Vendor Ratings, VDR Paul Dittner, Stanley Bruederle

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1 Vendor Ratings, Paul Dittner, Stanley Bruederle Research Note 28 October 2003 Vendor Rating: Motorola Semiconductor Products Sector Motorola s semiconductor sector has lost market share. However, it is a leader in specific markets and expects to benefit from growth in those markets. Motorola Semiconductor Products Sector Overall Rating: What You Need to Know: In 1999, Motorola s Semiconductor Products Sector sold its commodity discrete and integrated circuit businesses as part of a strategy to achieve higher growth and profitability. Since then, Motorola has lost market share in the semiconductor industry, its two main product categories (embedded microprocessor and microcontroller) and one of its target applications markets (wireless semiconductors). Although SPS s market position in network and wireless communications has declined during the past two years, Motorola has gained a leading position in supplying semiconductors to the automotive industry. Analyst Comments: In October, Motorola announced that its Semiconductor Products Sector (SPS) would be spun off as its own company. SPS has made significant changes to reduce costs and position itself for profitability; however, it must execute on its strategy. Detailed Rating: Initiative Corporate Viability Strategy SPS Strategy Financial SPS Financial Marketing SPS Marketing SPS Brand Organization SPS Organization Manufacturing Market Offerings Product/Service SPS Products Technology/Methodology SPS Technology Pricing Structure Rating Positive Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 SPS Pricing Customer Service/Support Sales/Distribution SPS Sales/Distribution Support/Account Management Positive Positive Corporate Viability: Strategy Motorola s semiconductor strategy is focused on products/markets, manufacturing and technology, with an objective of revenue growth and profit improvement. The company is changing the way it does business in each of these areas, and the challenges associated with this are making life difficult for the Semiconductor Products Sector (SPS) management team. SPS plans to launch more than 250 products this year, a 50 percent increase from Additionally, SPS is implementing an efficiency improvement program aimed at cost reduction and margin improvement. Although SPS has reduced its operating costs during the recent years of decline, more improvement is needed to reach the targeted margin goal of 15 percent. The SPS product/market strategy is to build on its strong position in microcontrollers, embedded processors and application-specific standard products in the automotive, networking and wireless communications markets. Products developed for the automotive market are adapted to the industrial and consumer markets. This product strategy is made challenging for Motorola by its historical position as a broadline semiconductor product supplier. The company is in the midst of a transition between these two significantly different approaches to doing business and is wrestling with problems associated with this transition. Much of the planning and positioning is complete; however, Motorola is trying to execute these changes. Motorola has adopted a different manufacturing strategy, called Asset-Light, of adopting outsourcing and partnerships for an increasing portion of its production. Additionally, SPS has reduced the number of manufacturing facilities from 21 to 10 during the past year. Despite these reductions, Motorola claims to have the capacity to produce $6 billion in revenue this year and that bricks and mortar are in place to support $11.5 billion in revenue, when manufacturing equipment is installed. Leading-edge complementary metal-oxide semiconductor (CMOS) process development is being undertaken under a partnership with Philips Semiconductor and STMicroelectronics at a pilot facility in Crolles, France. This enables Motorola to develop its leading-edge technology at a significantly lower cost than if the company had to do it itself. Processes developed at Crolles are transferred to Motorola production facilities when ready for production. While this approach offers promise, Gartner remains cautious about the approach until Motorola successfully transfers its first process from Crolles to one of its facilities and produces it in volume. Lastly and related to the prior point Motorola SPS is focusing its R&D on unique technology that it expects will make a large contribution to its success in chosen markets. While targeting a niche market can be very profitable, substantial risks can result. At the same time, the company is examining opportunities for producing royalties that will help defray the costs of R&D. SPS should take an aggressive approach to licensing technology, and this approach will provide stability to the unit during the long term. Although SPS has its strategy for renewed growth and profitability in place, the networking and wireless communications elements must gain traction before the company will begin to achieve its objectives. Financial 28 October

3 SPS s financial performance seems to have bottomed, and the company is beginning to approach positive results. However, a surprising decline in operating margin during the second quarter has raised concerns about the timeline for a return to profitability. Revenue in the fourth quarter of 2002 surpassed its breakeven point, but revenue in the first quarter disappointed, returning the company to negative territory. Second-quarter revenue continued the negative trend, which has blunted the impact of its 32 percent reduction in costs during the past year. Although SPS has achieved a positive trend during the past year, the company is still in a recovery situation, while some of its major U.S. competitors, particularly Texas Instruments, have achieved a strong financial position. Marketing SPS is recognized as being customer-focused and responsive to customers needs. Once viewed as a source for most products on a customer s bill of materials (BOM), Motorola focuses on selected market segments, while still offering a range of microprocessor and microcontroller products that are used in different systems. What customers don t get from the company are the other products that are on the BOM that they have been used to getting from Motorola. Additionally, as with Motorola s other divisions, outside of personal communications services (PCS), little is done to promote the division s diversity outside of the target markets. Motorola s global brand image remains strong, and SPS, as well as other divisions, must leverage that advantage and promote its position as a technology leader. Brand SPS has established one of the strongest brands in the industry. However, the company s image has been changing since 2000, as it has shed product lines and started to streamline its business. As a result, the customer s view of the company and brand has changed. Motorola is still struggling with that changing perception. Motorola has established a strong brand in Asia/Pacific. This should result in a strong position in that fast-growing market. The company, however, has not been successful in turning that brand image into market share, as Motorola s growth in 2002 was substantially less than the industry s growth in the region. Manufacturing Motorola has decided to employ what it refers to as an asset-light strategy in manufacturing: Fundamentally, the company is outsourcing much of its standard manufacturing requirements and is partnering on R&D expenditure to speed time-to-market of advanced technology, while continuing to make strategic R&D investments. This is not unusual for major semiconductor companies. In Motorola s case, the company is using a partnership with ST and Philips to develop leading-edge CMOS technology. Gartner will take a cautious view of this strategy until Motorola demonstrates that it can effectively transfer processes from Crolles to one of its production facilities. This approach to manufacturing results in an increase in direct manufacturing costs when operating at capacity but lower costs when demand is lower than capacity. This allows Motorola to better manage its manufacturing costs. It reduces the company s capital spending requirements, which have been reduced from $2.4 billion in 2000 to an expected $300 million this year. An asset-light strategy, coupled with its value-added product strategy, provides the company with a means to conserve capital while increasing profit margins and, possibly, revenue. Organization SPS has historically been able to maintain a stable organization with planned succession in management. This has not been the case with top management during the past six years, in which successors have 28 October

