Motorola Goes After Nokia
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Motorola is on a mission to dislodge European phone maker Nokia from the #1 phone slot.

Motorola Chief Executive Officer Ed Zander is betting a new generation of super-thin, low-cost phones will help him boost profitability and break the dominance of industry leader Nokia. Motorola had a 16 percent share of the Asia Pacific market in the second quarter, trailing Nokia’s 35 percent. Motorola has a 22 percent share of the global market, compared with 33 percent for Nokia, Strategy Analytics said in an Aug. 15 report.

“This is our chance to go after them,” Zander said in an interview this month. “We know where the No. 1 gets its numbers. It’s these emerging markets, and we have to go in there and go meet them.”

Motorola, the world’s second-largest maker of mobile phones, will start shipping the 1/3-inch-thick Motofone, its thinnest product yet, next month as it seeks to build on the success of the half-inch Razr. The first of the Scpl (pronounced “scalpel”) line, Motofone uses fewer parts, multiple-function chips and more efficient software to cut manufacturing costs.

The Motofone design means as many as 15 phones roll off the production line every second, up from five a second for the Razr. Zander needs that increase in productivity to reach an operating margin of 13 percent to 15 percent, a goal he has failed to meet since taking over in 2004. He declined to say when he might hit his target.

Even after selling more than 50 million phones in the Razr line, Motorola’s 11.2 percent operating margin — or percentage of net sales left after subtracting the costs to make and sell products — lags behind Nokia’s 16.7 percent.

Toward 15 Percent

“The Scpl Motofone will be the quickest-to-manufacture product in the world,” Ron Garriques, president of Motorola’s mobile unit, said in an interview. “This platform will bring us toward that 15 percent profit number.”

Boosting profit margins and the company’s share of emerging- market business at the same time may be tough, said Inder Singh, an analyst at Prudential Equity Group Inc. who rates Motorola shares “neutral” and doesn’t own them.

“Entering emerging markets and looking for margin expansion is somewhat challenging,” said New York-based Singh. “Most new entries to emerging markets are tagged with higher initial costs, and Nokia being an entrenched competitor in many of those markets makes it harder.”

Shares of Motorola, up 4.6 percent this year, declined 17 cents to $23.63 yesterday in New York Stock Exchange composite trading. Shares of Espoo, Finland-based Nokia, up 7 percent this year, slipped 2 cents to 16.53 euros in Helsinki.

While the Scpl line will have some high-priced models, it will start with an inexpensive phone to capture market share in faster-growing regions. The introduction strategy contrasts with the first Razr phones, which targeted customers willing to spend more for a camera and other features.

Working Up

“We launched the Razr platform at the $800 price point and worked our way down,” Garriques said. “With the Scpl we’re using it to work up. We’ll have more scale faster than we had on the Razr platform.” Motorola already has orders for 2 million Motofones in India, Pakistan and Bangladesh, he said.

Zander said he expects to sell phones as cheap as $35 in emerging markets. Total handset sales in the Asia Pacific region gained 52 percent in the second quarter, compared with just 9.5 percent in North America, according to research firm Strategy Analytics in Milton Keynes, England. Motorola hasn’t yet priced the Motofone.

“The opportunity in this market is the unconnected,” said Zander, 59. “It’s giving billions of people the capability to make a phone call, and you eventually get to sell all this other cool stuff.”

 

Trimmed Costs

In the same quarter, Motorola’s profit from continuing operations rose 47 percent to $1.35 billion, and Nokia’s net income jumped 43 percent to 1.14 billion euros ($1.5 billion). Both companies were helped by demand for phones in India and China, as well as pricier models.

Garriques, 42, trimmed costs and production time for the Motofone by integrating multiple functions into each electronic component to cut the number of parts. He also increased the number of parts used across the Scpl range, allowing Motorola to command lower prices from suppliers.

The company designed new software that requires less memory, new battery technology and a one-piece casing design to keep costs down. The phones have features tailored to emerging markets including displays for bright environments and longer battery life.

Razr sales will exceed the Scpl through 2008 as Motorola develops clamshell and keyboard Scpl models and introduces new Razrs with the goal of selling 300 million to 500 million of the current generation before the end of the line, Zander said.

He said teams are already working on the successor to the Scpl, which may arrive as soon as 2010. Motorola must keep introducing products to remain ahead of competitors in the same markets who copy elements of Motorola’s most popular designs, said Prudential’s Singh.

“In a world in which it’s easy to become the victim of copycats you have to run faster than the competition,” Singh said. “It’s not a sprint, it’s a marathon.”