Analysts see a tough battle for the handset maker to increase sales amid a global economic downturn. Motorola's own expectations for the current quarter are low

The latest flurry of turnaround plans for Motorola is being met with about as much enthusiasm as previous attempts to revive the company's foundering mobile-phone business: not much.

During an Oct. 30 conference call discussing the third-quarter results that included falling sales and a wider loss, Motorola (MOT) co-CEO Sanjay Jha outlined plans to reduce costs, streamline the way the company makes products, and delay a spin-off of the handset business. Along with a dour warning that sales will continue to slump, the announcements did little to shore up confidence. Motorola's already embattled shares tumbled 5.3% to 5.17. RBC Capital Markets analyst Mark Sue cut his 12-month Motorola price target to 7 a share from 8.

To trim losses and help eliminate $600 million in expenses, Motorola plans to cut about 3,000 jobs, two-thirds of them in the handset division. The company will also reduce its focus on certain markets, such as Europe, while stepping up emphasis on the Americas and China. Motorola also plans to retool products so that it makes low-end phones based on its own software and high-end phones that only run Microsoft's (MSFT) Windows Mobile operating system and the Android software developed by the Google (GOOG)-led Open Handset Alliance.

Grim Outlook

The moves are aimed at restoring the company's dwindling fortunes. In the third quarter, the operating loss at Motorola's handset division widened to $840 million from $248 million a year earlier. Unit sales dropped 32%, to 25.4 million from a year earlier, and the company's market share plummeted to 8.4% globally, down from 9.5% in the second quarter and 22.4% in 2006, when Motorola's Razr handset was all the rage. In the period, Motorola lost its No. 3 place among the world's largest handset makers to Sony Ericsson, according to Strategy Analytics.

Prospects have only worsened this quarter—traditionally the most crucial for cell-phone makers because it includes yearend holiday purchases. Jha expects unit sales to be lower than in the third quarter. That's in contrast to industry trends. Global cell-phone shipments should rise 10.5% to 11% in the quarter, according to research firm ABI Research.

Will revival efforts by Jha and co-CEO Greg Brown work? Not immediately. Motorola's market share is likely to keep falling in the coming year, say analysts including Matt Thornton of Avian Securities and Ken Hyers of Technology Business Research. Thornton says the company's share could dip to as low as 6% next year.

As Motorola focuses on making its phones more profitable, analysts say it may sacrifice the scale that makes it able to compete with bigger rivals including Nokia (NOK). The company currently sells about 100 million units a year; as the number drops, the cost of making each phone may increase.

"They are getting dangerously close to losing that valuable scale," says Neil Mawston, director of mobile wireless practice at Strategy Analytics in London. Once production slips below 100 million annually, per-unit costs could rise by 10% to 20%, he estimates. These higher costs could, in turn, make winning new, profitable deals with carriers harder. "No one wants to catch a falling knife," Mawston says.

Fewer Operating Systems

Jha argues that some smaller handset makers are doing just fine. "Scale in wireless is important," he tells BusinessWeek. "But there are meaningful [companies], namely Apple (AAPL) and Research In Motion (RIMM), who have much less scale than we do." Each sells about 10 million phones a year. "We are fortunate to have the scale," he adds. "But as we move forward we have to make a trade-off. It's not by design that we want to lower volume, but as we migrate the business to a place it needs to be,, this is part of the trade-off that happens in that transition period."

Part of Motorola's transition is cutting fat. After trimming $474 million in operating expenses this year, the handset division has earmarked another $600 million in expense reductions for 2009. The company hopes to reduce costs partly by building phones out of parts from fewer vendors. To that end, Motorola has already ended contracts with chipmaker Freescale.

Motorola also wants to use fewer operating systems. But what happens if a wireless carrier wants Motorola to build phones using a system other than the handful it has chosen? "There's very much an addiction to winning big chunks of business," says Bill Hughes, who formerly worked at Motorola and is now principal analyst at In-Stat. "If you give them a big enough order, they'll build it. The fact of the matter is, they've talked about [reducing the types of software they support] several times in the past couple of years. But it all comes back to their addiction to big orders."

Investing in a Comeback

This time around will be different, co-CEO Brown tells BusinessWeek. Jha's predecessors lacked his mobile-industry experience and technical expertise. The former COO at mobile chip maker Qualcomm (QCOM) is credited with helping turn Qualcomm's chip division into the largest mobile chip business in the world, with $5.7 billion in sales last year. He burnished Qualcomm's reputation as a nimble, innovative competitor. And he was the point person for developing the company's road maps and plotting forays into new wireless technologies. "There has never been [a leader] with the caliber of software and technical leadership of Sanjay at Motorola before," Brown says. "He is taking it to next level swiftly."

Taking Motorola to the next level will require investing, however. To collaborate with Microsoft more closely on Windows Mobile devices, Motorola will open an office in Seattle. Motorola is also beefing up its software team that works on the Android operating system. Jha will also spearhead efforts to bulk up the services that would come standard on Motorola handsets. "Services and [user experience] will become very important," Jha said during the earnings call. Motorola may develop a way to help consumers to easily find the nearest hair salon or a coffee shop, for example. "We want to solve the problems that consumers want solved."

Adding to the challenges facing Jha, who joined Motorola in August, is orchestrating a comeback amid a global economic downturn and slowed cell-phone sales growth. The last time Motorola suffered massive market share losses, its share dropped from 27% in 1996 to 13.9% in 2002, before its legendary Razr phone launched, according to Strategy Analytics. Even after the Razr became a bestseller, Motorola's market share never rose to its former glory. "Motorola has recovered from a slump before, but it took them a full 10 years," Mawston says. "That gives some idea of how big a task Motorola still faces."

Source:BusinessWeek