Motorola entices rivals with its cell phone secrets
By getting competitors to buy wireless phone technology, company hopes to boost its sales of semiconductors
By Kirk Ladendorf
AMERICAN-STATESMAN STAFF
Monday, June 10, 2002
Motorola Inc.'s path to recovery in the chip business traveled through Cannes on the French Riviera early last year.
Austin executive Pete Shinyeda hosted a dinner at the Carlton Inter-Continental hotel for a man he had never met: Peter Zapf, the top cell phone executive at Germany's Siemens AG, the fourth-largest cell phone maker in the world. But Shinyeda hardly noticed the swank surroundings and superb food. He was focused on striking a novel deal: persuading Siemens, long a rival in the wireless phone business, to buy Motorola's phone technology.
"I just wanted the door to crack open slightly so that I could have my technical team spend time with his technical team," Shinyeda recalled recently.
Thirteen months later, however, Shinyeda, who heads Motorola's wireless chip business, had signed up Siemens as a customer for Motorola chips to be used in so-called third-generation cell phones that combine voice, photos and even video.
The Siemens deal, industry analysts say, could help Motorola win the gamble it undertook last year to revive its slumping semiconductor business.
That gamble is based on a new strategy: For the first time, Motorola is opening its technology vault. It's selling virtually all the hardware and software required to make an advanced cell phone to any company that also buys a substantial number of Motorola chips.
Companies such as Siemens will be Motorola customers, but also competitors.
"This could be the thing that saves Motorola Semiconductor," says analyst Will Strauss of Forward Concepts in Tempe, Ariz. "Siemens is the biggest deal yet, but there are more coming."
Motorola is trying to revive its ailing Austin-based chip division, which was devastated by the semiconductor industry downturn of 2001. Revenue plunged 37 percent to $4.94 billion, while operating income sank to a $2.14 billion loss.
In the first quarter of this year, sales remained weak at $1.09 billion, but the operating loss narrowed to $238 million. Management pledges that the chip business will become profitable by the end of the year.
The semiconductor downturn had a vast human toll as well. The company expects it will have cut 10,000 semiconductor jobs worldwide in 2001 and 2002, leaving the Austin-based chip business with about 24,000 workers, including more than 8,000 in Austin. Of those job cuts, nearly 2,000 have occurred in Austin.
The wireless strategy may also decide the fate of the chip business as a continuing Motorola operation. Senior company managers have said Motorola may be forced to sell or spin off the chip business if it cannot stop being a financial drag on the parent company.
But now the company is playing offense again. Shinyeda says Motorola is leading the industry in selling these "platforms" of the essential chips for new wireless phones.
"We have redefined the rules of the game in the wireless semiconductor business," he said.
Simplifying wireless
Shinyeda's assessment is more than high-tech bravado.
So far, Motorola has found several willing buyers for its wireless technology, including companies such as Siemens, China's Eastern Communications Ltd. and Taiwan's Benq Corp. (formerly Acer).
The appeal of Motorola's pitch lies in simplifying the wireless business.
Phone makers face daunting technical challenges and huge development costs to keep pace with cellular communication technology, which is requiring increasingly complex and powerful phones that can surf the Web as well as handle an incoming phone call.
Motorola, as an industry pioneer, already has much of the basic technology in place. Buying from Motorola could save companies hundreds of millions of dollars in development costs and months or years of time in getting products to market.
The big technical challenge for cellular phone makers is handling the next generation of wireless networks, which will include the Internet and all kinds of nonvoice communications. Within two years, powerful third-generation (3G) phones will be multimedia devices able to transmit still photo images and limited video.
Analysts say the 3G phones may have roughly 100 times as much internal computer processing power as today's 2G phones. Almost every aspect of the Internet-ready phones has to be reinvented to handle higher-speed data communications -- and that requires the more sophisticated internal architecture Motorola is selling.
Shinyeda, as the head of Motorola's wireless chip business, has become the point man for the new strategy, traveling to the hot spots of the wireless world -- Munich, Cannes, Shanghai, Seoul, Taipei, Hong Kong and Helsinki -- to convince the industry's top executives that Motorola's new approach to the business makes sense. Not every sales call Shinyeda made has been successful. Top executives at Nokia and Samsung turned him down flat, but Shinyeda is undeterred. Motorola has begun selling a few wireless chips -- but not a complete set for an entire phone -- to Nokia and it will keep working on Samsung.
"The ice has been broken," Shinyeda says. "This wireless phone market is so brutal that, if we have the best solution, the marketplace will not allow our customer base to stay with the second-best solution. The best solution will win out."
The 50-something Shinyeda, who was a track-and-field athlete and a martial arts practitioner when he was younger, says he handles travel well. He had better; he has taken more than 25 international trips in the past year and a half.
