Foreign Rivals, Weaker Demand Threaten Motorola’s Dominance U.S. Telecommunications Giant May Be Losing Its Invincibility

For almost two decades, Motorola has been one of those elite companies that seemed to do everything right.

In the early 1980s, it jumped on the quality bandwagon before most of its competitors even knew there was a bandwagon, and in 1988 it won the federal government’s first Malcolm Baldrige National Quality Award.

It instituted a corporate-wide philosophy that called for creating “technology platforms” to spawn industries and perpetuate its dream of a wireless world. Trailblazing products such as vastly improved two-way radios, pagers and cellular telephones were the result of that philosophy.

More recently, the Schaumburg, Ill.-based telecommunications giant has trotted out a whole generation of sexy high-technology products, from personal communications systems and wireless modems to its nascent $4.7 billion Iridium satellite-based global communications system, scheduled for launch in 1997.

For the most part, investors have gone along with Motorola Inc.’s resolute vision of a wireless world. And why not? With 1995 sales hitting a record $27 billion and with cellular phones and pagers racking up annual growth rates of 40 and 50 percent, Motorola stock was among the bluest of the blue chips.

But after peaking at more than $80 in September, the stock started a decline that two weeks ago turned into a dive below $45 after the company shocked Wall Street with its fourth-quarter earnings report.

Profits not only failed to meet analysts’ expectations of growth, but actually fell 16 percent, to $432 million from $515 million in the year-earlier period. That translated into a profit of 72 cents per share - more than 17 cents below Wall Street’s consensus forecast.

The company’s stock rebounded somewhat by last week, closing at $52.87-1/2 on Wednesday, but fundamental questions remained:

Had Motorola miscalculated? Was its vision of a wireless world flawed? Suddenly the company that could do no wrong found itself under more scrutiny than it had been since it sold its faltering color television business to Japan’s Matsushita Corp. in the mid-1970s.

During a recent conference call with Wall Street analysts, fresh questions were raised about Motorola’s ability to compete with a new lineup of foreign competitors that are becoming increasingly aggressive in their efforts to cut into Motorola’s 50 percent share of the global cellular-phone market.

Other analysts wondered about the potential of maturing U.S. markets for pagers and cellular phones. Still others wanted to know if Motorola’s plan to spend billions of dollars building factories was on target at a time when increased capacity is flooding distribution channels and sales growth rates are falling off.

They pointed to the $40 million personal communications system facility announced last month for Elgin; the $750 million semiconductor plant in China; the $100 million cellular-phone factory in Harvard, and a $3 billion wafer plant near Richmond, Va., to turn out PowerPC microprocessors.

And they wondered about Motorola’s plan to offer buyouts to a third of the 3,200 employees at its Boynton Beach, Fla., pager plant - a plan Motorola called a rebalancing measure designed to shift more production to its newer “Flex” paging technology in Fort Worth.

The brain trust at Motorola was ready for the barrage of questions.

Ed Gamms, vice president of investor relations, said the company’s cellular-phone and semiconductor businesses likely would struggle through the first half of 1996.

Jim Caile, vice president of marketing for Motorola’s subscriber cellular group, pointed out what many analysts already knew: The U.S. cellular telephone market has hit a temporary plateau. Not only would sales of cellular phones be affected, but sales of semiconductors, which are at the heart of the mobile phones, also would be hurt.

Why? Because most people in the United States who can afford cellular phones already have them.

“We’re in a market that is shifting from business users, who are not particularly price-sensitive, to consumers, who are very price-sensitive,” said Morgan Stanley analyst Robert Maire, who predicted slowing growth as a result.

Motorola concurs and warned investors that the next couple of quarters could be sluggish as U.S. demand for cellular phones continues to be flat.

It’s a different story, however, on the international front.

“In 1995, we will end up with 80 million users worldwide,” Caile said. “That’s up from 54 million in 1994 and 33 million in 1993.”

Caile added that telecommunications still is a predominately wired industry, with wireless technology accounting for less than 2 percent of the total time people spend talking on the phone and communicating via computer and fax. That leaves substantial room for growth.

“A few years ago industry forecasts were that by the year 2000 there would be 100 million cellular-phone users worldwide and an equal number of pager users and 60 million to 70 million two-way radio customers,” Caile said. “Our latest data show a much different picture. We are estimating 150 million to 200 million pager users and from 200 million to 300 million cellular users. The potential for cellular has doubled from what it was two to three years ago.”

But analysts point out that just because the potential for growth in the international wireless markets is enormous, that doesn’t mean that Motorola will continue to dominate some 45 percent of it the way it does now.

“Motorola is not the only company with a vision of a wireless world,” said Hans Buehler, an analyst with Felbinger Ltd. in Frankfurt. “Everybody sees the potential for growth. Telecommunications companies from Hamburg to Tokyo are already elbowing one another for market share. This will be a bloody war, and only a handful will come on top.”