The first time Mike Zafirovski tried to cut costs at Motorola Inc's cellphone business in August 2000, CEO Christopher Galvin turned him down.
Zafirovski, who'd left General Electric Co two months earlier to head Motorola's biggest unit, says he proposed firing 3,000 workers and closing one of nine handset and pager plants.
PHOTO: BLOOMBERG
Galvin says a longtime deputy was telling him the division could meet a goal of 10 percent pretax profit margins for the fourth quarter of 2000 without any cuts. At the time, Motorola was forecasting that demand for cell phones would surge to 600 million in 2001. "There was vigorous debate," Galvin says.
PHOTO: BLOOMBERG
By October 2000, when Galvin agreed to eliminate 6,000 jobs, it was too late. The division's fourth-quarter margins were 2.2 percent. In the first quarter of last year, it had a pretax loss of US$402 million as revenue plunged 29 percent to US$2.28 billion.
Motorola now figures that manufacturers shipped about 380 million handsets last year.
For Motorola investors, such miscalculations are familiar territory. Since Jan. 1, 1997, when Galvin took the chief executive post that his father and grandfather had between them held for 53 of the company's 74 years, Motorola has stumbled where it once excelled.
In cellphones, Motorola is second to Nokia Oyj, after ceding the top spot in 1998. Galvin's sale of a low-margin semiconductor business in 1999 failed to boost profitability to 1996 levels in what was Motorola's No. 2 division.
Even in commercial two-way radios, an industry that Motorola has dominated since it developed the walkie-talkie for US GIs in World War II, the company is making less money than it did six years ago.
Last year, three of Motorola's six divisions -- cellphones and pagers, chips and electronic components -- were unprofitable, leading to the company's first loss excluding restructuring costs since the Great Depression. Motorola predicts it won't make a profit until the third quarter of this year.
The bottom line: Anyone who bought Motorola shares at a split-adjusted US$20.42 the day Galvin became CEO has lost money. The shares were unchanged Friday at US$14.25.
"A lot has gone wrong on Galvin's watch," says portfolio manager Howard Ward, whose Gabelli Growth Fund, with 3.35 million shares, is among Motorola's biggest holders. "I don't think he gets another chance. The free pass is over."
Motorola was scheduled to report its fourth quarter after the close of regular US trading yesterday. Analysts expect a loss of US$0.05 a share excluding some expenses, the average estimate in a Thomson Financial/First Call survey. A year earlier, net income was US$135 million, or US$0.06 a share.
End of a Family Dynasty
With investors demanding a turnaround, Galvin, 51, is breaking with tradition by appointing outsiders such as Zafirovski to revive the company his grandfather Paul Galvin founded in 1928 and his father, Robert, ran as CEO from 1969 to 1986.
"Wall Street doesn't like our financial performance; nor do I," Galvin wrote in an e-mail response to questions for this article.
In October, Galvin named Edward Breen, 45, president and operating chief, the first person to hold either post who hadn't spent most of his or her career at Motorola. Breen came to the company as an executive vice president in January 2000 with its US$13.5 billion purchase of General Instrument Corp, the No. 1 maker of television set-top boxes. He joined the board in January. Breen declined to be interviewed.
Newcomers now head half of Motorola's divisions: cellphones and pagers, led by Zafirovski, 48; cable-TV equipment, the company's top moneymaker last year, headed by David Robinson, 42; and electronics for cars and industrial equipment, under Thomas Lynch, 47. Motorola veterans run divisions that make semiconductors, two-way radios and wireless-networking equipment, which is now Motorola's second-biggest unit.
When Motorola exited the color TV business in 1974, Bob Galvin's goal was to make the company a leader in communications and microelectronics. That year, he expanded the chip unit, building the company's first Austin, Texas, semiconductor plant.
In 1977, Motorola bought the first of two modem makers. In 1983, the company put its DynaTAC cellular network into operation after a decade of development.
Now, Galvin is shedding parts of those businesses, and he's instructed his executives to run at a profit the pieces the company keeps.
On a Dec. 18 conference call for investors, Motorola said that cutting back will enable it to earn US$0.15 a share this year.
Analysts say the goal will be tough to meet, as revenue slumps to a predicted five-year low of US$28.4 billion.
Galvin is staking the future of the company on the wireless Internet. Motorola is developing phones like the A388, which will double as an electronic organizer and sell for less than US$300.
Lynch's division is focusing on what Motorola calls telematics: equipping luxury cars like Lincolns and BMWs with phone service, Web access and interactive maps.
