Is Motorola A Bit Too Patient?

While it waits for long-term bets to pay off, profits erode

For on-the-go cellular phone users, few things are more annoying than losing a connection in the middle of a call. But for global market leader Motorola Inc., lost calls are more than an annoyance: AirTouch Communications Inc. was supposed to have a sophisticated multimillion dollar digital-cellular system from Motorola up and running in Los Angeles by early 1995. But with technical problems still causing lines to go dead, AirTouch won't put customers on the system--or finish paying Motorola--until the kinks are cleared up. "We are being finicky," says spokeswoman Amy Damianakes. "We want it to be as good as the existing analog service or better."

That hardly seems like a lot to ask of Motorola, the world's biggest maker of cell phones and pagers. After all, as the global leader in two of the world's fastest-growing technologies--wireless communications and semiconductors--Motorola has long been lauded as one of America's technology giants. But as the Schaumburg (Ill.)-based company struggles to regain momentum in the tough U.S. cellular market, it is facing a host of uncomfortable new questions. The biggest: Has Motorola hit a bit of momentary turbulence, or is the high-flying star finally coming down to earth?

The queries picked up force early in January, after the company announced that fourth-quarter earnings would fall 16%, to $432 million. Company officials blamed much of the slide on cellular, yet difficulties there aren't all that Motorola has to worry about these days. CEO Gary L. Tooker, 56, and President Christopher B. Galvin, 45, who together make up the office of chief executive, are set on keeping Motorola in a broad array of markets: Its products range from tiny chips that go into cars to U.S. Army ground stations for airborne surveillance equipment. But with competition rising and problems cropping up on several fronts, investors are starting to ask if Motorola has its fingers in too many pies.

Other high-profile Motorola products--such as the PowerPC chip and the Envoy personal digital assistant--have been slow to catch on. Iridium Inc.'s costly global satellite-phone system, for which Motorola is the prime contractor, has had trouble finding financial backers. And perhaps most worrying is a nagging question that has trailed the company for several years: With an increasing share of its products going into consumer markets, can the engineers who run Motorola learn to do a better job of marketing their wares? "They're spread really thin," warns Susan Kalla, an analyst with Stamford (Conn.)-based SoundView Financial Group.

With all that to worry about, it's no surprise that Wall Street has thrown up a red flag. After soaring from 11 in 1991 to 82 last September, Motorola shares have fallen about 36%, to around 53. For the full year, Motorola managed to boost profits 14%, to $1.78 billion, on a sales gain of 22%, to $27 billion. But with the company warning that earnings comparisons will remain "difficult" this year, analysts surveyed by First Call expect 1996 profits to rise just 2%.

NO RETREAT. Not that Motorola is in dire straits by any means. But until recently, this was a company that seemed infallible. As it moved from strength to strength in its core technology markets, revenues have more than doubled since 1989, while income jumped 39% annually. But even insiders say that pace can't be maintained. "It can't go on forever," says one. "Maybe 15% a year is realistic, but [growth isn't going to continue] at 30%."

For all the storm, CEO Tooker sees no need for retrenchment. A plain-speaking electrical engineer who joined the company in 1962, he's won respect as a no-nonsense operating manager who honed his skills in the cutthroat semiconductor business. He says he has no intention of pulling back on the long-term strategy by which Motorola built its name. The style was set by former Chairman Robert W. Galvin--Christopher's father, who remains chairman of the board's executive committee--and continued under charismatic CEO George M.C. Fisher: placing farsighted bets on a wide array of technologies. Tooker, who took the top job when Fisher went to Eastman Kodak Co. in 1993, argues that Motorola must stick to that strategy while expanding in fast-growing developing markets. "Our opportunities have probably never been better," he says.

Lately, though, Motorola has seemed to have unwonted difficulty in making the most of its opportunities. The biggest challenge remains in cellular, which provides 40% of sales. There, Motorola's problems are twofold. After a three-year spurt in which growth topped 30% a year, demand in the U.S. is slowing. At the same time, Scandinavian rivals such as L.M. Ericsson and Nokia are stepping up efforts in the U.S. The result: a vicious price war that has hit Motorola's earnings particularly hard.

