AT&T Consumer Products: Case Analysis

EXECUTIVE SUMMARY OF THE CASE

American Telegraph and Telephone (AT&T), as of the time of the case study, had an organizational structure built around the lines of business in which the company engaged in, with each line of business responsible for its own profitability and its contribution to AT&T revenues. The two sectors created for the overall management of resources to support the lines of business were AT&T Communications (for the long-distance service), and AT&T Technologies (for the unregulated parts of the business), which included AT&T Consumer Products (CP). AT&T CP, the focus of this case study, began experiencing serious competition in the 1980s from the import of telephones from Asian companies such as Taiwan, Hong Kong, Japan and Korea, which all offered telephone models at much lower costs than the US-manufactured electromechenical telephones.

This spelled troubled for CP since, prior to 1983, it had never even sold as much as a telephone cord, plus AT&T’s telephones were never designed to be marketable. CP quickly realized that their “we make it, you take it” approach with regard to the telephone models they offer their customers resulted in declining revenues and unacceptable profit levels. They thus decided to explore the idea of off-shore manufacturing operations in Asia, where their major competitors came from. The first site they selected was Singapore, for its English-speaking labor force, its low hourly compensation rates, and the squeaky-clean government structure, among other factors. The relocation to Singapore proved to be successful, even though it caused the lay-off of at least 500 US workers, and for employee morale in its US facilities to decline steadily. Nevertheless, the Singapore operation was followed by a proposal for an off-shore facility to Bangkok, Thailand, and to Mexico. To respond to the need to grow its answering machine manufacturing operations, AT&T vice president for manufacturing, Stevens (who replaced Jim Bercaw), visited the masquiladoras (in-plant assembly operations) in Mexico. However, he did not like what he saw – the Mexican factories resembled sweatshops, and employment of minors (below 14 years old) was a common problem. There were many considerations involved in setting up shop in Mexico – both Mexican and US laws had to be followed, and even though labor costs were cheap, wage inflation, hazardous environmental conditions, huge workforce turnover, and a Mexican government steeped in corruption and bribery, were just some of the factors AT&T had to consider.

DISCUSSION

Given the information in the case, identify and comment upon the logic used by Consumer Products (CP) to reach its decision to locate a telephone manufacturing facility in Singapore. Would you have proceeded differently if you were responsible for manufacturing strategy at CP, and if so, in what way? Further, upon what basis would you evaluate the various location alternatives available to CP?

AT&T’s decision to relocate a telephone manufacturing facility in Singapore was premised on the fact that all its competitors came from Asia, especially from Japan. It thus decided to contract out the remainder of its manufacturing requirements to Asian original equipment manufacturers (OEMs). The logic behind choosing Singapore as its off-shore site was based on several factors.

First of all, Singapore had a strategic position in lieu of its Asian neighbors and had an excellent natural harbor, with a third of its labor force employed in manufacturing. Singapore was also an English-speaking country, and its Economic Development Board provided a kind of one-stop shopping for foreign companies who wanted to do business there. The government was known to be squeaky-clean, so corruption and bureaucracy would not be a problem. Plus, an existing building was also immediately available for lease at the time AT&T was looking into venturing its operations off-shore. The plan to move to Singapore was also intended to save 10,000 jobs in the AT&T facilities in the US, although it entailed sacrificing 500 jobs in the US as operations were moved to Singapore (Badaracco and White, 1993).

As such, the relocation to Singapore appeared to be a good move, since it reduced CP’s labor costs by 90%, and its overhead costs by 40%. Overall, it saved 30% of its manufacturing costs by relocating to Singapore, even after accounting for tariffs and transportation costs (Badaracco and White, 1993).