Robinson's unit is adding video-on-demand to decoders that turn cable-TV lines into high-speed pipes for voice and data.
Motorola is also building for police departments a type of radio that can beam images of suspects to officers on the beat. Galvin says each of those businesses has the potential for annual sales growth of more than 10 percent.
Galvin's need to take a new approach became clear in 2000, when Motorola's shares tumbled 59 percent.
"We got the crap beat out of us in the financial community for not performing," says Lynch, wearing an open-neck shirt and casual slacks in a seventh-floor office at Motorola's headquarters in Schaumburg, Illinois, 28 miles northwest of Chicago.
Plenty to Cut
In January last year, Galvin named Lynch and Robinson division presidents, gave Breen authority over three divisions and let his top executives slash costs and decide which products to drop. They found plenty to cut.
By selling such businesses as military communications and catering and closing others, Motorola trimmed a quarter of its workforce last year, the biggest reduction in 40 years. It ended last year with about 103,000 employees, down from a peak of 150,000 in August 2000. Lynch and Robinson say Breen is likely to gut Motorola's staff of more than 2,000 administrative employees in Schaumburg.
Last year, Motorola shut a software group in the semiconductor unit, scrapped its analog cellphone and began phasing out pagers in favor of wireless messaging and e-mail devices. In September, Motorola sold its military-communications unit to General Dynamics Corp for US$825 million. And that same month, it shed its in-house catering service, Food Works, dropping 600 employees who had received full company benefits.
Motorola's chip division may be next on the block. At a November UBS Warburg LLC conference in New York, Galvin told investors that if the business didn't meet profitability targets, he might sell it. He didn't say when.
"There are no fixed timetables other than a huge urgency to return to profitability," Galvin wrote in his e-mail.
Breen's colleagues say one of his priorities as president will be deciding what to do with the division, which makes the DragonBall processor for Palm Inc handheld computers, image sensors and digital-signal processors for cellphones.
Once demand does pick up, Motorola may find it cut too deeply and lacks the manufacturing capacity to make enough phones, chips and equipment to grab a commanding share of the wireless Internet.
"There's definitely a risk," says Wojtek Uzdelewicz, an analyst at Bear Stearns Cos, who rates Motorola shares a "neutral." "You always pay a price with layoffs: As the recovery begins, you don't have enough people."
How did the company that championed six sigma -- the manufacturing standard that encourages precision and limits defects to 3.41 per million -- wind up in such a mess? Bob Galvin offers one explanation: Motorola became less demanding of managers and based promotions on seniority instead of ability. The result was a lapse in the manufacturing efficiency and employee accountability that helped Motorola win the first Malcolm Baldrige National Quality Award in 1988.
"In retrospect, there may have been a greater tolerance for mediocrity," says Galvin, 79, a Motorola director until May 2001. "That's a characteristic that has had to change."
Giving managers more leeway is a departure from what former executives say was Chris Galvin's tendency to meddle in decisions at the division level. In 1998, for example, he stopped the semiconductor unit from developing a single base of electronics on which Motorola could have standardized some of its handsets.
Common Platform
Much like Honda Motor Co makes cars as distinct as the Civic sedan and CRV sport-utility vehicle on the same chassis, engineers led by then-division president Hector Ruiz wanted to build a common platform for different phone models. Nokia, which used that strategy, boosted pretax margins to 19.1 percent in 1998 from 6.6 percent in 1996.
Galvin says Motorola needed to wait for new software, advances in chip design and standards for high-speed data transmissions. In July, Motorola unveiled a plan to sell a US$30 package of cellphone electronics. The platform, made from Motorola's chips, may help the semiconductor unit lessen its dependence on internal sales.
Today, the division generates 65 percent of its wireless-chip revenue from Motorola's own businesses. That may drop to 35 percent by 2005 as rival manufacturers buy the handset platforms, says Ray Burgess, the chip unit's head of strategy.
"I detect a change," says Ruiz, who spent 23 years at Motorola before leaving in January 2000 to become president of chipmaker Advanced Micro Devices Inc.
One reason he left Motorola, Ruiz says, is that he disagreed with Galvin on the platform issue. "There's now a set of leaders who are being given the room to run their businesses, as they should be," he says.
Breen is used to getting results. The Philadelphia native, who has reddish hair and a trim mustache, joined General Instrument in 1978 straight out of Grove City College, a Christian college 60 miles north of Pittsburgh. He rose to head of sales by 1988 and became chief executive in 1997.
