Will new leadership at Motorola Inc. change the fortunes of the company's troubled Semiconductor Products Sector (SPS)?
Although most of Motorola has fallen on tough times during the past few years, SPS has fallen harder and faster. With SPS facing problems, including excessive costs, a loss of technological leadership, and a major downsizing of its manufacturing operations, a new vision and strong leadership will be needed to rescue this division, iSuppli Corp. believes.
Motorola at 75
Christopher Galvin, the third-generation leader of Motorola, this week resigned as chairman and chief executive officer, citing differences with the company's board of directors. Galvin's resignation marks the end of an era for the electronics giant.
Paul Galvin in 1928 founded Motorola as the Galvin Manufacturing Corp. in Chicago. After several technical setbacks and one bankruptcy, the company survived. A half century after its establishment, Motorola emerged as the world's leading provider of mobile communications.
However, as Motorola turns 75, its leadership in markets it once dominated is long since gone. The once-innovative company known for both its technological and its manufacturing expertise now is seeking new leadership to reinvigorate and redefine itself.
SPS on the ropes
What's the likely impact of the change of leadership at Motorola on SPS?
SPS already has undergone its own management change recently, with Scott Anderson replacing Fred Shlapak as the president of the group in July.
Although Shlapak assumed control of SPS just as the industry entered its worst-ever decline, his actions only served to slow the group's financial bleeding. To Shlapak's credit, he did institute SPS' asset-light strategy and developed a strong partnership with Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), while forging an alliance between Motorola, Philips and STMicroelectronics.
As a result of his actions, Motorola SPS experienced a quarter of financial success. However, what price did SPS pay for its moment in the sun?
For the past 25 years, Motorola's name has been synonymous with manufacturing prowess. Yet, in the wake of its asset-light drive, Motorola now is operating only 10 of its original 28 manufacturing facilities. Of Motorola's remaining front-end fabs, none is capable of conducting volume production using 90-nanometer technology or 300mm wafers.
Making matters worse is the fact that several of Motorola's remaining facilities are located in high-cost labor regions of the world. Furthermore, there are persistent rumors that Motorola will divest from its 200mm facility in Tianjin, China. This at a time when most companies are trying to expand in China.
SPS' manufacturing operations were established in order to develop and to provide semiconductor technology to serve the needs of Motorola's equipment groups. SPS' process technologists and its R&D labs are still able to develop leading-edge technology. However, with no volume manufacturing capability for leading-edge products, one has to question the usefulness of Motorola's technology-development efforts.
SPS spin off?
To many observers, particularly Wall Street analysts, the answer to Motorola's semiconductor struggles has been to sell or spin off SPS. Indeed, speculation has been rampant that Motorola would take one of these options soon.
There is some precedent at Motorola for divestitures. The company spun off its older discrete product lines to form ON Semiconductor.
However, spinning off SPS as an integrated device manufacturer (IDM) or as a foundry would generate a new set of problems for the fledgling company. With its less-than-cutting-edge fab capabilities, the fledgling company would face tough opposition from all of the second-tier manufacturers, while having little to no distinctive competitive advantage. Selling SPS' existing fabs to another semiconductor market also is highly unlikely because most suppliers are trying to rid themselves of older manufacturing facilities, rather than trying to buy more.
SPS' financial position
Motorola's strategic challenges regarding SPS are reflected in the division's poor financial performance. Motorola's revenue in the first quarter declined 10.6% on a sequential basis. Revenue declined by another 3% in the second quarter.
With revenues of $2.2 billion in the first six months of 2003, SPS remains ranked among the top 10 semiconductor suppliers, according to iSuppli.
However, Motorola SPS was the only company in the top 10 to see its revenue decline compared to the first half of 2002.
The average revenue increase among the top 10 companies was 10%. But SPS' revenue declined by 1.8%. Based on this performance, one could argue that Motorola' asset-light strategy is also a revenue-light strategy.
Innovation is the key to success, and who knows that better than Motorola? The right kind of innovation could help SPS achieve success whether Motorola keeps the division or not.
However, it's questionable whether SPS' new products have scored enough design wins in high-growth product segments to turn around the group's performance.
Approximately 60% of SPS' revenue is derived from the wireless and automotive markets.
Although it has been Motorola's strategy to win in automotive, and this area is one of the most stable segments for semiconductor suppliers, it also yields one of the lowest profit margins of any major chip application market.
In wireless communications, SPS has pinned its hopes on China and sales of components to other phone makers. SPS derives only 7% of its revenue from the high-growth consumer market.
Like all major semiconductor companies, Motorola SPS is expanding in Asia/Pacific. iSuppli estimates that more that 35% of SPS' revenue was derived from sales in this region. China accounts for 10% to 13% of SPS' Asia revenue.
The wireless market in China is undergoing severe price pressure. At the same time, Chinese consumers are demanding new phone models with features that Motorola hasn't incorporated yet. A fast-follower strategy will not win in this market.
Motorola's global market share in mobile phones continues to come under pressure from Nokia, Sony-Ericsson, Samsung and a large number of second-tier companies. The key to winning in this market is to offer the right product with the right features at the right price.
Motorola does not receive high marks here either. Unlike most major handset suppliers, Motorola waited until the second half of 2003 before introducing a large variety of feature-rich phones.
Can Motorola recover to once again become a dominant company?
The answer to this question starts with a vision and strong leadership. In the coming weeks, Motorola faces two of its most difficult questions in its 75 year history: Who will replace Galvin and what should be done about SPS? Motorola's next 75 years are riding on the answers.
Len Jelinek is a principal analyst with iSuppli Corp. Additional information on semiconductor manufacturing capacity is available in Jelinek's report, Factory Utilizations Improve as Manufacturing Embarks on a Slow Sustained Recovery, from iSuppli's Semiconductor Manufacturing service. Contact him at firstname.lastname@example.org