While we haven’t heard a howl of calls for the head of Motorola CEO ED Zander, we have certainly heard murmurings. Finding a CEO for a high profile, major global supplier to something as technologically intense and competitive as handset creation is a tough assignment, not undertaken lightly. Finding Zander was tough. Finding a second messiah, having already found Zander to turn around Motorola might be an almost impossible task.
On the conference call Zander sounded irked, irritated and serious as he explained to analysts that the previous head of the handset division had failed to find cost reductions, failed to keep an eye on profitability, failed to bring new 3G technologies to market quickly enough and failed to keep up with the intense competition in both third world and European markets.
Zander at least was giving nobody a second chance in order to show that he’s ruthless enough to deserve one himself.
For Zander this is the first major crisis of his so-far shiny tenure, and he cancelled his keynote spot at this week’s CTIA Wireless show, to show he was knuckling down and sorting out the problems. He earned his spurs when helping Scott McNealy turn around Sun Microsystems and there he will have learned some valuable lessons, because it was also a company focused on technological excellence. The difference is that Motorola is up against more powerful and often more commercially agile competitors, and it has a really tough job adapting advanced platforms for an increasingly price constrained market.
When Zander arrived at Motorola he found that the RAZR was virtually ready for launch and he fired the launch button, gaining most of the plaudits himself. He also signed the deal that led to joint development between Apple and Motorola on a music phone. That deal is largely seen as creating the dissatisfaction that led to Apple going it alone in handsets with the iPhone. So that one was a minus.
This week the honeymoon period seemed to have ended, as Motorola followed a poor fourth quarter, with margins collapsing amid the shift to low end, emerging markets, with a Q1 loss, profits warning and the abrupt departure of the chief financial officer.
This followed the resignation of Ron Garriques, the head of Motorola’s core cellphone division, who had previously been seen as a possible successor to Zander, but it was he who took the flak for the failure to replace RAZR with an equally convincing device. Analysts are now convinced that Zander was over-optimistic when he said at the start of the year that Motorola would return to double-digit operating profit in the second half of the year.
One problem in Q1 was that Zander’s gamble to boost margins by pulling back on its relentless quest for market share seems not to have paid off. The other cellphone leaders, Nokia, Samsung and Sony Ericsson, have been wary of racing headlong into the ultra-low cost market, despite the lure of the huge market shares promised by emerging user bases such as India’s.
This week Zander re-iterated his promise to go after only profitably market share, an instruction that he said he issued in January and which, we are led to believe, Garriques misinterpreted.
Nokia, in particular, also aims to enter these markets primarily through midrange devices geared to relatively high income users, which will become more mainstream as economic growth boosts average spending power. But Motorola has led the charge to create mass market offerings in order to dominate these new mobile economies, saddling itself with an exaggerated version of the dilemma always faced by phone makers – market share versus margins.
However, without a high end handset to equal RAZR’s impact as yet – and with Nokia and others coming up with attractive devices such as the Nokia N95, Apple iPhone and LG Prada – a shift of balance towards higher value products has not driven impressive results yet. Motorola decided to hold back on price cutting on some of its low end and midrange models, only to find that customers shopped elsewhere in this category, while high end purchasers looked to the new range of multimedia products from companies like Nokia.
Zander shocked Wall Street by announcing sales for the first quarter would be at least $1bn below the estimates made only 10 weeks ago, around $9.2 billion to $9.3 billion. The CEO also expects sales, profitability and operating cash flow for the full year to be ‘substantially below prior guidance,’ although he reckons it will be profitable with most of the effects coming in the first two quarters. The other major issue he discussed was the limited choice from Motorola of 3G products for the ultra-competitive European market.
Motorola’s immediate response to the crisis is to cut 3,500 jobs and to take steps to reduce other costs whilst announcing the departure of CFO David Devonshire. His place will be taken by acting CFO Thomas Meredith – a board member, reflecting that the board of directors is becoming intolerant of Zander and seizing some direct influence. Greg Brown, currently head of Motorola’s Networks and Enterprise arm, will become president and COO and will look after the all important handset division directly. This post has been vacant but Zander clearly felt the need to convince shareholders that he would step up the focus on operational efficiency and excellence, always a greater challenge for the company than technology. Mike Zafirowski, who was COO and president under Galvin, was well respected in this position but now heads up Nortel.
In addition to the management reshuffle Motorola is now accelerating the size and scope of the existing billion share buyback program, to $7.5bn – a move that meets many of the demands of corporate raider Carl Icahn, previously snubbed by Motorola. Icahn has been increasing his holding in Motorola stock, now at 2.7%, and is putting himself forward for election to the board. But he wants the company to use all its $11.3bn in free cash to finance stock repurchases, so management presumably thinks that, by making some concessions, they will reduce the strength of his appeal to shareholders and keep him off the board.
While it is important that Motorola continues to preserve the momentum behind its operational improvements program – which still sees it well behind Nokia in terms of execution and supply china excellence – none of its turnaround plans will be radical enough without new cellphone models. It’s time for Zander to go back own to the labs and discover another RAZR lurking there. And if he doesn’t he won’t be able to build one overnight and even if he does, it will take time to bring to market in volume.
Edward Snyder, an analyst at Charter Equity Research, echoed the views of many, saying Motorola is ‘losing a ton of money in phones. The company needs to release a set of new phones designed for lower prices, they need to design lower priced phones that are designed to be profitable at a much lower price. And that’s going to take about a year and half.’
If that’s the case it may be too long a period for Zander, since he has promised what is in effect a 6 month turnaround. He is a strong CEO with many achievements under his belt and the potential to create a turnaround akin to that of Nokia, whose own dark days of 2004-5 are now widely forgotten by the fickle mobile investment community. But with Icahn beating at the door and Nokia and Sony Ericsson storming, he may not be given sufficient time to show what he can do.
One of the new devices that throws Motorola’s current product hiatus into sharpest relief is the Nokia N95 flagship media device, which has now started shipping in key European, Asian and Middle Eastern markets.
The product includes HSDPA and Wi-Fi connectivity, a 5megapixel camera, a two-way slide design, integrated GPS and a wide range of multimedia capabilities. UK retailer Carphone Warehouse expects to have the product available on April 1 with the unsubsidized retail price likely to be about €550 ($734) Carphone Warehouse says it is facing high demand and rationing sales to one unit per customer for now. With no US release date set yet, the grey market is flourishing, with N95s selling for $1,200 on the eBay auction site.