By Bruce Einhorn in Shanghai, with Dexter Roberts in Tianjin and Roger O. Crockett in Chicago
Can Motorola hang on to its top spot as local rivals come on strong?
It's a wild night at the old Exhibition Center in Shanghai. The Soviet-style palace, dating from the glory days of Moscow's friendship with the People's Republic, is the unlikely setting for a gala launch of new cellular phones from Motorola Inc. Outside the hall, white Motorola balloons flutter in the brisk winter air, while purple and red spotlights project the company's logo and Chinese slogan, Nihao Moto (Hello Moto), on the building's pillared facade. Inside, hundreds of guests listen to popular tunes, watch movie trailers, and play games -- all on shiny new Motorola phones. Then it's time for a banquet of shark's fin soup and other Chinese delicacies while fashion models showing off Motorola handsets strut across the stage to a steady rock beat. Quite a show -- and a symbolic leap into the future for the American high-tech icon. The January event marked the first time Motorola has launched a new global product line in Asia. The choice of China should come as no surprise. As the world's largest cellular market, with 200 million subscribers, China is the marketing fixation of every company in the industry. And Motorola was a China pioneer. Current Chairman Christopher B. Galvin first visited Shanghai as a rising exec and met with Jiang Zemin -- then a little-known local party functionary, now China's President -- in 1986. The U.S. giant has been nurturing the Chinese market ever since, investing $ 3.4 billion in manufacturing and research and development facilities there, more than any other Western company.
That commitment has paid off. Motorola sells more cell phones than anyone else in China: nearly 17 million in 2002, according to market researcher Adventis Corp. Last year, Motorola manufactured telecom and other equipment valued at $ 5.7 billion in China, selling roughly $ 2 billion worth abroad, making it one of China's top exporters. Some 20% of the company's $ 26.2 billion 2002 revenue came from China, according to brokerage Bear, Stearns & Co., and Motorola executives confidently predict sales will continue to increase at double-digit rates.
Even more important, analysts say Motorola is profitable in China. And it's growing faster there than anywhere else -- big news for a company that has been languishing in the red and is expected to eke out just a small profit globally for 2002. ''China has been great for Motorola,'' says Mike S. Zafirovski, the company's president and chief operating officer, who flew into Shanghai for the bash. ''It's very much a bright spot.''
But no number of sultry fashion models, flashy billboards, or shark fins can hide the fact that the bright spot may soon start to dim. Archrival Nokia has poured $ 2.4 billion into China and has a giant complex making cell phones and components near Beijing. Korea's Samsung Electronics is benefiting from looser regulations following China's 2001 entry into the World Trade Organization. Even more ominous for Motorola is new competition from local Chinese handset makers. They had less than 3% of the market as late as 1999 but today control some 26%, according to Adventis. Meanwhile, Motorola's market share slipped to 28% last year, from 31% in 2000.
Motorola is in little immediate danger of losing its lead in China, but there is no denying that local rivals are coming on strong. Many Chinese companies plan to double or triple their capacity, flooding the market with handsets and driving down prices. In the past year alone, the average price of a phone in China fell by 15%, to $ 170, according to Beijing-based Norson Telecom Consulting. ''If the local guys get too much market share, that could put huge pressure on Motorola,'' says Bear, Stearns analyst Wojtek Uzdelewicz.
That's pressure the company can't afford. Outside China, key customers for Motorola's networking gear -- wireless operators such as Europe's T-Mobile International and Verizon Communications in the U.S. -- have slashed spending dramatically. Motorola's infrastructure business throws off so little profit that company execs floated the idea of selling it. Its semiconductor group, though recently reorganized, isn't doing much better. The bottom line: Investors have pushed Motorola shares down 60%, to $ 9.30 a share, over the past two years. No wonder China, the source of 30% of its handset sales, is a beacon for the company. ''This is our most important market,'' says Scott A. Durchslag, Motorola's corporate vice-president for strategy and business development.
Yet Motorola has made some recent missteps in this key market. The company made headlines with a $ 1.5 billion semiconductor plant in Tianjin to make phone-handset chips, even though many questioned the fab's economic viability. The facility was to be one of the most advanced chipmaking factories in China. Now, due to slack global demand for chips -- and a glut of capacity -- the company has been slow to ramp up manufacturing at the completed plant. ''It's prudent to wait until we have something tangible'' in terms of demand, says Joe Steinberg, Tianjin-based vice-president and general manager of Motorola's China chip division.
The chip plant is crucial to Motorola's plans to deepen its roots in China. The company already employs some 1,300 Chinese engineers doing research for products such as mobile-phone handsets and semiconductors for PCs. Motorola is also hiring more local designers, since China's millions of cellular subscribers are growing increasingly savvy and trend-conscious. ''The Chinese have become very knowledgeable about phones,'' says Brian Holmes, Motorola's senior director for product marketing in China. ''They do their homework.''
So Motorola is introducing models with more flair. Analysts have criticized Motorola's Chinese phones as technology winners with ho-hum design, especially when compared with the offerings of local rivals. TCL International Holdings, a manufacturer in Guangdong province, features a diamond-encrusted handset. Eastcom, a state-owned enterprise near Shanghai, sells a $ 425 phone that's covered in specially treated fish skin.
