5. Motorola's semiconductor unit just couldn't seem to get it right in 2001. The global semiconductor recession that suddenly developed only exacerbated its core problems.
And it looked to me, as the year went on, that semiconductor was also losing the support and confidence of its corporate management. When I started flying to Phoenix in the early 1960s to cover this division as a reporter, it was a towering leader in the global chip business. And it was a vital part of the corporation. No more, it seems.
As Motorola's business started crashing in the spring of 2001, it wasn't all that clear initially to some observers that its semiconductor operation was in just as much trouble as was its notorious cell phone unit. Chip sales collapsed to $1.3 billion in the second quarter, a 38% drop from a year ago and off 12.2% from the previous quarter. Chip orders were even worse, dipping to $1 billion--a 9% drop sequentially and a 51% decline from a year ago. Moto's chip business turned in an operating loss of $381 million, off more than a half billion dollars from the $176 million earnings of the year-ago quarter!
Despite this first-half disaster, CEO Chris Galvin expected the semiconductor industry to "resume a double-digit growth pattern this year." But things at Motorola Semi went from bad to worse.
It seemed that Motorola managers were beginning to wonder if the next upturn in chips and cell phones would come in time to help their troubled company. At least three vice presidents left the company in August and some observers questioned whether president Bob Growney had over reacted by responding to reports that Motorola was thinking about selling or spinning-off its troubled semiconductor unit. Whatever the case, few companies could afford this kind of executive drain.
Motorola Semiconductor was given a firm deadline by corporate to cut its losses, turn itself around, restructure its business, and show an acceptable return on investment. We didn't know what deadline Motorola corporate gave its semiconductor unit to get back on track, but it didn't look like the chip giant made much progress in the third quarter in its attempts to improve performance.
The semiconductor outlook grew even darker in the third quarter. Galvin's predicted recovery for the global industry didn't come, and Motorola didn't see one coming until the first half of 2002. Motorola's chip business continued to struggle, showing an operating loss of $355 million on sales that fell 14% sequentially from the second quarter. It did manage to slightly narrow its losses, racking up an operating loss of $381 million in the second quarter.
The fourth quarter was also looking a lot worse. The electronics giant warned investors that it expected to post a loss for the fourth-straight quarter on sales that will be only flat to 3% higher than the just-ended third quarter. As problems deepened, Motorola decided to slash another 7,000 jobs, making a total of 39,000 positions eliminated in 2001--more than one-quarter of the company's total global workforce.
By fall, Motorola Semiconductor seemed to be no more than an asset the company needed to fix up so that it could be peddled for the maximum amount of money. CEO Galvin, whose grandfather founded the company, compared his semiconductor unit to the company's government business division that he sold recently. "Two years ago we were losing a lot of money in the government business, and we said there is no sense in selling it now or disposing of it now," Galvin recalled. "We fixed it. We got it generating significant positive cash flow and double-digit pretax profits. We sold it in September 2000."
Motorola Semiconductor would have to be valued a lot more than it was worth in November before Galvin would consider selling it, he indicated. "If you look at it from a marketplace standpoint and the business is valued at two, four, or six, or eight times sales, one can decide whether you want that in the portfolio or not," he says. "That's the essence of the plan we are working on right now for Semiconductor." Chicago never did understand Phoenix.
Meanwhile, things were going from bad to worse. A nervous Motorola decided in November to chop another 9,400 jobs, meaning that nearly one-third of its workers would be offed in the past year. Some 4,000 jobs of them would be coming out of semiconductor, which would also have to close down more of its chip plants as it was forced to establish an "asset light" manufacturing model. Its new "asset light" strategy sounded a lot like a previous plan the company came up with in 1998 to increase outsourcing and cut back its own production. But for some reason, that never happened.
The new strategy calls for shutting down a bunch of wafer fabs and eventually outsourcing half the company's CMOS-based products. That would enable Motorola Semi to return to double-digit operating margins, maintains corporate president Growney. "The 'asset light' model is an attempt to reduce the fixed expenditures in the business more significantly than we did before," explained CEO Galvin. "We will not build 300-mm fabs ourselves. We will do that in a partnership." That doesn't sound like the giant independent device manufacturer that I once knew.
(Return to 2001 Top 10 list or go to No. 6).