In his first month as CEO, he shut a factory in Puerto Rico, slashed 600 of 1,400 jobs in San Diego and put Lynch in charge of a satellite-equipment unit that was losing money. By the second quarter of 1998, General Instrument was profitable and remained so through its purchase by Motorola.
"I like the fact that a guy with a track record like Ed's is at the top of the food chain," says Carl Vogel, who's been a customer of Breen's since 1998. Today, he does business with Breen as CEO of Charter Communications Inc, the cable-TV firm controlled by billionaire Paul Allen. "He's somebody who can get things done." Robinson and Lynch say it was obvious from their first days why Motorola was falling apart. At General Instrument, they'd learned to run a tight ship in the early 1990s, when a leveraged buyout by Forstmann Little & Co almost collapsed and the equipment maker breached its debt covenants.
Motorola was less efficient than its rivals. In 1999, it generated US$273,000 of revenue per employee, less than Nokia's US$380,000 or the US$419,000 at No. 1 chipmaker Intel Corp.
Lynch recalls an example of the company's inefficiency in early 2000, when he sought to combine a General Instrument unit in San Diego with Motorola's businesses in the region. "I'd bring my facilities guy from GI, and 12 Motorolans would show up," he says. "No wonder we weren't making any money."
Zafirovski had a similar experience. As CEO of General Electric's lighting business, he'd reported to Jack Welch and learned how to control expenses. When he joined Motorola in mid-2000, the company was making or developing 60 phone models, dozens of which had no parts in common.
Component Problems
On the outside, the StarTAC flip-open handsets made for Verizon Wireless Inc and Sprint Corp's PCS division looked identical. Underneath, they shared almost no components.
Duplication of effort was one legacy of Bob Galvin's strategy of encouraging internal rivalries. He required teams of employees to compete against each other on the theory that the best technology would win and the customer would reap the benefits. In the 1980s, that approach was the centerpiece of Motorola's drive for Japanese-style efficiency.
By the time Chris Galvin succeeded Gary Tooker as CEO in 1997, the system had broken down into what Chris Galvin now describes as "warring tribes" that hoarded talent and resources.
"Shame on Motorola," says Zafirovski, whose division has resuscitated the six sigma standard he says had lapsed.
So far, Zafirovski has cut the cost of manufacturing a cellphone 15 percent by eliminating 18 of 60 models and by standardizing parts. He's chopped a third of the division's overhead by reducing travel and by closing factories in Illinois, Florida, Ireland and Scotland.
In the process, he appointed 17 new managers, including nine who'd been at Motorola less than three years.
By the end of this year, Zafirovski -- who's such a devotee of Welch that a photograph of the retired GE chief hangs in his eldest son's bedroom -- plans to manufacture all of Motorola's handsets on four or five platforms, down from 23 at the end of last year.
To make Motorola's phones more appealing to customers, Zafirovski is giving his 105 designers, led by Tim Parsey, control over materials and software.
Last year, Parsey, who joined Motorola from Apple Computer Inc, introduced the V.60. The US$499 flip phone in anodized aluminum sold so quickly that Motorola was refusing new orders in late October. As of Jan. 1, the company had shipped more than 1 million.
Customers are also snapping up the V.120, a larger model with scalloped sides that sells for US$179. The company's V.66 model, aimed at the European market, taps the Internet as fast as a dial-up modem.
In the third quarter, Motorola's share of the global handset market rose to 15.7 percent -- the highest in almost two years, according to research firm Dataquest. Zafirovski's division had a pretax profit of US$15 million, its first since the fourth quarter of 2000. Investors are pleased with the progress.
"They're doing the things they need to do," says Neil Kilbane, who holds 506,000 Motorola shares in the Victory Value Fund he manages at Key Asset Management Inc.
Still, Motorola has a way to go before recovering from its failure to recognize the importance of digital phones in 1997, a misstep that led to Nokia's ascendancy. In Galvin's rush to catch up, Motorola alienated customers with phones that dropped signals, offered poor battery life and had tiny buttons that were difficult to find.
Changing advertising slogans such as "What you never thought possible" and "Wings" failed to build a consistent brand identity. "Motorola's products came across as flimsy or goofy," says John Brewer of Vincio, a wireless industry consulting firm in Portland, Oregon. "Nobody gets any of their marketing strategies."
Today, Galvin advises his managers on design and manufacturing even as he gives them more freedom. Every Tuesday for the past year, he's joined Zafirovski and a handful of Motorolans in the so-called West Wing War Room in Libertyville, Illinois, to plot Nokia's defeat.