Motorola's market share is also slipping. From 42% of the U.S. market in 1994, SoundView analyst Kalla expects Motorola's share to fall to 37% this year; Nokia meanwhile will go from 21% to 32%. Motorola attributes the drop largely to excessive orders in late 1994 that bloated inventories, but rivals crow that they're gaining. "We've been winning share for three years," says Anders Torstensson, executive vice-president of Ericsson's U.S. arm. And look out: While Japanese manufacturers such as Sony, Panasonic, and Toshiba have largely lost out so far, they intend to return with a vengeance in the market for low-cost personal communications services (PCS) phones next year.

Nor are the cellular problems limited to the U.S.; in Europe, too, Motorola's slice has fallen from 38% in 1994 to a projected 33% in 1996. In part, that's due to an aggressive push by Nokia and Ericsson to grab share as a more sophisticated digital cellular service known as GSM takes hold there.

And that points to further questions for Motorola as the U.S. begins to shift to digital cellular. Motorola is placing big bets on a newer technology known as CDMA--code division multiple access. Cellular service providers like CDMA because it offers far higher call-carrying capacity than GSM. But the technology still has some bugs, as the Los Angeles experience shows. Analysts say substantial CDMA sales may not begin until late 1997, and some competitors remain skeptical. "We don't consider it to be economically viable in its present state on a large scale," says Per Bengtson, a spokesman for Ericsson. With CDMA likely to take time, the company is emphasizing GSM.

Still, Tooker says Motorola plans to hunker down: He expects cellular will see a strong rebound when PCS phones hit the markets--probably by 1997--and spur demand again. But problems may not be so readily solved for the PowerPC, the $1 billion chip developed by Motorola in partnership with Apple Computer Inc. and IBM. Introduced with fanfare in 1993 with Apple as its flagship customer, the PowerPC was supposed to become a major rival to Intel Corp.'s Pentium. But although Motorola is now getting lots of PowerPC orders from makers of settop boxes, server computers, and other special machines, the chip hasn't created anything like the breakthrough expected.

Apple's struggles have hardly helped: Its sliding market share has meant fewer chip sales than expected. Without Apple as a base, few other PC makers have adopted the chip. Although Motorola continues to pour money into software development and is creating its own PowerPC-based computer systems in hopes of jump-starting the market, outsiders think its chances are slim.

Iridium, the $3.4 billion satellite phone system of which Motorola is the main backer, is also running into outside skepticism. The ring of satellites should allow callers to use wireless phones anywhere around the world to call anywhere, but several rivals are vying for the risky market. Although Tooker predicts that Iridium will eventually be a big success--the first of 66 satellites are due to be launched late this year--few outsiders are ready to back it. Iridium has raised only $1.6 billion so far and last fall had to scrap a $300 million junk-bond offering in the face of investor disinterest.

OUTSIDE HELP. Despite the crop of difficulties, Tooker denies that the company is spread too thin. One thing he and Galvin will need to concentrate on is better marketing. With an ever-increasing share of their products going to consumer markets, Motorola execs have said for years that they need to boost their consumer marketing know-how. But the engineering-led company has been slow to change. A case in point: The Envoy PDA was technically strong but priced far too high for the market at $1,000 to $1,500.

To improve its marketing savvy, the board asked Procter & Gamble Co. Chairman and CEO John E. Pepper to become a director last year. Although "selling a cellular phone isn't the same as selling soap," Pepper should help Motorola figure out how to "market consumer products in a way that it may not have considered," says Director B. Kenneth West, the former chairman of Harris Bankcorp Inc. Motorola has also beefed up marketing by bringing in executives from the likes of Black & Decker Corp. and Mattel Inc.

But elsewhere, Tooker says few changes are planned despite the earnings slide. "This is a few days in the life of a company that's decades old," he says. "We think we're making balanced investments for the future." Nor does the board appear worried. "There may be some unruliness in the competitive environment, but it's worth hanging in," says director West. Both argue that by mid-1997--when they expect cellular to revive, the PowerPC and a relaunched Envoy to take off, and the bet on CDMA to pay off--a fresh surge in profits and revenues will mute the short-term skeptics. Though questions are growing, given Motorola's record, few are willing to count it out yet.

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