From an operational point-of-view, without considering the impact of the relocation to Singapore on AT&T’s US labor force, I would have to agree that the decision to move was a sound strategy. The hourly compensation of production workers in manufacturing in Singapore is only $ 2.67, based on Exhibit 8 of the case study. It is does not, by far, offer the cheapest hourly compensation rate of all the other countries surveyed in Exhibit 8 – Hong Kong paid $ 2.40, while Malaysia paid $ 1.60 hourly rates on its production workers in manufacturing. Yet even though Singapore does not offer the lowest or even one of the lower compensation rates for its workers, relocating to Singapore had many other benefits that would make it a logical choice, particularly for a US company that is venturing to an off-shore location for the first time

As mentioned, the government in Singapore is squeaky clean – the company would not have to struggle with corruption, red-tape, and bureaucracy which are quite prevalent in Third World countries. In addition, Singapore has not had a history of religious or civil wars, like Malaysia, even though the latter also offers a one-stop-shopping opportunity like Singapore. However, unlike Thailand and Malaysia, Singapore is an English-speaking country, which is important in helping to launch the off-shore plant according to the US strategies and mission visions. Even though AT&T’s vice president of Manufacturing at the time, Jim Bercaw, stated that they did not want to build an American factory in Singapore, but eventually wanted a plant run solely by Singaporeans, the fact that the labor force could speak English at the initial launch of the plant is crucial. All training materials, and most importantly, company communication materials pertaining to AT&T’s CP business foundation (“Business Passion” and “Shared Values”) are most likely in English. To impart these values to the Singaporeans would be easier if they spoke English as well.

Based on the Exhibits, particularly Exhibit 8, I wouldn’t present any other alternative location to AT&T. I believe that Singapore is the best off-shore location, especially since this is the first time the company ventured into non-US manufacturing operations. But this opinion is based purely on operational considerations. I would have to present a different opinion when I consider the labor impact and human resources (especially employee morale) areas that were deeply affected by the decision to relocate off-shore. These issues will be discussed more thoroughly in the next section.

In the relocation of factories to outside the United States did AT&T adequately assess the impact the relocation would have on its US employees? Would you have adopted a different approach, and if so why, or if not why not? If you argue the approach was wrong what would you have done instead?

In 1985, AT&T laid of 875 workers at its Shreveport Western Electric plant in northwestern Louisiana, 100 of whom made residential phones. The remaining 650 residential telephone workers were eventually phased out through subsequent layoffs, transfers, or attrition. At the time of the layoff, AT&T announced it was shifting its manufacturing operations off-shore to Singapore to cut costs and remain competitive, with the announcement coming in the second year of the company’s three-year contract with the union International Brotherhood of Electrical Workers (IBEW). According to IBEW, AT&T did not attempt to discuss or negotiate alternatives to moving off-shore with the union (Badaracco and White, 1993). AT&T workers who were let go received Trade Readjustment Payments, the benefits outlined in their union contracts (which included severance pay based on years of service and extended medical benefits), and Enhanced Training Opportunity Programs which re negotiated by the union to help its members prepare for life after AT&T.

I would have adopted a different approach in preparing the US workers to adjust to the plan to source out operations in Asia. The problem with the approach that it was simply reactive. It did not prepare or anticipate thoroughly the impact of such a decision on its workers – many of whom have built their lives around the company and have been loyal to AT&T for many years. CP implemented its decision without seriously considering the impact on its US work force and without consulting or at least briefing and negotiating with the union. Even though from an operational perspective, the move to Singapore drastically reduced manufacturing costs, the operations in the US still remained a vital element in AT&T. And operations in the US was strongly linked with the morale and human resources management of its workforce. I believe AT&T should have first considered their options in the US – there was a US Greenfield site in Texas or the AT&T “factory-within-a-factory” (Badaracco and White, 1993, p. 19) plant available. The company should have thoroughly exhausted their options domestically, and should have conducted business plans or feasibility studies of containing their operations within the US.

As their executives themselves admitted, the jump to Singapore was literally a jump, and “iffy” situation that merely reacted to intense competition. Their main premise, after all, for moving to Asia was simply because their competitors were Asian. AT&T should have considered the possibilities of replicating the quality of work and operations of their competitors in domestic territory first. Feasibility studies of developing a manufacturing plant to rival their competitors could have considered the cost and length of time required to re-train their current workforce, to determine the kind of training they needed, and to determine their trainability. In other words, it should have first exhausted all remedies available within the US before shifting its operations outside the country.