Motorola has dozens of competitors in the wireless semiconductor business. The biggest is Texas Instruments Inc., which dominates the market for the processor control chips -- called baseband processors -- that control digital cell phones. Other competitors include Infineon Technologies AG of Germany, Agere Systems Inc., Intel Corp. and France's STMicroelec- tronics NV.
In Austin, Silicon Laboratories Inc., which makes specialized wireless radio transceiver chips, doubts the appeal of Motorola's strategy.
"We haven't seen the demand for a single wireless platform up to this point," said Ed Healy, vice president for wireless products for Austin-based Silicon Laboratories, which makes innovative chips that enable cell phones to send and receive radio signals. "Our customers are using best-in-class components rather than a single platform. Right now, the industry's approach is to mix and match the best parts."
Potential rewards
The final report card on Motorola's strategy is years away. But if it pays off, the company's troubled chip business, long regarded as a problem child within the $30 billion corporation, may become a more prized possession.
That outcome is far from certain. It was only last summer that senior Motorola executives publicly warned the chip business that it must stop being a financial drag on the parent company or risk being sold or spun off. Those statements touched off a flurry of speculation by industry analysts, many of whom said the chip business would almost certainly be sent packing.
But Strauss of Forward Concepts predicts that Motorola's chip business will soon become the primary place where the company's vast knowledge of wireless systems resides. When top management finally realizes that, Strauss reasons, the chip business will be too important for the company to jettison.
Motorola wants to gain ground on Texas Instruments, the largest supplier of wireless chips, but it has a long way to go. TI supplied an estimated 50 percent of baseband processors -- the brain chips -- for the 390 million cell phones sold in 2001, compared with 13 percent for second-place Motorola, according to Strauss.
Strauss says Motorola may boost its market share above 20 percent within a few years. But chip prices in the fiercely competitive cell phone industry are low. The average price for baseband processor chips was $6.20 last year, compared with an average price of $133 for personal computer processors.
One advantage for Motorola might lie in its manufacturing processes. Motorola says it's the only company that has highly sophisticated processes that can handle production of the wide variety of chips needed for the wireless industry. It's the last piece of the puzzle, Motorola officials say, after the design and software components.
Whatever the outcome financially, Motorola's wireless chip strategy -- years in the making -- has started to change the insular and often combative culture within the company. Two parts of Motorola's business -- chips and the cell phones -- haven't always worked well together.
The two sides have had a stormy relationship for the past decade, with each side of the business faulting the other for the company's lackluster results. The cell phone business, in fact, frequently bought wireless chips from Motorola rivals such as Texas Instruments.
But besides courting outside customers, Motorola's wireless division has also been courting its corporate sibling. And the biggest order for wireless chips has come from Motorola's cell phone business, which sells one out of every six of the world's cell phones.
kladendorf@statesman.com; 445-3622
Sales of wireless chip sets hold promise for Motorola
Motorola Inc. isn't saying how much revenue it expects from sales of its wireless chip sets, but company officials and analysts offer some clues.
A successful cell phone product line can sell 10 million to 20 million units. Motorola estimates that its wireless chip sets will capture in the "tens of dollars" per phone when they start shipping later this year -- that's for 2.5G phones that are Internet ready. More complex 3G phone chip sets won't begin shipping until late 2003, but will bring in more sales revenue per phone.
Cell phone makers are expected to sell about 420 million phones worldwide this year, up 7 percent from 2001. Sales are expected to grow to 490 million in 2003.
One industry analyst, Will Strauss of Forward Concepts in Tempe, Ariz., expects Motorola's chip business to capture more than 20 percent of the wireless phone market in the near future. If Motorola can become the key chip supplier for 100 million or more phones, then it stands to take in more than $2 billion in sales just on chips for cell phones.
These companies have committed to buy Motorola wireless chip sets:
* Taiwan's Benq Corp. (formerly Acer) will buy the chip set for 2.5G Internet-ready cell phones. The chips are expected to be in production during the third quarter.
* Eastern Communications Co. Ltd., China's largest cell phone maker, agreed to buy the Motorola chip set for 2.5G phones.
* Motorola's cell phone business agreed to standardize its 2.5G phones around the chip set developed by Motorola's semiconductor unit. It also has committed to the 3G chip set.
* South Korea's Sewon Telecom Co. will buy the Motorola 2.5G chip set.
* RTX Telecom A/S of Denmark, which designs phones for other companies, chose the 2.5G chip set.
* Germany's Siemens AG, the fourth-largest cell phone maker, agreed to buy Motorola's chip set for 3G phones. Those chips are not expected to be in production until 2003.
* Nokia Corp., the No. 1 phone maker, and Samsung Corp., the No. 4 maker, each have turned down Motorola's wireless platform overtures. Nokia has agreed to buy some individual Motorola components for its phones.
-- Kirk Ladendorf
austin360.com |
