Motorola's turnaround plans meet with skepticism

Olga Kharif and Roger O. Crockett
10 Nov 2008

The latest flurry of turnaround plans for Motorola is being met with about as much enthusiasm as previous attempts to revive the company's foundering mobile-phone business: not much.

During an Oct. 30 conference call discussing the third-quarter results that included falling sales and a wider loss, Motorola (MOT) co-CEO Sanjay Jha outlined plans to reduce costs, streamline the way the company makes products, and delay a spin-off of the handset business. Along with a dour warning that sales will continue to slump, the announcements did little to shore up confidence. Motorola's already embattled shares tumbled 5.3% to 5.17. RBC Capital Markets analyst Mark Sue cut his 12-month Motorola price target to 7 a share from 8.

To trim losses and help eliminate $600 million in expenses, Motorola plans to cut about 3,000 jobs, two-thirds of them in the handset division. The company will also reduce its focus on certain markets, such as Europe, while stepping up emphasis on the Americas and China. Motorola also plans to retool products so that it makes low-end phones based on its own software and high-end phones that only run Microsoft's (MSFT) Windows Mobile operating system and the Android software developed by the Google (GOOG)-led Open Handset Alliance.

Grim outlook

The moves are aimed at restoring the company's dwindling fortunes. In the third quarter, the operating loss at Motorola's handset division widened to $840 million from $248 million a year earlier. Unit sales dropped 32%, to 25.4 million from a year earlier, and the company's market share plummeted to 8.4% globally, down from 9.5% in the second quarter and 22.4% in 2006, when Motorola's Razr handset was all the rage. In the period, Motorola lost its No. 3 place among the world's largest handset makers to Sony Ericsson, according to Strategy Analytics.

Prospects have only worsened this quarter"”traditionally the most crucial for cell-phone makers because it includes yearend holiday purchases. Jha expects unit sales to be lower than in the third quarter. That's in contrast to industry trends. Global cell-phone shipments should rise 10.5% to 11% in the quarter, according to research firm ABI Research.

Will revival efforts by Jha and co-CEO Greg Brown work‾ Not immediately. Motorola's market share is likely to keep falling in the coming year, say analysts including Matt Thornton of Avian Securities and Ken Hyers of Technology Business Research. Thornton says the company's share could dip to as low as 6% next year.

As Motorola focuses on making its phones more profitable, analysts say it may sacrifice the scale that makes it able to compete with bigger rivals including Nokia (NOK). The company currently sells about 100 million units a year; as the number drops, the cost of making each phone may increase.

'They are getting dangerously close to losing that valuable scale,' says Neil Mawston, director of mobile wireless practice at Strategy Analytics in London. Once production slips below 100 million annually, per-unit costs could rise by 10% to 20%, he estimates. These higher costs could, in turn, make winning new, profitable deals with carriers harder. 'No one wants to catch a falling knife,' Mawston says.

Fewer operating systems

Jha argues that some smaller handset makers are doing just fine.

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