Christopher Galvin's six-year tenure at Motorola Inc. was generally considered a modest success. Similarly, Edward Zander merits, at best, a B-minus grade after four years as chairman and CEO at the communications equipment vendor.

It's Gregory Brown's turn now, and the odds don't really favor his doing much better than his last two predecessors, analysts and investors said last week.

Brown's appointment as Motorola's new CEO, effective in January, earned tepid support from shareholders, who boosted the company's stock price a mere 2 percent the day it was announced. The stock gave up all the gains in early trading a few days later, on Monday, Dec. 3.

The message was clear. It's going to take more than another change in executive leadership to turn Motorola around. Billionaire investor Carl Icahn was quick to dust off his old remedy, which calls for breaking the company into four separate entities. But even this drastic move, whatever its merits, has major downsides and cannot fix Motorola's immediate problems.

Fundamentally, Motorola suffers from a dysfunctional design and supply chain system that is prone to churning out one-time hit products in the wireless handset industry, a fast-growing market that analysts say requires quicker updates, a wider range of products and a deeper understanding of consumer preferences.

While Motorola has made advances in ensuring its manufacturing operation can respond quickly to changes in demand, its design operation has been slower to change, bogged down by a mentality that seeks competitive advantage through attention- grabbing products like the mid-1990s clamshell StarTac phone and the Razr earlier this decade.

By contrast, mobile handset market leader Nokia is not associated with a particular "wow" product, but rather, with a wide range of functional yet stylish equipment, giving it a robust 38 percent market share in the third quarter, according to market researcher Gartner Inc.

"Motorola is a pale version of the company it was a year ago," said Carolina Milanesi, research director for mobile devices at Gartner, in a statement late last month announcing total industry sales for wireless handsets. The company, she said, "needs a much stronger portfolio to return to its former market share."

It's a problem Motorola is keenly aware of and one the company is working to resolve, according to executives who spoke during a conference call to discuss the latest quarterly results.

Industry analysts, shareholders and other interested parties have heard that same promise from a succession of Motorola executives too many times in at least the past seven years.

When Zander became chairman and CEO in January 2004, for instance, the company was just emerging from several rounds of design and supply chain reorganization that helped lift earnings after the introduction of its first Razr phones.

First-quarter 2004 sales jumped 42 percent to $8.6 billion, from $6 billion in the 2003 comparable quarter. Gross margins improved almost one point, boosting earnings before taxes to $916 million from $257 million.

Motorola's wireless handset division, then called the Personal Communications Sector, contributed more than 60 percent of the revenue increase during the 2004 first quarter as unit shipments of handsets surged 51 percent. "Strong sales of new products introduced in the second half of 2003" were the primary driver, the company said in its quarterly SEC filing.

It has been downhill since then, culminating in a disastrous performance in the third quarter of this year, when wireless handset shipments sagged 31 percent, to 37.2 million units, compared with 53.7 million in the third quarter of 2006.

Market share at the division, now called Mobile Devices, sank nine percentage points in the 2007 third quarter, to 13 percent. Sales dropped 36 percent, or $2.5 billion, to $4.5 billion--not much higher than the $4.1 billion reported by Motorola in Zander's first quarter as Motorola's CEO in 2004. To be blunt, a breakup of Motorola would initially create nothing more than little pockets of trouble for the company's shareholders, similar to the situation they encountered in spinning off Freescale Semiconductor Inc., the company's former chip division.

Despite its current problems, Motorola remains a technology giant and still wields considerable clout in its various markets. In mobile handsets, Motorola slipped to third place behind Samsung Electronics Inc. in the second quarter, but the South Korean company's lead can easily evaporate if it fails to tightly manage its inventory, according to Gartner's Milanesi.

"Samsung will have to continue to closely manage its inventory in the last quarter of the year so they do not start 2008 on the wrong foot," she said.

Motorola's remaining two business reporting units, Home and Networks Mobility and Enterprise Mobility Solutions, are both profitable, posting combined operating earnings of $487 million for the third quarter. Mobile Devices, by contrast, posted a loss of $248 million.

Perhaps that is why Icahn wants Motorola split into four entities, including mobile devices, enterprise mobility, connected home and mobile networks infrastructure. The Mobile Devices division, which represents approximately half of Motorola's sales, is likely to face the most difficulty if the company does break up.

Additionally, a breakup would leave Motorola even more vulnerable than it is now as the emerging entities struggle to define their identities, hold on to customers and develop separate functional and administrative systems.

Moreover, the purchasing clout the company currently enjoys with suppliers will be sharply reduced at a time when even the more successful business units need to keep manufacturing costs down to maintain a competitive edge.

Still, Icahn might yet get his wish. Many Motorola shareholders are equally displeased with the company's recent performance. Analysts forecast that 2007 revenue will decline 14 percent to $36.7 billion, from $42.9 billion in 2006. The figure is up 17 percent from the $31.3 billion posted in 2004, Zander's first year at the company.

The outgoing CEO leaves an equally mixed record on the stock market. Since Jan. 30, 2004, Zander's first full month at the company, Motorola's stock price has risen a disappointing 11 percent. The Dow Jones Industrial Average rose almost 28 percent during the same period.

By: DocMemory
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