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Motorola Misjudged Chip, Cellular Markets

Thu., Jan. 11, 1996, midnight

Motorola Inc. made too many cellular phones, not enough pagers, and too few semiconductors in the fourth quarter, causing its first profit decline in four years.

The company said it may take several quarters to bounce back from a slump in cellular phone sales and semiconductor capacity constraints.

“It’s a case where you had too much competition coming too quickly and the company didn’t prepare for it fast enough,” said Albert Lin, an analyst at Cowen & Co. “And it’s an industry so young that there are no rear-view mirrors.”

Motorola was hit broadside in the cell phone market by Nokia AB and LM Ericsson, which took about 5 percent of Motorola’s cellular phone market share in 1995, Lin said. Motorola’s fourth-quarter earnings fell 16 percent.

At the same time, the company failed to get up to speed in making semiconductors, which are an integral part of its products. Motorola’s paging business in particular suffered from a lack of chips. Pressure to lower its cellular phone prices hurt Motorola’s margins. The company said it plans to spend $4.4 billion in 1996 for new plant and equipment to boost its supply of semiconductors. It already plans to build a $3 billion chip plant near Richmond, Va., to make PowerPC microprocessors. Still, Motorola’s problems won’t end any time soon.

“They’re in more of a trough than a rut,” said Lin. “It’s going to take a couple of quarters before investors see hard evidence that Motorola is a great company that they need to own.”

Analysts said the Schaumburg-based company will have to concentrate on replacing low-profit, aging cellular phones with ones consumers are excited to buy.

One in 10 people in the U.S. has a cellular phone and demand is slowing. Analysts said the U.S. market will increase about 35 percent this year compared with the 50 percent average increase over the past few years.

Lower prices from phone companies providing cellular service is what’s needed, Motorola said.

“More competition will cause service fees (for customers) to come down and that, in turn, will spur demand,” said George Grimsrud, a Motorola spokesman. And that will spur more customers to buy phones.

Some service providers say they already are seeing a pick-up in demand.

Rick Conrad, regional president of Bell Atlantic Nynex Mobile in the New York and New Jersey metro region, said there has been a surge in demand in a new program called TalkAlong, which offers low monthly service charges.

Meanwhile, new technologies such as personal communications services - a new generation of cellular phone - also will spur demand. Motorola, in a conference call with analysts Wednesday, said it is beginning to get equipment contracts with PCS companies that are building nationwide networks, although significant revenue won’t be generated until late this year.

Motorola needs to get its semiconductor expansion up and running, analysts said.

About 18 percent of Motorola’s total chip production is consumed internally, mainly for cellular phones and pagers. The longer the delays in increasing chip capacity, the more the company will suffer.

“More time spent trying to tweak means worse financial prospects,” said Cowen & Co.’s Lin.

In the end, analysts said the changes needed at Motorola are already being put in place and that the company is well aware of the problems it faces.

“This wasn’t the wake-up quarter for the company; it may have been for investors.” said Lin.

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