Motorola: "A Shot of Adrenaline"

Will a slew of new phones put an end to its slump?

When Motorola (MOT ) announced disappointing sales on July 15, execs were right to blame forces outside the company's control -- tough times in China, due to SARS and inventory buildup. Those factors helped push sales down 10% for the quarter ended in June, to $6.2 billion. And they partly explain why phone sales, which account for nearly 40% of the company's revenues, fell 13%, to $2.3 billion.

But dig a little deeper and there's much more to the Schaumburg (Ill.) company's woes than SARS and Asia's oversupply. At the top of the list: a dearth of new phone models. So far this year, Motorola has released just six phone models worldwide. Meanwhile, market leader Nokia (NOK ) Corp. has shipped 13 new handsets, and hard-charging No. 3 phonemaker, Samsung Group, plans scores of releases. Many of their new phones sport such hot-selling features as cameras and color screens. With fewer new products of its own, say analysts, Motorola has almost certainly lost market share.

To address that, CEO Christopher Galvin told analysts July 15 that innovation will become a top priority. Over the next six months, Motorola will inundate the market with no fewer than 31 new handsets. If the phones are a hit, it will be a testament to Galvin's and COO Mike Zafirovski's efforts to move the company from a tradition of emphasizing technology over applications consumers want. The new phone models, says Wojtek Uzdel-ewicz, a wireless equipment analyst for Bear, Stearns & Co. will give Motorola "a shot of adrenaline." But, he adds, "it's not one quarter that makes a company."

Besides, Motorola will be playing catch-up. A year ago, Nokia and Samsung already were building phones with the latest multimedia applications, but Motorola held back. "The [camera] capability is still maturing," Steve Lalla, director of global product marketing for Motorola's phone unit, said in January. "It's a bit early." As a result, Samsung and Nokia beat Motorola to market with a range of sought-after phones that boast color screens and snap digital photos.

That means Motorola will be entering niches where Samsung and Nokia already have a strong foothold. Motorola's first integrated camera-phone arrives in Europe in the fall -- and won't debut in the U.S. until even later. There's plenty of potential growth at stake. Globally, camera-phone sales are expected to double to 16% of the industry total in 2004. Sales growth likely will be even more robust in Europe, the world's biggest cellular market. Motorola is feverishly trying to do better in Europe, where its share fell to 6% last quarter, down two percentage points in a year, says researcher Gartner Inc. "Motorola doesn't get to have the honeymoon period when they can build volume," says Sanford C. Bernstein (AC ) & Co. analyst Paul Sagawa. "Instead, they'll be thrown into a highly competitive market."

Motorola also faces daunting new challenges in its strongholds. It leads the U.S. market, with a 32% share, and holds nearly that much of China's fast-growing market. But Nokia is fighting back hard in both places. After neglecting the technology favored by Verizon Wireless (VZ ) and Sprint PCS (FON ) the Finnish giant is unveiling several new phones for those carriers this year. "Nokia is not about to concede the world's No. 2 market," says Deutsche Bank (DB ) analyst Brian T. Modoff.

It certainly has the wherewithal to fend off Motorola. Top-flight manufacturing and design enable it to introduce 8 to 10 new phones every quarter -- much faster than the 9 to 12 months Motorola historically has taken to roll out new products. Why the huge difference? Nokia builds most of its phones around a common chipset -- the smart innards of a phone -- allowing it to snap on different features and designs. Motorola has struggled to implement similar technology. But now, the company is finally standardizing phones around a common core. By yearend, says Zafirovski, 70% of Motorola's new phones will sport the new insides, which should speed its launches.

By yearend, Zafirovski told analysts, Motorola will return to growth. The most important step to getting there, he concedes, is improving new product introduction. Motorola has made these promises before. This time, it must deliver.

By Roger O. Crockett in Chicago, with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

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