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Motorola's Mr. Fix-It Exits

By Olga Kharif and Roger O. Crockett Passed over for the CEO job, Motorola's (MOT) No. 2 has long been considered a goner. And indeed, on Jan. 12, President and Chief Operating Officer Mike Zafirovski resigned. "Most people are surprised it has taken this long," says Paul Sagawa, an analyst with Sanford C. Bernstein & Co. in New York.

Zafirovski, 51, announced that he would depart effective Jan. 31. While he enjoyed working with current CEO Ed Zander, he tells BusinessWeek Online, "both of us are very operationally oriented. It becomes difficult to divvy up a [chief executive] job so that both of us can be satisfied."

Zafirovski is now hoping to land the top job at another company. He's rumored to be considered as CEO at troubled telecom equipment maker Nortel (NT). (Nortel won't comment on rumors, according to a company spokesperson.) "There are lots of companies out there that could use a good manager," says Neil Strother, an analyst with market consultancy In-Stat in Seattle.

"A LITTLE BIT AWRY." While Zafirovski has agreed to hang around as an adviser, Motorola is going to feel the loss of his full attention. Widely considered to be a skilled operations chief, the General Electric (GE) veteran and Jack Welch protégé has made his mark since he arrived at Motorola in 2000. He first took money-losing handset business and put it in the black. While COO, he also helped lead Motorola to six consecutive growth quarters. Its profitability in 2004 is expected to be the highest in Motorola's history.

Despite his successes, Zafirovski didn't have time to help fix all of the operational problems. Struggling against strong rivals and with operating margins that lag behind those of Nokia (NOK), Motorola is sure to miss his leadership. Perhaps that's why investors pushed Motorola shares down 1% on Jan. 12, to $16.47, on the news of Zafirovski's departure.

With Zafirovski out of the picture, "things could go a little bit awry for Motorola operationally," says Richard Windsor, an analyst with Nomura International investment house in London. Motorola has delayed the release of some handsets in the past. Windsor worries that such problems could reoccur.

PRODUCTION SNAFUS. One thing, however, is clear: Zander emerges as an unrivaled leader. The COO job won't be filled. The 56-year-old former Sun Microsystems (SUNW) president and chief operating officer will absorb many of Zafirovski's functions. Business-unit presidents will report directly to Zander, effective Jan. 31.

Some big challenges remain, such as boosting profits. Operating margins are 10%, far below the 16.6% benchmark set by Nokia. And analysts aren't optimistic that Motorola will catch up. Competitive pressure in the handset market, which accounts for 56% of revenues, is rising. Also, Motorola is still beset with high costs.

Zander will need to revamp the way Motorola produces wireless phones. Analysts fret that it still operates on a batch basis, meaning it makes a bunch of cell phones, puts them in warehouses, and hopes it has accurately forecast how many customers will need, explains Sagawa. No. 1 cell-phone maker Nokia uses a just-in-time mode -- it manufactures a phone only after it has been ordered -- making for much leaner operations.

WALK THE WALK. Quality issues plague Motorola, too. Recently, it had to recall its v710 camera phone, because software and camera didn't work properly. Sagawa's research shows Motorola's warranty returns are about twice as high as Nokia's. "It affects both their brand name and the brand quality of the carrier," says Michael King, an analyst with market consultancy Gartner. "They lost a lot of credibility with those customers."

That's dangerous at a time when rivals like Samsung and LG are making big strides. Both are keeping quality problems to a minimum, and their phones are seen as edgy and hip. They're grabbing more share from Motorola, which has about 15% of the market.

Zander has outlined his vision of unlimited mobility, but many analysts say they want to see action back up the talk. This week, many investors expected Motorola to announce a cell phone integrating Apple's (AAPL) iPod music player. However, the announcement never came. The product's status is unclear.

GOING SOLO. Still, Motorola is doing many things right. Its phone lineup is more attractive and improved. The ultrathin, ultracool RAZR camera phone, for one, is drawing accolades and is said to be gaining some popularity.

As for results, analysts polled by Thomson One expect Motorola to report fourth-quarter sales of $8.45 billion and $618 million in income, up from $8 billion and $489 million, respectively, in the same quarter a year ago. It'll report earnings on Jan. 18.

So far, Zander has impressed customers and industry observers. "He's very aggressive, he works very hard. He was a good CEO choice for Motorola," says Craig Mathias, founder of wireless consultancy Farpoint Group in Ashland, Mass., who worked with Zander in the 1970s.

But it may well be tougher for Zander to thrive without Zafirovski by his side. Kharif is a reporter for BusinessWeek Online in Portland, Ore., and Crockett is deputy bureau chief for BusinessWeek in Chicago

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