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Motorola's China Challenge

By Bruce Einhorn The board members of Motorola now must begin the job of finding a new CEO, following the Sept. 20 resignation of Christopher Galvin. Whoever ends up getting the nod faces the China Challenge. The Middle Kingdom is the world's largest mobile-phone market, and one of the most important countries anywhere for Motorola. Here's a rundown of the difficult issues Motorola's next CEO faces:

Loss of Top Talent. Early this month, Motorola (MOT) lost the head of its China operations, Timothy Chen, who jumped to run China for Microsoft. Big loss. Chen had been a high-profile spokesman for Motorola in China, where the company has long enjoyed the top position in handset sales. In January, Motorola threw a giant party in Shanghai to unveil the 2003 models of mobile phones. Chen was all over, schmoozing with everyone from business partners to local reporters.

More than their counterparts at many other multinationals, Motorola executives have long realized the importance of cultivating good ties with Chinese officials. Galvin himself traveled frequently to China, meeting everyone from top government officials in Beijing to the executives at vendors in southern Guangdong province. Result: Telecom analysts say that Communist cadres view the company with far less suspicion than they do other U.S. outfits. With the loss of Chen and now Galvin, will Motorola be able to find new people who can keep those relationships going?

More competition. A few years ago, Motorola didn't much need to concern itself about competition in China. Sure, there was always Nokia (NOK) to worry about. But Ericsson's (ERICY) rapid loss of market in China and around the globe had to leave Galvin & Co. breathing easier. Moreover, most other European and Asian rivals were far behind Motorola, and local China brands such as TCL offered little more than cheap assembly of phones based on modules sold to them by companies such as France's Wavecom. Not much value-added there.

Motorola's lead in the handset market is now shrinking, however. Statistics on market share in China are still notoriously unreliable, but most experts agree that Motorola, while still No. 1, is slipping. And it's the locals such as TCL and Ningbo Bird making inroad, with stylish phones that are more in tune with the tastes of fashion-conscious Chinese consumers. Even more worrisome for Motorola, the Chinese are no longer just slapping together phones based on parts they've purchased from abroad. Instead, they're ramping up their inhouse research and development, doing the hard work themselves. TCL, for instance, has sharply cut its purchases from Wavecom, and has more than doubled its headcount of R&D engineers, to almost 500. As the Chinese reduce their reliance on foreign help, they'll be even more competitive against Motorola.

Slower growth. As competition grows on the mainland, China is no longer the dynamic market it once was. With more than 240 million cell-phone users, it's still the world's largest market. But growth is slowing, to around 10% a year, from much higher double-digit growth that marketed the last five years.

Another challenge for Motorola is the location of that demand. Until now, companies could focus their attention on the country's three big and prosperous metropolitan areas -- Beijing in the north, the Shanghai metropolis in the east, and the Pearl River Delta in the south. Now companies need to be looking more to smaller cities and the countryside for growth. That's where local rivals like TCL have a big advantage, since they have the distribution network in these areas.

Swoon in semiconductors. Galvin made headlines a year ago, when he brought Motorola's board with him to the mainland and announced the company would be investing billions of dollars. Much of that investment has gone to the company's semiconductor fab in the northern city of Tianjin, close to Beijing. Chinese leaders took the fab investment as evidence that multinationals take their ambitions for building a world-class semiconductor industry seriously.

Neither Motorola nor the Chinese leadership anticipated the worldwide chip slump that followed the collapse of the dot-com bubble, however. Result: The Tianjin fab increasingly seems like an albatross for Motorola. One solution that many people believe is inevitable: Motorola will get rid of it. A possible buyer: the Shanghai-based foundry, Semiconductor Manufacturing International Co. (SMIC). Whoever takes over as CEO will need to decide quickly whether SMIC or some other buyer makes the most sense.

U.S.-China political shoals.ith only 13 months to go until the U.S. Presidential election, China is already shaping up as a major issue. The jobless recovery in the U.S. has highlighted a steady loss of manufacturing jobs. Hence the recent attention from Bush Administration officials such as Treasury Secretary Snow to the managed Chinese currency and how it is hurting U.S. exporters.

A lot of this is just political theater, designed to impress voters in Michigan and Pennsylvania that President Bush cares about their problems and is going to bat for them. But Democratic Presidential contenders are likely to keep up the heat. And all this China rhetoric could take a diplomatic toll on American companies operating in China. Whoever replaces Galvin will need to figure out how to placate China's leaders -- without antagonizing American consumers. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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