen says. ``To be a global player, they [Telekom] must be prepared for competition. You can learn the lessons of competition only through competition.''

Breaking Deutsche Telekom's market stranglehold will not be easy to achieve in the near future. With Germany heading into the home stretch before October parliamentary elections, politicians don't seem to want to tackle the issue.

Just getting the privatization measure passed was difficult enough. The move met determined trade union resistance. That, in turn, caused the opposition Social Democratic Party (SPD) to take a cautious approach toward the privatization question.

The SPD, which controls the Bundesrat, or upper house of parliament, will need strong trade union support if it is to have any chance of unseating Chancellor Helmut Kohl's Christian Democrat-led coalition.

At first, leaders of the 670,000-member post and communications union denounced the privatization plan as sacrificing social justice for the sake of profits. In June, they organized a series of warning strikes that disrupted mail delivery and phone service. But a government and union agreement on a new labor pact July 2 cleared the way for privatization.

Under the government plan, Deutsche Telekom will be separated from the postal service and the postal bank, and all three will be privatized. Telekom is scheduled to become a joint-stock company on Jan. 1, 1995. The initial stock offering is expected to follow some time in early 1996.

A month before the privatization decision, Deutsche Telekom confirmed its intention to become a major global competitor by concluding a strategic alliance with France Telecom and United States long-distance carrier Sprint. Under the deal, the French and German state operators would obtain a 20 percent stake in Sprint in exchange for a significant capital infusion. The agreement must win approval from the European Union and the United States Senate before it can take effect.

The Sprint stake would greatly enhance Deutsche Telekom's already-impressive list of international assets, which include 30 percent of the Hungarian national carrier Matav and a smaller share of Ukraine's telecom. In addition, Telekom recently purchased a 25 percent stake in European satellite television broadcaster Astra.

Some analysts say the German carrier may be overextending itself. Last year, Telekom reported pre-tax profits of about $4.5 billion. Yet after write-offs, taxes, and government transfers were deducted, the phone company found itself about $1.8 billion in the red. The main reason for the red ink is a debt of about $66 billion, incurred in recent years as Telekom spent billions upgrading the telephone system in former East Germany as well as on foreign acquisitions.

Another concern that could hold back Deutsche Telekom is the labor agreement that made privatization possible. The deal will permit more than one-half of Telekom's 230,000 employees to retain the status of civil servant. That means not only will they receive the generous benefits package enjoyed by all government employees, but they also cannot be fired and will be entitled to pensions of 75 percent of their final salary.

Some critics say Telekom's plan to finance pensions has insufficient means to generate funds for payments to retirees. ``You have to be a finance minister to understand it,'' Goergen says of the funding plan. ``But I think they have a solution.''

Telekom's current global strategy also depends on US Senate approval of the Sprint deal, something that is not a foregone conclusion. Some US legislators are threatening to reject the merger, saying if Deutsche Telekom is to be allowed into the US market, the monopoly must be opened to foreign competition.

Given its financial commitments, Deutsche Telekom probably won't be very attractive for individual investors, analysts say. Still, many expect that when the first batch of Telekom shares hit the market, they will be popular. Corporate investors, such as the German electronics conglomerate Siemens, which is a major equipment supplier to the phone company, are most likely to snap up shares.

Ultimately, even if the German state carrier clears the financial and regulatory hurdles, it faces a wrenching attitude adjustment before it can become a world leader.

Because of its monopoly status, Goergen explains, Telekom's customer service lags behind foreign competitors. ``Many monopolized companies don't feel the need to provide service,'' he says. ``Telekom officials realize this and want to change. But changing this way of working will be very difficult.''