Ed Zander knows how to capture an audience. He's an expert at it. Motorola's chairman and CEO has the charisma, the improvisational ability, the charm, the sense of humor, and mainly years of training and experience to know how to turn a gloomy analyst meeting into a great event. At Motorola's annual media and analyst meeting in Chicago last week, Zander captured the hearts of his audience in two separate appearances.
Only 19 months since he joined Motorola, Zander already managed to change the company from A to Z, to shake off the dust of many years, and to expose the real Motorola, once again, to the sunlight. Zander did that in several ways, bringing back the long-lost pride of being a part of the company, and reinvigorating the brand by launching so-called "cool" products with a single purpose: "to please the customer", as he puts it. Two years ago, nobody would have believed Motorola could ever make anything that was cool.
Zander, 58, is the first Motorola CEO to ever be brought from outside rather than coming up through the company ranks. No doubt, being "tabula rasa" helped him in making changes. He was chosen to lead the company after the board's mutiny against former CEO Christopher Galvin, who was forced to leave office in favor of new blood. Galvin worked for 36 years at Motorola, which was founded by his grandfather in 1928, and managed by his father between 1969-1989. But during his tenure, Motorola's share dropped about 70%. By contrast, Zander has managed to double the share's value in only 18 months.
During Galvin's time Motorola became a large, slow and bureaucratic company, launching awkward and lackluster products, and constantly disappointing the capital market. However, it did have major assets in the form of vast amounts of accumulated knowledge and leading engineering capabilities in the field of wireless communications. From this point of view, Zander's job was easy. As his predecessor had done so badly, "all" he had to do was rouse the giant organization from its comatose state, and make it start leveraging its potential.
Zander defined a technological vision for the company (called "seamless mobility"), set the company's focus for the coming years (cellular phones), and promised Wall Street continuous growth, stability and visibility in the financial results. To employees he promised to make Motorola a world leader again, and set the target of being number one in cellular handsets. In other words, he was going to beat Nokia.
Zander's became the analysts and investors' favorite because of the rise in the share value. Gadget enthusiasts like him, because of the cool products the company began manufacturing, as does the American media, which he courts with all his charm. In return, the media has helped him build his reputation as one of the most successful managers in the US today.
The results
The last financial quarter was the sixth consecutive one in which the company beat all the analysts' forecasts. This is what Zander means when he talks about consistency and uncompromising accomplishment and even beyond that of business targets set in advance. The capital market still holds a basic distrust to Motorola, after years and years of failures. But as the quarters go by, Motorola gains more and more trust, and for that consistency the capital market drives the share price up.
Motorola's income in the last quarter was $8.83 billion, well over the company's own forecast of $8.5 billion, and 8% growth compared to the previous quarter, or 17% growth compared to the second quarter of 2004. Motorola's forecast is for additional growth in the next quarter of about 17% compared to the third quarter of 2004. The financial results improvement brought a rise in the share value and in the company's market value. When Zander first came into office, the company's market value was $32.9 billion. At the end of July, Motorola's value together with Freescale (Motorola's semiconductor spin-off, which used to be an integral part of the company), was $58.85 billion. Meaning that in this time, Zander has added an astonishing $26 billion to the company's value.
The main problem in Motorola's financial reports lies in the operating profit, the issue that most concerns the analysts. In the last quarter, operating profit was 11.1% of revenue, compared with Nokia's 17%. Still, the figure is considered a relative success for Motorola, since in 2003 it stood at an all-time low of 5.5%.
Improvement is still fairly slow, which is why Motorola recently brought in Stu Reed as senior vice president of the newly formed integrated supply chain sector. Reed was hired for a single task: to add 3% to profit margins. The company's target is a margin of 13%-15%, though some Wall Street analysts think this is too modest, and that Motorola should strive for more.
Mobile devices are Motorola's main business, with revenue of about $4.4 billion of total revenue for the first quarter of 2005, or about 53%. Government and enterprise mobility solutions comprised 18.3% of revenue. The networks (cellular and other wireless networks) business represented 20%, while the connected home business segment was 8%.
RAZR
Zander took a chance when he decided to focus on cellular handsets. Due to this strategy handset manufacturing has come to represent more than half of the company's revenue, while home communication systems have become almost negligible in the overall operation. Developing and marketing digital set-top boxes are not considered Motorola's core operation, and there are some who believe that these segments will soon be either sold or spun-off from Motorola, perhaps as was done with Freescale.
Popular opinion says the cellular handset market is currently undergoing a process of commodification (the transformation of a non-commodity into a commodity), similar to what happened in the personal computer market. The process lowers profitability and takes the major, technologically advantaged players out of the game, and making it a market of cheap products, all resembling one another.
