Making over Motorola Inc. Motorola remains in transition The stock has been climbing after falling 86%, but the telecom has far to go to reclaim market share. "The jury's still out," says an analyst.

Posted: November 25, 2003

After two years of losses totaling more than $6 billion and an 86 percent drop in its stock price, Motorola Inc. is hoping for a comeback.

So far this year, the Schaumburg, Ill., communications conglomerate that pioneered cell-phone manufacturing has been profitable, and its stock price has nearly doubled. After bottoming out at below $8 a share in April, Motorola's shares closed yesterday at $13.56, up 16 cents in trading on the New York Stock Exchange.

Since September, 11 analysts have upgraded their ratings on Motorola stock.

Still, some experts say Motorola - which has a division in Horsham - has a long way to go before it completes a turnaround. Years of business missteps, poor timing, restructurings and layoffs have created internal turmoil and an inability to react quickly to changes in the telecommunications market.

And despite the profits it has reported this year, Motorola is still struggling to gain back market share and revenue lost over the last several years to Finnish rival Nokia, which has usurped Motorola as the world's No. 1 cell-phone-maker. Increasing competition from other manufacturers, including No. 3 Samsung and No. 6 Sony Ericsson, a joint venture between Sony Corp. and Ericsson, has made Motorola's comeback that much harder, analysts said.

"The jury's still out" on the company's turnaround, said Phillip Redman, a vice president at Gartner Inc., a Stamford, Conn., technology research company.

"It's in transition, like the economy," he said. "I haven't yet seen where the focus is coming from and the strategy to pull it all together. They seem to still be all over the place."

To regain the top berth, Motorola needs to change its strategy, analysts said. The company must:

Focus on developing new cell-phone products and getting them into stores faster.

Sell money-losing businesses.

Forge partnerships with companies that can drive down manufacturing costs.

All this would require an overhaul of the 75-year-old company's inward-looking culture of making everything itself - from the semiconductors that power cell phones to the cell phones themselves to cell-phone accessories, such as a desktop charger with speaker phone.

"It's very much a "we can do everything here' company," Redman said. "The way things have been changing in the last few years, strategic partnerships are very important."

Jane Zweig, chief executive officer of the Shosteck Group, a Wheaton, Md., wireless research company, said: "Motorola needs to take a good, hard look at all its businesses, and think about the interrelationships between them."

Analysts said the company started falling behind Nokia and others in the late 1990s, when it failed to upgrade its cellular technology from analog to digital, and make lower-priced, stylish phones that consumers wanted.

"They did really well when it was the old, clunky phones you could drop down the stairs and it would still work," Redman said. "But people don't keep phones as long anymore. Some buy two a year."

Most recently, Motorola failed to deliver cell phones that have cameras to cellular service provider Verizon Wireless in time for the Christmas sales rush.

Motorola says it now plans to get the camera phones to Verizon Wireless in early 2004. Analysts say the delay may hurt Motorola's fourth-quarter results.

"They didn't anticipate camera-phone interest in the U.S. market would be as high as it is," Redman said.

To cut costs and increase profit margins, he said, Motorola needs to standardize its phones and other equipment so they all run on the same operating platform and use the same electronic components.

Redman said this had been Nokia's strength. As a result, the Finnish giant has net profit margins between 17 percent and 20 percent, compared with the industry standard of 5 percent or lower. Motorola said its net margins so far this year had ranged from 0.3 percent to 1.9 percent.

"Nokia's strategy for production allows it to use similar components over many different product lines," Redman said.

Still, two recent moves have buoyed Motorola's stock.

In a surprise announcement in September, the company said Christopher Galvin, Motorola's chairman and CEO for the last seven years, was retiring. Galvin, the grandson of Motorola founder Paul Galvin, will remain at Motorola until a replacement is announced.

Then last month, Motorola said it would spin off its costly semiconductor unit, a move that also heartened Wall Street.

"Maybe by getting fresh blood in the executive suite, Motorola will take more bold actions," said Michael Hodel, a stock analyst at Morningstar Inc., the mutual-fund research company in Chicago.

"We view the company as stuck in a position where it can't get its business in order," Hodel said. "It's always taking restructuring charges and laying off people. That's a competitive disadvantage because you can't focus on the core business."

During his tenure, Galvin cut Motorola's workforce by 56,000, or 38 percent, and the company has taken reorganization and special charges totaling $14 billion.

Charles Golvin, a senior analyst at Forrester Research Inc., does not think Motorola will spin off its broadband communications unit based in Horsham. He said that division, which makes cable set-top boxes and other cable equipment and technologies, was key to Motorola's future.

"My understanding is that Motorola is getting away from the semiconductor piece and focusing on mobile handsets, mobile infrastructure and broadband," Golvin said.

The broadband unit employs 4,500 worldwide, including 1,000 in Horsham.

While it is unclear whether Motorola can make a comeback, Shosteck Group's Zweig said it was still a major industry force.

"In 2001 and 2002, Motorola wasn't necessarily doing worse. The whole industry was tanking," she said. "I don't rule them out of the game."

Contact staff writer Wendy Tanaka at 215-854-2752 or wtanaka@phillynews.com.

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