Motorola's Galvin Shakes Things Up--Again

Can his latest overhaul revive its standing in the wireless biz?

It's difficult to overstate how badly Motorola Inc. (MOT ) has been beaten up in the mobile-phone market by Finland's Nokia (NOK ) and other rivals over the past few years. Once the dominant mobile-phone maker in the world, Motorola has seen its market share shrivel as it has misread consumer tastes, alienated telecom companies with its arrogance, and tripped over its own feet in developing new products. Its share of the mobile-phone market has crumbled from 26% in 1996 to 14%, according to financial researcher Wit Soundview Group. Nokia, on the other hand, has boosted its share to 36% from 20%. "Motorola dominated the communications market and had every right to be the leader going forward," says Richard H. Earnest, a portfolio manager at HighMark Capital Management Inc., which has sold most of its holdings in Motorola and now has about 250,000 shares. "This company has made a lot of mistakes."

Now, Christopher B. Galvin, Motorola's chief executive, is making it his personal mission to resurrect the company's wireless-phone business. In a rare series of interviews with BusinessWeek, Galvin laid out a far-reaching plan for turning around the troubled division. He is insisting that the struggling unit report directly to him, instead of to another top executive. He is meeting with the division's brass to plot strategy once a week, instead of once a month as in the past. He is cutting costs to boost gross margins to 27% in 2002, up from 20% last year--putting Motorola closer to Nokia's 32% margins. And he is pushing for faster development of more innovative products. By August, for example, Motorola will bring out a sleek clamshell phone with Caller ID for business execs and an inexpensive phone with candy-colored face plates and FM radio for teenagers. "We think these are really neat phones," declares Galvin.

FIRING FRIENDS. The most radical change is Galvin's willingness to fire top execs, who used to have something approaching lifetime tenure at the company founded by his grandfather. Last October, he pushed out Merle L. Gilmore, a Motorola veteran and a personal friend who oversaw the mobile-phone business and other wireless operations. Over the past year, 11 out of the 19 managers in the wireless group have been replaced. And not one of the 19 managers has reached the three-year mark at the wireless-phone maker. Mike S. Zafirovski, a well-respected exec who spent 24 years at General Electric Co. and ultimately ran its lighting business, was hired as the president of the wireless-phone division last year. "That's how you get things to change," says Galvin. "You get a great new team."

Will Galvin's efforts be enough to turn around the wireless-phone unit? Although he should be able to return the division to profitability, he's unlikely to restore Motorola to its former glory as the market leader in mobile phones. The planned cost-cutting and the hiring of Zafirovski are solid, incremental steps. But the latest moves are unlikely to make Motorola innovative enough to regain market share from Nokia in the near-term.

The company has had a tin ear for hearing what customers want in recent years. In 1997, it spent most of its money developing analog phones, while wireless companies were buying digital phones. Then it missed the mobile phone's evolution to a mass-market product: It focused on selling mobile phones that cost $200 or more until last year, even though consumers typically wanted to spend less than $100. Last spring, SBC Communications Inc. (SBC ) had to pull ads featuring one of Motorola's inexpensive phones because the company didn't deliver them on time. "Our demand for Motorola phones was soured because they were late getting the phones to market," says Frank C. Boyer, a vice-president at Cingular Wireless, the recently formed joint venture between SBC and BellSouth Corp. (BLS )

Galvin concedes that the company has missed market shifts in the past, but he says it's more sensitive to customers now. For example, he's visiting or talking to customers several times a week and formed a new group to cater to the needs of large, global customers. "We recognized our problem and fixed it," he says.

Still, this is the third major overhaul of the wireless business since Galvin took over as CEO in 1997, and skeptics say there's little reason to believe this one will be much more successful than the previous two. "Motorola has technical prowess, but it is hopeless in addressing consumer needs," says Choi Dong June, marketing director for Korea's Appeal Telecom, which makes mobile phones for the company and is 51%-owned by Motorola. "It has grown into a big dinosaur."

Besides the problems in the mobile-phone business, the $38 billion Motorola has been squeezed by slowing demand in its semiconductor business, cutbacks by telecom companies that buy its wireless equipment, and the general economic malaise. The latest blow: On Apr. 10, the company reported its first quarterly loss in 15 years. Its stock has collapsed from 60 last March to about 15.

Reviving the mobile-phone business is key to Galvin getting Motorola back on track. It's the company's largest division, with $13 billion in sales. Moreover, it generates billions in revenues for other divisions. Motorola's mobile phones, for example, use chips from its semiconductor business. In the disastrous first quarter, the mobile-phone business led the fall: The division's sales sank 29% for the period, to $2.3 billion, while it lost $402 million on operations, compared with an operating profit of $53 million in the first quarter of 2000.

"KISS OF DEATH." The latest gaffe is spiraling expenses. Last year, gross margins shrank to 20% at the same time administrative and marketing costs climbed to 20% of sales. Bottom line: Motorola wasn't making a dime in its most important business. "That's the kiss of death," admits Zafirovski. Costs rose because of a "skunk works" approach, in which as many as 15 teams of 20 people developed different phones. The teams often used different parts, making manufacturing and purchasing an expensive headache. Last year, Motorola had 128 different phone types and used a staggering 550 different silicon pieces on the circuit boards inside the handsets.

To lower costs, Galvin is simplifying product development. His target: to reduce the number of phone types by 84%, to 20, and the number of silicon components by 82%, to 100--all by 2003. "Now we have a systematic product plan that reuses common parts," Galvin says. Still, it may not be enough in the treacherous tech markets. It will take two years to reach Galvin's goal and he'll still have twice as many phone types as Nokia.

Galvin and Zafirovski are taking other radical steps. In the past, the wireless business often used chips and batteries made by Motorola's other units, even though the process slowed handset development. Zafirovski has unshackled his group. For example, he buys chips from Qualcomm Inc. (QCOM ), even though Qualcomm has been a bitter rival in the past. "If you're not the best supplier in the world, we're not going to use you," says Zafirovski.

Galvin insists Motorola's troubles aren't dire. He points out that the company's broadband division, which makes cable modems, is performing well, and so is the unit that makes global-positioning systems for cars. Although he acknowledges that his previous restructurings haven't worked perfectly, he attributes most of the company's financial woes to the sluggish economy. "No one was predicting [the economic recession]," explains Galvin.

These days, Galvin can be found every Tuesday at the headquarters of the mobile-phone division in Libertyville, Ill. On one wall of a conference room is a full lineup of phones from each major rival. Nearby are the phones that Motorola plans to introduce over the next three years. Sizing up the competition, Galvin likes his chances. "We have wonderful opportunities ahead of us," he says. When the economy rebounds, "Motorola plans to be ready." Is he right this time? The future of his grandfather's company may depend on it.

By Roger O. Crockett in Libertyville, Ill.

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