Zander, who came from the computer world (he was president and COO at Sun Microsystems before Motorola), believes the process is exactly the reverse. In his opinion, the cellular market is very different from the computing market, as they are small devices, packed with technologies that advance rapidly. These devices become a platform for many applications, and there are also different operating systems for different devices. All of these give the space for companies with extensive R&D departments to bring the latest features and technologies before everybody else, both in hardware and in software. Motorola believes this reverse process will occur, and a few major players perhaps even only two, Nokia and Motorola will have the advantage, while smaller competitors like Samsung and others will gradually lose more and more market share.
Today Nokia securely leads the cellular handsets market, with a market share that is almost double Motorola's. However, Motorola is consistently increasing its market share and its lead over third place. It currently holds 18.1% of the cellular handsets market, a growth rate of 3.35% compared to same period last year. The target Zander has set for the company is ambitious: to reach 33% market share and beat Nokia.
The most prominent example of Motorola's attitude change is the V3 handset, brand-named RAZR. It's not a very sophisticated phone, but its impressive slim-line design set a whole new standard in the market. RAZR's purpose was to bring revitalize the Motorola brand by creating a new symbol, much like Motorola's StarTAC had been. Zander admits the RAZR concept was created long before he came in, but it was he who dug deep into the cellular design center and found it, identified its potential and expedited market penetration at a dazzling pace Motorola was unused to.
The RAZR did in fact create a major hype, and Motorola is leveraging the brand wherever it can. It makes a candy-bar shaped version without a flip up lid, marketed under the name SLVR, which will be marketed to CDMA networks, as well as GSM networks, and there will be a 3G version shortly, though that device will be a little bit thicker. If that's not enough, Motorola is launching a more sophisticated RAZR, along with special editions in different colors.
Another device aimed at changing Motorola's market status it the Q, which was launched last week. This device, whose proportions were inspired by the RAZR, will compete with the popular Blackberry PDA. For Q, Motorola joined forces with Microsoft, which developed the device's operating system. It will be interesting to see whether Motorola can create a worthy opponent to so successful a device as Blackberry.
Meanwhile, Motorola has encountered some difficulties in sticking to its timetable for launching these advanced devices, but delays are acceptable in the high-end cellular market. Besides, it's the low and mid-priced devices that sell best and bring in the most income, rather than those perceived as flagship devices. Low and mid-priced devices were not showcased at the analysts meeting, as they are less glamorous. They also have lower profit margins and, in general, selling them is a tough business that requires an ability to negotiate with cellular operators in developing countries. Motorola was late in entering this new sector, and one of its major challenges now is to increase its market share.
Vision
Zander has a vision for Motorola, on which the company's strategy is based. "Seamless mobility" means that every kind of content there is, will reach anyone, anywhere, anytime, over any kind of device. Users will be indifferent to the communication network serving them, and will expect to get any and all information without technological impediments.
Zander is no pioneer in this vision, which reappears every few years under different names, like "convergence," but Motorola's agenda to advance this vision is clear. Unlike its competitors, Motorola is active in all kinds of current wireless technology, cellular, wireless broadband, encoded, third generation, next generation and the like. The vision fits this list like a glove as it offers a complete solution, with the full range of wireless world benefits. The demonstrations during the meeting showed how a call can be switched from a cellular network, to a wireless broadband network and vice versa without being cut-off, and how a movie could be transferred from the home TV set, to the mobile device, to the car and to the computer, uninterrupted, starting from the same point where it was stopped on the last device. The demonstrations were far from perfect, but the Motorola dared to perform it, because this is the vision, and it demonstrated the logic behind it. However, achieving it still seems a long way off.
Changing the culture
Understanding that ineffectiveness was Motorola's Achilles' heel, Zander made some far-reaching structural and operational changes. He flattened out the hierarchy, causing several senior managers to leave. Motorola was once a company with intense internal competition between different sectors, in which every sector operated separately with a minimum of synergy. That created major expenses, and inefficiency in development and manufacturing. Today Zander is trying to change all that, downsizing plants, integrating computer platforms, and reducing supply chain expenses, lowering the number of suppliers, and increasing manufacturing standardization.
Israel
Israel is one of Motorola's largest development and manufacturing centers outside the US. It started doing business in Israel in 1948, and currently employs 3,400 people, with a turnover of almost $1 billion per year. Motorola Israel is run by Elisha Yanay who also serves as senior VP at Motorola Inc.
Motorola Israel focuses mainly on military communication systems for the Israel Defense Forces (IDF), security agencies worldwide, and large organizations such as the US postal service. The highly technologically skilled human resource in Israel serves as the main reason for keeping the centers in Israel, despite the relatively high cost. Motorola also has a manufacturing plant in Arad, which finds itself from time to time in a danger of closure, however Motorola Israel does its best to maintain the volume of operation in Israel.
Guy Hadass was Motorola's guest at a media and analyst meeting in Chicago.
Published by Globes [online], Israel business news - www.globes.co.il - on Thursday, August 11, 2005