Then, in October, Motorola (MOT
) spun off its semiconductor unit -- which analysts have long said was a distraction from its core cell-phone business. Soon after, Motorola's MPx200 smart phone, which features an operating system from software giant Microsoft (MSFT
) and is sold by No. 3 U.S. wireless-service provider AT&T Wireless (AWE
), began winning accolades. Perceiving the initial signs of a turnaround, investors have pushed Motorola's stock up 20% since September, to around $13 as of Dec. 11. But perhaps that optimism was premature.
On Dec. 4, Motorola announced that, thanks to component shortages, it would deliver fewer-than-expected camera phones during this holiday season to European and U.S. service providers, including America's sixth-largest wireless carrier, T-Mobile. Motorola says that shortage won't crimp fourth-quarter results. Thus, many analysts continue to push the stock, even after seeing it fall 2.2% on the day of the announcement. Their rationale: The problem is no big deal.
WHO'S TO BLAME? Still, it could be an indication of deeper troubles. Camera-phone components are scarce industrywide, yet Motorola's problems seem more pronounced than those of other manufacturers. The world's largest cell-phone maker, Nokia (NOK
), and rival SonyEricsson say they'll deliver their promised quotas of camera phones despite the shortages.
Motorola says it's harder hit because it uses parts that are about one-third smaller than those of its competitors, to allow for sleeker designs. But industry analysts and competitors alike say its woes are primarily the result of poor planning and weak supply-chain management -- a clue that perhaps not everything has taken a turn for the better since Galvin's departure.
That's partly why Wells Fargo Securities downgraded Motorola from buy to hold on Dec. 8, and it also helps to explain why many fund managers and analysts are taking a wait-and-see approach. Peter Hofstra, senior investment analyst with AIC Diversified Science & Technology fund, which owns Nokia stock, says: "I don't find a compelling Motorola story. I'd wait on the sidelines."
SHUTTER BUGS. Motorola's current problems likely stem from its reluctance to make camera phones in the first place. It unveiled its first such phone in August -- 12 months after Nokia and more than two years after the first camera phones became available from the likes of electronics giant Sharp. Motorola now sells 12 models, with one more due to be released shortly. It also erred when estimating the number of camera phones it would sell this year, says Allen Nogee, a wireless components analyst with market consultancy Cahners In-Stat.
Such a mistake is understandable: Back in August, when many analysts expected sales to take off slowly, the industry expected customers to buy 90 million camera phones worldwide in 2003. Today, the estimate is 140 million, or nearly one-third of all cell-phone sales, says Mark Hampson, senior product marketing manager at Sharp Microelectronics of the Americas (Sharp is the largest supplier of camera modules for phones). It turns out that U.S. and European consumers love snapping pictures. And amidst intensifying competition, U.S. wireless service providers are willing to heavily subsidize the new phones -- further spurring consumer demand.
With sales surging, starting in September, Sharp began requiring its component customers to forecast their needs six months in advance, since it now takes about 12 weeks to fill an order, says Hampson. Motorola, which won't identify its supplier, probably noticed the surge in demand too late to get all of the components it needed on time, say industry insiders.
MODEL SHUFFLE. Because of this miscalculation, Motorola could miss out on a big opportunity. Camera phones are one of this holiday season's hottest sellers, and many analysts, such as those at Lehman Brothers, expected Motorola to raise fourth-quarter revenue guidance to $7.8 billion from the previous $7.5 billion, vs. the $7.7 billion it recorded in the prior-year quarter. Now, that increase is likely out of the question, according to a recent report by Lehman analyst Tim Luke.
Another analyst, John Bucher of Harris Nesbitt Gerard in Los Angeles, says Motorola could offset the shortfall -- affecting its V300, V500, and V600 models -- by ramping up marketing for its nine other camera phones. In fact, T-Mobile still has the V300 in stock, and it carries Motorola's older T722i camera phone. But it also distributes models from SonyEricsson and Samsung, and could point customers to phones from those rivals if Motorola doesn't come through. "We always manage our inventory to mitigate risk," a T-Mobile spokesperson responded in an e-mail to BusinessWeek Online. "We have other products in the same tier."
As a result, any inability to deliver on Motorola's part could cut its market share, worries Michael King, an analyst with market consultancy Gartner. That could lead to a chicken-and-egg problem: Motorola's phone sales are less than half those of Nokia, and smaller customers carry less weight with suppliers, notes King. In a crunch, therefore, if compent suppliers switched production to accommodate larger customers, rivals like Nokia would have a better chance of getting emergency deliveries.
STILL LEARNING. The good news is that the shortages could be resolved within a few months, as components companies boost production. Sharp doubled its camera-module capacity in 2002, and increased it by 50% more this year, says Hampson. Plus, new suppliers, such as semiconductor companies that want to diversify, are jumping into the market. This means supply and demand for camera-phone components could come into balance in 2004's first half.
Motorola has recruited two more component suppliers in the past several weeks, in addition to the unnamed one it has relied on until now. "We already see some progress," says a spokesperson. Yet, it won't say exactly when it expects to be up to speed.
"My guess is that in the post-Galvin era, Motorola doesn't have it all figured out," says Neil Strother, an analyst with Carners In-Stat. Until it does, investors might want to approach the stock with caution. By Olga Kharif in Portland, Ore.