Even if granted that after determining that it would still be more cost efficient and profitable to simply shift their operations to Asia, AT&T should have still prepared for the impact of the decision to outsource. It took great pains to redevelop a company strategy that is all about “Business Passion” and “Shared Values” but in failing to prepare their people in the decision to outsource, and to allow them to participate even in a small way in the decision, completely belies this mission and vision of the company of putting people first. Laying-off is always a painful process, and AT&T should have been prepared with the impact of lay-offs on worker morale and on its organizational culture as a whole. Negotiating with the unions, open forum discussions with the unions, members, and workers, and a thorough review of performance evaluations should have been in order. Workers should have also been given advanced notice, should they prefer to consider seeking employment elsewhere, or should they want to at least prepare themselves and their families financially on the prospect of an impending lay-off.

The reactive measures taken by AT&T – on offering severance packages and retraining programs, among others – were commendable, but they do not account for the impact on morale especially of the workers who were retained. The workers who were left behind would still be in constant fear of losing their jobs should the company decide to launch yet another offshore operation that may threaten or endanger their jobs. And the loss of their colleagues does not exactly make for a happy and motivating work environment.

Speculate on whether you think AT&T’s relocation to Mexico described in the case might have enjoyed the same success, and if not what factors do you think might contribute to its failure in Mexico? Where did the relocation differ from Whirlpool’s situation in Mexico?

I don’t think relocation to Mexico would enjoy the same success for AT&T as it did with the relocation to Singapore. It is true that production costs, at least from the labor perspective, will go down dramatically, considering that compensation rates in Mexico are much cheaper. Exhibit 8 of the case study indicated that hourly compensation of production workers in manufacturing are only $ 1.32, with the average hourly compensation cost for masquiladora workers at $ 0.80, as shown in Exhibit 11. However, even if labor costs will go down for AT&T, it would still have to contend with a host of issues if it decides to set up shop in Mexico. First of all, it has to constantly take note of border regulations and variances in Mexican and American law, which are both applied for masquiladoras and twin plants in Mexico with US counterparts. Second, Mexico was notorious for illegal employment of minors, with an estimated of five to ten million children under 14 employed in masquiladoras.

This is a serious legal issue, and for a US company, it is a serious moral and ethical issue that AT&T has to consider as well. Measures to prevent it would require constant monitoring and surveillance of their plant to make sure it does not employ children, and this in itself is exhausting, taxing and hardly conducive for an environment of trust. AT&T insists on maintaining a company culture of sincerity, integrity, love, and respect – this is hardly possible if they constantly have to patrol or police their own factories to make sure it is not employing child laborers. Third, masquiladoras result in hazardous effects to the environment in the areas where they are located, with toxic wastes polluting the people’s drinking water. These people are usually the masquiladora workers themselves.

This poses another ethical dilemma for AT&T – in insisting on maintaining a factory, they will inevitably have to get rid of their toxic wastes, and in doing so, they threaten to endanger the lives and health of the very people they employ. Masquiladora workers already live in squalid living conditions as it is. Again, this does not exactly adhere to their “Business Passion” and “Shared Values” policy – a policy which should be instilled in all AT&T plants, whether in the US or elsewhere, to ensure uniformity of standards and corporate vision. Last but not least, the Mexican government is known for corruption. Even if AT&T ends up saving on labor costs, they may have to account for hidden fees or taxes or unwarranted expenses paid to corrupt local government officials or other forms of bribery to appease the local government in Mexico.

