Motorola Inc.’s fortunes are improving faster than the market is catching on.
While some suppliers and vendors are still apprehensive about doing business with the telecom equipment and mobile handset vendor because of its recent woeful sales performance, it is increasingly clear business partners that take a longer-term approach to corporate relationship development should start taking a second look at the company.
After four years of cost-cutting and other painful reorganization actions, Motorola is slowly but steadily reversing the downward spiral it fell into in the middle of this decade, improving its profile with investors and suppliers who at one time wondered whether pouring critical investment capital into products designed to support the company’s operations made sense.
A closer look today indicates Motorola is defying the odds finally and, barring any further missteps, could offer future hefty payoffs for its shareholders, fund investors, and business partners. Some savvy investors are already pouring money into the company ahead of the planned spinoff of the handset division, which is likely next year.
Billionaire investor Carl Icahn, for instance, in August alone spent more than $100 million on Motorola’s shares. Research firm Barclays Capital has also jacked up its price target on Motorola stock to “$10 as the firm believes that Q3 Droid X units will surpass expectations.” These are votes of confidence suppliers need to watch closely.
It’s not too late to buy into Motorola’s coming upswing. As its businesses improve, and following the handset division spinoff, the company will move from cost-cutting mode to spending on growth-related activities. Suppliers will invariably benefit from this. Analysts estimate Motorola’s sales will improve slightly in 2010 to $22.4 billion from $22 billion in 2009 and then rise to $24 billion in 2011. If the company’s Droid smartphone series takes off sharply, the 2011 estimates could turn out to be too conservative.
Motorola indeed fell badly in the last years and is highly unlikely to match its record sales performance for many years. Sales at the company’s wireless handset division sagged starting four years ago, as rivals introduced more attractive multimedia devices or smartphones like Apple Inc.’s iPhone. Motorola’s annual sales have taken a beating since then, with revenue tumbling to $22 billion in 2009, down 49 percent, from $43 billion in 2006.
The sales decline hurt, not only Motorola, but also its component suppliers and contract manufacturers. As its cost of goods sold fell, Motorola’s bargaining power with suppliers similarly declined. COGS, the area of primary interest to suppliers jostling for business with Motorola, fell by half to $15 billion in 2009 from $30 billion in 2006. The implication was that Motorola had become a liability for many customers as they could not count on it for the huge volume of business they used to do with it.
Freescale Semiconductor Inc., for instance, exited the wireless IC component business because Motorola, its main customer, was performing so poorly in the segment. The investment required could not be justified, Freescale chairman and CEO Rich Beyer told me in an interview.
Motorola’s risk profile as a potential business partner has dramatically improved since then. While Freescale insists it will not jump back into the handset business, there are other areas where suppliers can benefit from the coming upswing in Motorola’s business.