Thursday, August 21, 2008

Motorola Slumps in China

Sanjay Jha, the new co-chief executive officer of Motorola (MOT), is looking for ways to revive the company's handset division, and China is bound to be one of his most important challenges
(, 8/4/08). The country should be easy territory for
Motorola: China is the world's largest cell-phone market, with more
than 500 million people owning mobile handsets, and it wasn't that long
ago that Motorola was the market leader. The company, which spent many
years building its operations in the country, was No. 1 in China (, 9/23/03) until 2004.

Even after Motorola fell behind Nokia (NOK)
in China, it clung to a respectable No. 2 position in the fast-growing
market, and in April 2007, that second spot meant Motorola still had
more than a 20% share. But as the company's fortunes suffered
worldwide, its China business was no longer a sure thing. Over the past
16 months, Motorola's China sales have "plummeted," says Flora Wu, an
analyst in Beijing with BDA China, a market research firm. Today, Nokia
is tops in China with 38% of the market. No. 2 is now Samsung Electronics, with 16%. Motorola is a distant third, with just 7.5% market share.

What went wrong? To some extent, Motorola in China faces the same
problem that plagues the company everywhere: failing to produce an
encore to the tremendously successful Razr, which it introduced back in
2004. And coming out with new and interesting models is especially
important in China, where big-city consumers replace their phones
frequently and put a priority on models that are cool-looking but
reasonably priced. Motorola "just had problems launching new and
popular models," says Wu. "The Chinese market is one of the most
competitive," she says. If you're an executive at a company that
doesn't keep pace with what your rivals are launching, "your market
share will decline sharply."

An Olympic Gag Order

It hasn't helped that Motorola's biggest rivals have been so good at
tackling the China market. Samsung is a global sponsor of the Beijing
Olympics, which means it is the only cell-phone maker allowed to
advertise in Beijing during the Games. So, while the Korean company
plasters billboards and bus stops with ads for its phones, Motorola
can't respond. The U.S. company even had to take down a big sign atop
its China headquarters in downtown Beijing. Samsung is also sponsoring
the Chinese gold-medal-winning men's and women's gymnastics teams.
"When they receive a gold medal, they're wearing the Samsung shirt,"
boasts spokesman Gyehyun Kwon, a Samsung corporate vice-president.
"That way, Chinese people [see] Samsung is really helping the Chinese

For its part, Nokia remains comfortably ahead of the pack in the
country, with models ranging from high-end handsets for affluent
residents of big cities like Beijing and Shanghai to inexpensive
entry-level phones suitable for new users in the countryside. "Nokia
has really covered every segment of the market," says Dave Carini, an
analyst in Beijing with market-research firm Maverick China Research.
To develop its China business further, the Finnish company announced
last month plans for an additional $150 million in its in-house venture
capital fund targeting potential investments in China and India.

Restructuring May Boost Motorola

The news from China hasn't been all bleak for Motorola, however. The
Schaumburg (Ill.) company has managed to win some important
infrastructure contracts recently. For instance, early this month
Motorola announced in the first half of the year it had landed $431
million in contracts to provide China Mobile (CHL),
the country's top cellular operator, with second-generation GSM
equipment. That's up from $394 million for the same period in 2007.

A government-backed restructuring of the country's state-owned
operators might also boost Motorola's business, says Simon Leung,
president of Motorola Asia-Pacific. Following the restructuring, there
will be three Chinese cellular operators: China Mobile, current No. 2
China Unicom (CHU), and China Telecom (CHA),
which until now had been a fixed-line operator without a cellular
business. Motorola, says Leung, has good relationships with each
operator. "We are the only ones with the technology to address the
needs of all three of them," he says. "We are in a very good position."

Stay Tuned for New Models

When it comes to handsets, "we do have a gap" with the market
leaders, Leung concedes. "We took our eyes off the ball a little bit.
We didn't have the phones in the market at the right time." Still, he
points to several new models that the company plans to introduce soon.
"Stay tuned," he says.

BDA's Wu agrees that Motorola isn't out of the running completely in
the Chinese handset market, since the company has significant R&D
resources it can utilize to help it rebuild. But Motorola's rivals
aren't standing still, and the company's missteps have hurt its
reputation among Chinese consumers. "The brand has suffered," she says.
"The problem cannot be sorted out in a short period of time."

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