Motorola's Turnaround Plans Meet with Skepticism

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"They are getting dangerously close to losing that valuable scale," says Neil Mawston, director of mobile wireless practice at Strategy Analytics in London. Once production slips below 100 million annually, per-unit costs could rise by 10% to 20%, he estimates. These higher costs could, in turn, make winning new, profitable deals with carriers harder. "No one wants to catch a falling knife," Mawston says.

Fewer Operating Systems

Jha argues that some smaller handset makers are doing just fine. "Scale in wireless is important," he tells BusinessWeek. "But there are meaningful [companies], namely Apple (AAPL) and Research In Motion (RIMM), who have much less scale than we do." Each sells about 10 million phones a year. "We are fortunate to have the scale," he adds. "But as we move forward we have to make a trade-off. It's not by design that we want to lower volume, but as we migrate the business to a place it needs to be,, this is part of the trade-off that happens in that transition period."

Part of Motorola's transition is cutting fat. After trimming $474 million in operating expenses this year, the handset division has earmarked another $600 million in expense reductions for 2009. The company hopes to reduce costs partly by building phones out of parts from fewer vendors. To that end, Motorola has already ended contracts with chipmaker Freescale.

Motorola also wants to use fewer operating systems. But what happens if a wireless carrier wants Motorola to build phones using a system other than the handful it has chosen? "There's very much an addiction to winning big chunks of business," says Bill Hughes, who formerly worked at Motorola and is now principal analyst at In-Stat. "If you give them a big enough order, they'll build it. The fact of the matter is, they've talked about [reducing the types of software they support] several times in the past couple of years. But it all comes back to their addiction to big orders."

Investing in a Comeback

This time around will be different, co-CEO Brown tells BusinessWeek. Jha's predecessors lacked his mobile-industry experience and technical expertise. The former COO at mobile chip maker Qualcomm (QCOM) is credited with helping turn Qualcomm's chip division into the largest mobile chip business in the world, with $5.7 billion in sales last year. He burnished Qualcomm's reputation as a nimble, innovative competitor. And he was the point person for developing the company's road maps and plotting forays into new wireless technologies. "There has never been [a leader] with the caliber of software and technical leadership of Sanjay at Motorola before," Brown says. "He is taking it to next level swiftly."

Taking Motorola to the next level will require investing, however. To collaborate with Microsoft more closely on Windows Mobile devices, Motorola will open an office in Seattle. Motorola is also beefing up its software team that works on the Android operating system. Jha will also spearhead efforts to bulk up the services that would come standard on Motorola handsets. "Services and [user experience] will become very important," Jha said during the earnings call. Motorola may develop a way to help consumers to easily find the nearest hair salon or a coffee shop, for example. "We want to solve the problems that consumers want solved."

Adding to the challenges facing Jha, who joined Motorola in August, is orchestrating a comeback amid a global economic downturn and slowed cell-phone sales growth. The last time Motorola suffered massive market share losses, its share dropped from 27% in 1996 to 13.9% in 2002, before its legendary Razr phone launched, according to Strategy Analytics. Even after the Razr became a bestseller, Motorola's market share never rose to its former glory. "Motorola has recovered from a slump before, but it took them a full 10 years," Mawston says. "That gives some idea of how big a task Motorola still faces."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore. Crockett is deputy manager of BusinessWeek's Chicago bureau .