What’s at the Heart of Motorola’s Rough Patch?
When Motorola, one of America’s most honored companies, reported lower quarterly earnings last week, it was as if it opened a secret passage to reveal a world teeming with competitors as well as opportunities, where high-stakes decisions have billion-dollar consequences.
On an infinitesimal 0.6% slippage in sales for the second quarter, Motorola reported a 32% drop in profit--a clear sign that competition was forcing the company to sell its cellular phones, semiconductors, pagers and two-way radios at lower, less profitable prices.
Professional investors and analysts reacted severely to the news. They sent Motorola’s stock price down 16% over the next three days. On the week, Motorola lost $6.4 billion in market value.
Yes, investors were jittery about technology last week, but Motorola went beyond jitters. Its price decline reflected doubts about the company’s ability to compete and earn profits at the rate it has in recent years.
For investors and business people everywhere, Motorola is a good example of how brutal competition is these days, even in the most advanced technologies, and of how even the finest companies can make misjudgments.
Always a solid company, Motorola has grown more dramatically in the 1990s than at any time in its 69-year history. As sales more than doubled to $27 billion, profit tripled from 1991 to ‘95, double the rate of the previous five years.
Motorola was dominant in cellular phones, selling radiotelephone systems and base stations to phone companies and handsets--the popular MicroTac and StarTac--to consumers. It spread its success overseas, the source of 63% of its sales, and enjoyed high profit margins and a rising stock price--up sixfold since 1991.
The company prepared for the bright future in global communications, spending $12.5 billion on plant and equipment in the last five years, more than double its previous rate of investment.
But it ran into competitors, who sold cellular phones at lower prices and brought pressure on Motorola profit margins--competitors who built excess capacity in semiconductors and cut prices as demand for computer chips slowed.
The competitors are formidable. They include L.M. Ericsson, the Swedish company that for 120 years has been a world leader in supplying telephone systems. Ericsson got into the U.S. market in the 1980s supplying cellular phones to entrepreneur Craig McCaw’s company.
And it has continued to grow even faster than Motorola. One reason: Ericsson accepts slightly lower profit margins in order to get the business.
That Motorola’s profit declines when it meets Ericsson’s competitive prices indicates that the Schaumburg, Ill.-based company doesn’t have its costs in line.
The profit erosion hurts now because Motorola is waiting for big investments to come to fruition in personal communications service (PCS) systems--digital phones that are really computers-in-the-hand.
The U.S. market for PCS and cellular devices is about to take off as competition lowers telephone charges. Remarkably, only 13% of U.S. telephone users have cellular, compared with 25% in Scandinavia--the home of Ericsson--notes analyst Rakesh Sood of Hambrecht & Quist, a San Francisco investment firm.
On top of that, the world market’s potential is awesome: India and China have less than one phone for every 100 people, compared with a global average of 11 per 100 and more than 60 per 100 in the United States.
Yet even before PCS markets get going, competition is fierce. Motorola recently stepped away from a competition to supply a PCS system to Sprint/Spectrum, a consortium of Sprint Corp. and three cable companies, because it didn’t want to match the billions in supplier financing offered by competitors Lucent Technologies and Northern Telecom Ltd.
“The world is a buyer’s market for even the most advanced technology,” says Peter Bernstein, head of Infonautics Consulting, a Ramsey, N.J., telecommunications research firm.
So Motorola is going through a rough patch. But is it a victim of circumstances or of its own mistakes? A little of both, it appears.
Critics note that Motorola stubbornly increased investment in plants to make semiconductors last year, even though chip demand was softening and its own big customer, Apple Computer, was having problems.
Last week it announced a cutback of that investment, raising doubts about its judgment.
“It has massive investments in new PCS technology and a satellite network and new kinds of pagers and semiconductors all at the same time. How many of those big bets will pay off?” asks Charles Biderman, editor of Wireless Trim Tabs, a Santa Rosa, Calif., investment newsletter that is critical of Motorola.
Such an ambitious program could reflect a lack of hard choices at a company known for good, decentralized management but undergoing a transition of leadership from one member of the founding Galvin family to Christopher Galvin, 44, who is now chief operating officer.
Or it could reflect overconfidence. Even analysts favorable to the company suggest it is sometimes “arrogant.” “They’re sure of technology, but they could work on customer care,” says an expert who has worked with Motorola.
What it adds up to is that Motorola is challenged not only to cut costs, but to change its ways.
No question it can come back strong. “Motorola is very strong in growth markets like India,” says William Davidson, a telecommunications professor at USC and head of Mesa Research, a consulting firm.
“Their CDMA [code division multiple access] technology for PCS offers far more capacity than the technology Ericsson is using,” he says. That technology will get major introductions in U.S. and overseas markets in 1997.
“These guys do best when they’re under pressure,” another analyst says.
There is a track record at the company for performance under pressure. In the 1980s, realizing it had fallen behind in semiconductor technology, Motorola didn’t hesitate to make a joint venture with Japan’s Toshiba to renew its knowledge and get back in the game.
In the 1970s, Motorola sold its television operation and used the money to invest in cellular telephony. Earlier it had plunged into semiconductors for the two-way car radios from which the company gets its name--and thus transformed itself into a leading company of the Information Age.
So just ahead, investors and competitors should look for a shake-up in Schaumburg, a renewed drive to cut costs and regain competitive leadership. The lesson is that is what it takes in business today, even for the best companies and even in the most advanced technologies.