To fight back, Motorola now sells a faux-diamond-studded handset of its own. And it's hoping mainland consumers will fall for phones that can better handle Chinese-language text messages and double as karaoke machines or e-books -- innovations that local rivals have a hard time matching. ''In the past, Motorola's reputation was more for good quality,'' says Tim Chen, chairman of Motorola's China operations. ''Now it's much more trendy.'' Of the 20-plus new models that Motorola will launch in China this year, at least a dozen will be phones that can send and receive photos, says Brian Lu, Beijing-based vice-president and general manager of Motorola's Greater China handset group. Lu vows that such products will tame the wild ambitions of Motorola's local rivals. ''It will be difficult for them in the long haul,'' he says. ''They don't control the technology. They don't control the R&D.''
Yet the Chinese may be stronger than Lu thinks. Take Ningbo Bird Co., a Chinese mobile-phone manufacturer that is currently ranked No. 6 in China but is growing at a torrid pace. Ningbo Bird last year made more than 7 million phones and has just opened two new factories that nearly triple its capacity. Furthermore, even though Ningbo Bird has in the past relied on others for its technology, it's boosting its R&D and designed 15% of the phones it made last year. With all that capacity, Ningbo Bird will be looking to markets beyond China. ''The competition will be even more intense, so we have to export,'' explains Ma Sitian, the company's deputy general manager.
That's what should scare Motorola the most. Virtually every product made in China -- from sneakers to DVD players -- quickly drops in price as manufacturers gain scale and low-paid workers churn out goods by the container-load. At the same time, even as demand for phones continues to climb in China, the rate of growth is slowing. So, like Ningbo Bird, other Chinese rivals will begin selling their phones abroad, potentially hurting Motorola's sales worldwide.
Team Motorola is determined to stay ahead of the game. So Motorola has hatched a strategy that executives dub ''Two plus three plus three.'' The ''two'' refers to Motorola's primary operations in China, manufacturing and R&D. The first ''three'' refers to the businesses Motorola wants to expand in China: semiconductor production, broadband equipment, and digital-trunking networks (the mobile-communications systems used by police and taxi drivers). The final ''three'' refers to targets Motorola has set for yearend 2006: $ 10 billion worth of production in China, purchases of $ 10 billion worth of components in the country, and $ 10 billion in direct or indirect investment by Motorola and its partners. In short, the company wants to cut costs via local sourcing and boost its strength in new areas where there are fewer worries about Chinese rivals flooding the market with me-too products.
A critical part of Motorola's strategy is to show Beijing its commitment to the Chinese economy. ''We take pride in viewing ourselves as a very local company in China,'' says COO Zafirovski. And since Motorola isn't blind to Beijing's desire to boost China's science and technology prowess, it recently announced a $ 100 million expansion of an R&D center in the capital. ''There is a lot of trust on the Chinese side because Motorola has put a lot of investment into the country,'' says Craig Watts, an analyst with Norson Telecom Consulting.
Motorola is even prepared to work with the companies that are eating away at its top position in handsets. Motorola has agreed to sell chips for cell phones to TCL and Eastcom. As a bonus, if Motorola can get local manufacturers on its customer list, the Tianjin chip fab might see enough business to get the production lines running full-bore.
Even as local rivals nip at its heels, Motorola's Chinese adventure has been a great success. Motorola ''is well established, and it will take some time to dislodge them,'' says Duncan Clark, an analyst with Beijing-based telecom consultant BDA China Ltd. Given the threat to Motorola's market share in China, though, the company has to keep moving -- especially in light of its history elsewhere. Bear Stearns estimates that since the mid-'90s, Motorola's market share in handsets has slipped from about 50% to 30% in the U.S. and from more than 30% to less than 10% in Europe. In the context of those setbacks, China is the gamble Motorola has to win.
Handset Combat Global players dominate the Chinese mobile market -- the world's biggest -- but scrappy locals are growing fast MOTOROLA The longtime leader in China is now trying to create a hipper image to woo young buyers. Market Share: 28.0% NOKIA Has invested more than $2.4 billion in China, but it doesn't make newly popular CDMA handsets there. Market Share: 22.4% TCL Chinese TV maker has only made handsets since 1999 but is rocketing up the charts. Market Share: 8.1% SIEMENS Made 13 million phones in Shanghai last year and now has R&D center in Beijing. Market Share: 6.9% SAMSUNG Gaining ground thanks to strength in CDMA. Has partnership with Guangdong-based China Kejian. Market Share: 6.3% NINGBO BIRD Chinese upstart built 7 million phones in 2002 and has just tripled its production capacity. Market Share: 4.4% Data: Adventis
To state that the technology is complementary at this stage is presumptuous (since it implies a level of control by the telcos which simply doesn't exist) and smacks of desperately trying to associate with a hot new area of growth. That said, it's probably the thing that could still save some of the telcos from the train wreck that lies ahead... (telecom services price deflation combined with a mature market is a lethal combo).
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