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Dull cellphone designs bog down Motorola

Posted: 27 Aug 2007 ?? ?Print Version ?Bookmark and Share

Keywords:dull cellphone designs? Motorola cellphones? design appeal?

The tones of their presentations summed up their respective company's June-ended quarter. Ed Zander, chairman and CEO of Motorola Inc., sounded tentative, weary, apologetic. Olli-Pekka Kallasvuo, Nokia Corp. president and CEO, was confident and assertive.

Zander, four years into his tenure at Motorola, is struggling to improve the position of the American corporate icon in the face of intense opposition from Chinese, European, Japanese and South Korean rivals. So far, analysts give him mixed reviews, and although Zander isn't in danger of losing his position, a few shareholders and observers have called for his departure.

The makeover of Motorola has been moderately executed thus far, with few of the jarring actions that Wall Street has learned to expect from companies operating in similarly competitive climates. Some sources believe Zander, to save his job and Motorola's reputation, must do more than shuffle top executives and cut costs.

Based on his comments during Motorola's latest earnings call, Zander realizes the work ahead of him. "Our top priorities remain unchanged: to improve our product portfolio in key market segments and reduce costs," he said.

Body blows
Motorola is reeling from the blows it received in Q2, when it was edged out by Samsung Electronics Inc. as the world's second-biggest wireless handset vendor. Motorola's market share slipped to 13.5 percent, while Samsung's rose to 13.7 percent and top-ranked Nokia's increased to 38 percent.

Analysts expect Motorola to regain share in Q3 and Q4 as it battles back with a batch of new products, key executive changes and cost-cutting actions. Some rival executives suggest Motorola might reclaim boasting rights as the market's second-ranked wireless handset maker by year's end.

Even Nokia's Kallasvuo, prodded by analysts during his company's Q2 conference call in early August, insisted that "Motorola has not gone away. They are there, they're competing, they do have products and they want to take market share. They will come up sooner or later."

Still, Motorola's shareholders, component suppliers (including its IC spin-off, Freescale Semiconductor Inc.), EMS providers and customers are looking for the company to do more than surface for a quick gulp of fresh air. The wireless-handset and telecommunications equipment vendor remains bedeviled by unappealing products, heavily dependent on sales to North American customers and clearly determined to hold on to a large portion of its manufacturing operations. Yet it has persisted in its policy of incremental, rather than sweeping, changes.

If Motorola is to shake off the cycle of reorganization, fleeting product successes and market share losses that have characterized its business in recent years, many believe, it must implement fundamental operational, design and supply chain changes.

Working more, making less

Motorola has always insisted that an efficient supply chain is central to its operation, but the company won't completely outsource production, believing it should maintain some control over that critical function. The result is that its costs haven't fallen as quickly as some have thought necessary to give it an edge in a market where products become obsolescent after three months or so.

In product design, Motorola's inability to respond deftly to market demand has been problematic. Analysts who noted the huge success of the company's Razr handset have also observed that Motorola isn't always ready with another winner to follow up a successful product.

Industry observers noteand Motorola's own executives concedethat its current handset lineup has paled beside Apple Inc.'s iPhone in its ability to captivate customers. CEO Zander acknowledged during the earnings conference call that there hadn't been "many really new 'wow' products" in Motorola's Q1 and Q2 offerings.

"We do need some of these new products out there," Zander said. "We need to get our portfolio refreshed. We are confident that we are doing the right things, but we have got to put the numbers up, and we have got to put the products into the marketplace."

Loads of cash, minimal debt

Numbers tell the story
Up until the end of 2006, Motorola was doing fine, at least in revenue terms. The company recorded 2006 revenue of $42.9 billion, almost double the $22 billion it posted in 2002. It has been profitable every year since 2003, and despite having projected a loss in its mobile-device division for 2007, it is still expected to eke out a profit this year.

Most analysts expect Motorola's revenue growth will slide into negative territory by year's end, however, primarily because of problems in the handset unit. The company is expected to report about $36.7 billion in revenue for 2007 and about $40 billion in 2008.

Look beyond the revenue numbers, and problems peek out. Gross profit margins slid below 30 percent in 2006, from as high as 33 percent in 2002, and remain under pressure. The culprits here are lower demand for its products as well as pricing pressures in the wireless-handset business, which in 2006 accounted for 66 percent of Motorola's annual revenue. In 2004 and 2005, the handset unit represented approximately 58 percent and 61 percent, respectively, of revenue.

The increased exposure to wireless sales means Motorola must keep its product line primed with gadgets that appeal locally but can also be customized for the international market. That hasn't been the case of late.

Netgear WNR854T

Mobile handsets grab a bigger share.
Click image to view charts

Motorola has been at this juncture before in its wireless business. In the mid-1990s, it rolled out the StarTAC handset and enjoyed huge demand from a public fascinated by the clamshell design. But Motorola didn't score another huge wireless hit until the Razr debuted in 2004. To some observers, that's a sign that Motorolaunlike Nokiahas not implemented an institutionalized system for regularly turning out products that are compelling in design as well as rich in features. To compensate for that lack, Motorola has focused on cost-cutting initiatives every time it has fallen behind its rivals.

"Cost containment and site rationalizations alone" do not make for "a long-term vision and strategy," Eric Jackson, a Motorola shareholder activist and founder of Jackson Leadership Systems Inc., stated in a report. "Controlling costs is critical when your major division is seeing sales recede as much as [the Motorola wireless unit's] have in the last three quarters.

"The simple truth is that customers do not like [Motorola's] current lineup. There needs to be a better strategy for more-compelling phones that will raise revenue."

- Bolaji Ojo
EE Times

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