Motorola: A Lesson for Today’s Economy

One of the world’s most admired and skillful companies, Motorola Inc. is facing challenges to its business and its family management as great as any in its 73-year history.

The Chicago-based company has suffered reversals in recent years. Motorola surrendered the global lead in mobile telephones to Nokia Corp. four years ago and has been losing market share ever since. It had to write off big investments in the Iridium satellite network.

The pension and mutual funds that hold about 50% of Motorola’s stock are distressed.

“The company is not earning its cost of capital,” says Timothy Bixler, president of Holt Portfolio Advisory, a firm that reports on corporate finances to 400 institutional investors.

“It’s a sick company and Chris will have to do something to deliver better results,” Bixler says, referring to Christopher Galvin, Motorola’s chief executive and the third generation of his family to run the company.

Motorola’s stock, at $16 a share at Friday’s close on the New York Stock Exchange, is down 60% in the last year. That may not be surprising for a high-tech company these days, but investor impatience with Motorola is unusual.

A company dating to 1928, Motorola long ago successfully adapted from its beginnings in car radios to become a world leader in electronics. Today it supplies more semiconductors and other electronic components for car engines than any other firm.

With its long history in radio, Motorola understood the potential of wireless communications and became a global leader in pagers, mobile telephones, cable modems and now hand-held devices for accessing the Internet.

It is a big company, with $37.5 billion in annual sales last year and $1.3 billion in net income from telecommunications systems, broadband Internet devices and semiconductors.

Which is why Motorola is a company to watch--and learn from. That a major firm on the cutting edge of so many technologies is having difficulties offers an object lesson in what a company must do to stay ahead technologically while earning a return on capital that passes muster with global investors.

As recently as the mid-1990s, Motorola held a commanding lead in the world market for mobile telephones. Under then-CEO Robert Galvin, who has just retired, at 78, from Motorola’s board of directors, the company battled its way into markets in Japan and the rest of Asia in the 1980s. Its position in pagers and phones in China was unmatched.

But it held back from shifting to digital telephones, and Finland-based Nokia, already ahead in Europe, came on fast to become the market leader in Asia and the United States in 1997.

Then Motorola, a company rich in engineering but not in marketing, failed to grasp that mobile phones had become mass-market consumer products, to be sold at low prices and with touches of fashion. It fell further behind.

At the end of last year, Nokia was pulling away with 30.6% of the world market to Motorola’s 14.6%, according to research firm Gartner Dataquest.

And the market is drawing new Korean and Japanese competitors that are strong in consumer products, reports Jane Zweig, head of Shosteck Group, a telecommunications consulting firm in Wheaton, Md.

The challenge to Motorola is awesome. It is losing money in telephones, which make up 35% of its sales. And success in phones is integral to other parts of its business, such as the ground stations and other infrastructure that it supplies for mobile phone networks. Communications in one form or another accounts for 75% of Motorola’s sales.

The company needs to mount a comeback in phones, but technology and competitiveness don’t come cheap. Motorola invested $4.4 billion last year in research and development and spent an additional $4 billion on plant and equipment to support its businesses.

It’s a heavy burden. The company has been earning less than 7% on invested capital in recent years, less than half the 17% it earned in the early ‘90s and well below the 30% return on capital that Nokia earns each year.

The gap puts Motorola at a competitive disadvantage. It has had to increase borrowing and scrimp on some of its businesses to keep up a high rate of investment while Nokia earns the profits it needs to reinvest in the business and avoids the costs of debt.

So what must Motorola do? Wall Street analysts, according to financial newspaper Barron’s, are calling for the company to sell or spin off whole divisions, such as the semiconductor operation, which has nearly $7.9 billion in revenue.

Analyst Edward Snyder of J.P. Morgan & Co. says, however, that jettisoning a whole division such as semiconductors, which has special capabilities important to other parts of Motorola, would be a mistake.

Rather, Snyder says, the company will soon sell parts of the semiconductor operation and of other segments to raise capital. In fact, Motorola started selling off money-losing operations last year. And it has launched a restructuring that will entail laying off more than 10% of its 121,000 employees.

That has to be hard for a company trying to expand in global markets--a firm, moreover, that has pioneered incentive and benefit programs for all ranks of its employees.

But from these dark times, the company hopes to start a comeback later this year with the introduction of technology called general packet radio service that can transmit data over the Internet to mobile telephone devices.

“Motorola is ahead of competition with GPRS technology,” says analyst Samuel May of U.S. Bancorp Piper Jaffray, a Minneapolis-based investment firm.

The technology won’t inspire a large market right away, experts say. Wireless Internet for voice and data won’t become a sizable market until 2004, estimates Bryan Prohm, telecommunications analyst for Gartner Dataquest.

But Motorola hopes to build on its technology to achieve a leadership position on the Internet comparable to the leads it used to have in conventional telephony.

Last year the company paid $17 billion to acquire General Instrument, a developer of set-top boxes for cable access to the Internet. CEO Galvin sees a fresh start with “new generations of products.”

Investors agree that Motorola will make a new start, one way or another. Its returns are so low that something must be done, says James McCarthy of Legacy Capital, an institutional investment company in Roseville, Calif.

Either returns improve, he says, or investors will demand that the Galvin family, which owns about 3% of the stock, step aside in favor of new managers who will get the profits up.

That’s why 73-year old Motorola, which has dealt with adversity and adapted to change before, is a company to learn from--and watch.

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James Flanigan can be reached at jim.flanigan@latimes.com.