Pie charts in red, blue and green adorn the walls. Some track orders and sales; others show how Motorola's phones stack up against Nokia's and Samsung Electronics Co's. Display cases are jammed with handsets from Ericsson AB, Siemens AG, Kyocera Corp and other companies.
"None of this ever happened before," says Ron Garriques, Zafirovski's head of product management.
Galvin Gets Tough
During a five-hour session on Oct. 29, Galvin raised concern about an icon on the screen of new wireless phones that tap the Internet, transmitting voice and data simultaneously. The screen had enough space for one image.
Galvin wanted a reminder that a data transmission was under way rather than an indicator for low battery, according to Garriques. The group adopted Galvin's suggestion.
Galvin is also paying more heed to Wall Street, where 17 of 30 analysts who cover Motorola advise investors to hold or sell the stock.
He met with investors at the November Warburg conference in New York. In a Nov. 16 memo to employees following the meeting, Galvin said shareholders had applauded the choice of Breen as president and chief operating officer. "Our message was well received, but the `jury' on performance is still out," he wrote.
In the past, Motorola cared little for investors' opinions, says Bob Galvin. During his own tenure as CEO, the elder Galvin says he told shareholders with suggestions to mind their own business.
"I'd say, `Thank you very much, but I've got to run the company the way I think it needs to be run,'" Bob Galvin recalls.
Some investors want Chris Galvin to sell the semiconductor unit, freeing Motorola to focus on wireless equipment, cell phones and handheld computers. Critics say Motorola can do without the cyclical nature of the chip industry and the unpredictable swings in earnings it creates.
In 2000, the division earned US$677 million on a pretax basis.
Last year, as worldwide chip revenue fell by a third, it had a pretax loss of about US$1.2 billion, according to estimates by J.P. Morgan Securities Inc analyst Ed Snyder, who rates Motorola a "market perform." This year, Snyder expects the division to have a pretax loss of US$340 million.
Even in good times, the multibillion-dollar expense of building chip plants is a drain on earnings. In 2000, the cost of depreciating investments in plants and equipment cut the division's pretax profit by US$1.13 billion.
Nokia is more streamlined. The Finnish company makes only cell phones and wireless equipment. It buys its chips from such companies as Texas Instruments Inc, STMicroelectronics NV and even Motorola.
Nokia's decision to limit products let it blow past Motorola and grab a third of the handset market, Snyder says. Motorola, by contrast, still hasn't focused, says Gabelli Asset Management's Ward, who wants Motorola to dump the chip unit.
"Management has to decide what it wants this company to be," he says.
Galvin went halfway to shedding the chip business in August 1999, when he sold the piece that made low-cost capacitors and resistors to Texas Pacific Group for US$1.6 billion. A few weeks later, he met with Lucent Technologies Inc's then-CEO Rich McGinn in Austin to discuss combining the companies' chip divisions.
The plan was to sell shares in the new entity, which would give it a market value of US$40 billion to US$50 billion, and later spin it off to shareholders, according to people familiar with the talks. In the end, Galvin pulled the plug.
Shareholders wish he hadn't. "A graceful departure would have been a good thing," says David Katz, chief investment officer at Matrix Asset Advisors Inc., which owns 507,000 Motorola shares.
Galvin told investors at the Warburg conference that rehabilitating the chip division was better than selling when the market value of rivals such as Texas Instruments had fallen 30 percent or more from the year before.
He outlined a plan to contract more production to other chipmakers so Motorola doesn't have to build as many new plants, to find partners to share the cost of putting up the factories it does need and to boost royalties by licensing chip technology to rivals.
No Rebound in Chip Demand Soon
With few signs of a rebound in chip demand before the fourth quarter -- and with Motorola predicting that revenue may decline at the wireless- and cable-TV equipment divisions -- generating a profit this year may hinge on more cost cutting.
In December, Galvin announced plans to eliminate 9,400 more jobs by the end of this year. The firings will shave US$865 million this year and US$1.1 billion a year starting next year, the company estimates.
Some analysts say the cuts won't be enough, and finding efficiencies may be tough after a year of cutbacks.
Galvin is relying on cell phones to generate most of the US$0.15 a share in earnings that Motorola predicts for this year.
Analysts say that's a risky proposition. Morgan Stanley Dean Witter & Co on Monday trimmed its forecast for mobile-phone shipments this year to 410 million from 435 million and reduced its rating on Nokia shares to "underperform" from ``neutral."
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