Given all these other considerations, it hardly seems worth it to set up an off-shore plant in Mexico. The very concept of masquiladoras, though definitely profitable, poses a host of ethical and moral issues to any foreign company intending to put up its operations in Mexico. It is not similar to the Singapore facility where there are barely any drawbacks within Singapore itself (the drawbacks experienced by AT&T were mostly from organizational morale in the US, but not from within Singapore itself). In other words, the cons outweigh the pros of setting up an off-shore site in Mexico. It is also not as if AT&T does not have any other alternatives. Based on Exhibit 13, the initial estimate of average cost per unit (labor costed at average masquiladora rates) in Mexico amounts to $ 42.89, Mexico at $ 45.37, and the US Greenfield site at $ 48.09. Even though Mexico is undoubtedly the cheapest, the array of other issues that may pose potential and endless headaches to AT&T are discouraging. Malaysia and the Greenfield site may be a bit more expensive, but AT&T should seriously consider exploring these two options first since they will more likely ensure more ethical operations that Mexico in the long run.

AT&T is contemplating outsourcing some of its operations in Mexico. To better understand the pros and cons of this decision, it would be prudent of AT&T CP to consider and review the experiences of other US-based manufacturing companies who have decided to outsource in Mexico. In 2005, Whirlpool Corporation invested approximately $ 250 million in its North American manufacturing base, specifically in the US and Mexico, to better improve its operating platform and to remain competitive. This strategy reflects the corporation’s objective of strengthening its role within its own global manufacturing and distribution network, as well as in expanding and optimizing its innovation capability and global operating platform. By the end of 2005, Whirlpool had begun production of a new front-loading clothes washer in a Monterrey, Mexico facility.

In 2006, it completed construction of a new refrigerator plant in Ramos Arizpe, Mexico, to produce side-by-side refrigerator/freezer models. The Ramos Arizpe site employs approximately 1,000 local workers, and resulted in the laying off of an estimated 730 employees in Whirlpool’s Forth Smith, Arkansas plant in October 2006. Whirlpool’s experience thus is similar to what AT&T went through when it ventured out into Singapore. Long-term employees lost their jobs. The difference perhaps is that majority of the Whirlpool layoffs were voluntary, with many of those employees recalled within 18 months (Whirlpool Corporation, 2005).

However, AT&T should be wary, since the move to Mexico may have reduced Whirlpool’s labor operation costs, but it nevertheless resulted in an increase of expenses in other areas of production. Efforts to reduce parts costs are thrown away due to the tremendous amount of inventory carrying costs associated with appliances, as well as shipping costs. Despite its lofty goals for Mexico, Whirlpool had to consolidate units previously manufactured at the company’s laundry production facility in Monterrey, Mexico, by consolidating top-loading washer production at its Clyde, Ohio plant. At present, the units are manufactured in Ohio, and exported for sale in Mexico. The corporation has had to strengthen its domestic assembly operations (Weber, 2004).

Based on Whirlpool’s experience, AT&T should really think hard before deciding to move its operations to low-cost countries such as Mexico. Apart from the issues and concerns AT&T has already outlined for itself – corrupt governments, labor issues on under-age employment, and the like – Whirlpool’s experience should also serve to remind AT&T CP that manufacturers, particularly appliance manufacturers, should focus more on cost and delivery problems rather than parts and labor costs. Local production for local consumption in the US eliminates shipping costs, and in the end, regional plants within the US may make more sense than going to Singapore or Mexico. Manufacturing the products closer to customers – and thus, closer to home – will not only decrease sipping costs, but improve a company’s response time as well (Weber, 2004).

BIBLIOGRAPHY

• Badaracco, J. and White, W. (July 7, 1993). AT&T Consumer Products. Harvard Business School Case # 392-108. Boston, MA: President and Fellows of Harvard College, Publishing Division, Harvard Business School.
• Weber, Austin. (January 1, 2004). Smart Appliances Spur Consumer Demand. Assembly Magazine. Retrieved February 12, 2007 from: http://www.assemblymag.com/articles/83999-smart-appliances-spur-consumer-demand
• Whirlpool Corporation to Strengthen and Extend North American Manufacturing and Global Operating Platform; New Refrigerator Factory in Mexico to Become Operational in 2006. (December 12, 2005). Whirlpool Corporation Press Releases.