4 remained in their positions for fewer than four years. Before that time, SPS had groomed sector presidents with its office of the general manager structure, which had been highly successful during the company s prior 25 years. Recent changes have occurred without this planning and are an important departure from Motorola s past successful culture. With the company s gradually declining market position during the past eight years, it is becoming an independent company, which may provide the freedom to innovate at the pace the semiconductor market requires. While SPS has generally not brought in outside talent, in the general manager s position, an infusion of external talent at the next level could provide energy that the company sorely needs. This has happened a few times in the past and was a factor in Motorola s successful launch of its CMOS technology in the mid-1970s. The promotion of Scott Anderson to President and CEO may provide the spark the company needs; however, Gartner will remain cautious until SPS produces positive results from the structure and management lead. Market Offerings: Product/Markets Products include embedded microprocessors (including communications processors), microcontrollers and wireless solutions. Major application markets include automotive, network communications and wireless communications. Motorola is focused on providing standard microcontroller, embedded processor, digital signal processor, and application-specific standard digital and analog products for these applications. SPS was ranked the No. 1 supplier in wireless communications in 2001 but dropped to No. 3 in Its decision to open its mobile communications chipsets to the merchant market occurred too late to have an impact on its 2002 revenue. Motorola s embedded processor business is primarily made up of communications processors in which the company holds more than 80 percent of the market. About 70 percent of Motorola s products can be classified as embedded processors and microcontrollers (standard product categories). The company s three major end markets each represented 25 percent to 29 percent of the company s business in Motorola offers different standard products that complement mainstream products (microcontrollers in industrial, data processing and consumer applications). We have some concern that these products may distract the company from achieving its goals in its primary markets. Technology Motorola has never been a CMOS process technology leader, although it has strong capabilities in copper interconnects and silicon-on-insulator. The company is depending on an alliance with ST and Philips for production of 90-nm CMOS process technology to be produced in Crolles. This can be a risky strategy, but in Motorola s case, it may work. The company s need for state-of-the-art process technology is not as critical, as much of its revenue market share comes from microcontrollers, discrete microwave power transistors and embedded processors. These do not necessarily require leading-edge technology. This is not the case for mobile communications chipsets and communications processors. On the other hand, Motorola does need specialized technology to successfully compete in its markets. With this in mind, the company has identified the following technology that it considers critical to its success in the markets in which it has chosen to build: Magnetoresistive RAM for nonvolatile embedded storage in mobile handsets Silicon germanium carbon radio frequency integrated circuit technology for making state-of-theart mobile handset transceivers SMARTMOS for smart high-power devices in automotive and other industrial applications 28 October

5 Silicon-on-insulator to achieve high-performance communications processors The company intends to offset the cost of developing its technology by expanding its intellectual property licensing program. Pricing Because of the high market share of low-priced microcontroller products, Motorola s semiconductor average selling prices are lower than the industry average. The company has adopted a strategy of developing value-added products to raise its average selling prices and gross margins. The development of its mobile handset system solution is a good example of this. Value in mobile handsets is migrating from the radio to the baseband and application processing functions. The marketing of wireless baseband and application processor products to customers outside of Motorola PCS is taking the company in the right direction. The big challenge that SPS faces is being a little late to the merchant market with this strategy. Customer Service/Support: Sales/Distribution SPS has always had a strong sales and distribution structure, with a large, direct sales force and strong relationships with major distributors. Distributor relationships may have been weakened when Motorola spun off its commodity product businesses in These products are the mainstays of distributor relationships. Most of Motorola s revenue comes from the automotive and wireless communications markets, which are far more oriented to direct sales relationships. As this shift has occurred, distributors have likely become somewhat less important to the company s strategy. A renewed effort to rebuild its distributor channels could contribute to Motorola s top-line-growth objective. The company supports its products with strong applications support in the field and factory. Motorola has shown particular strength in supporting its mobile handset chip family with complete support from reference designs to field test approval. This is necessary to compete with other leaders in the mobile handset solution race. Because this is a relatively newer development in the handset chipset area, Motorola has yet to see the financial benefit from this initiative. As Motorola shifts to a more marketfocused strategy, the concern is that it will not be able to shift applications support to its target markets as it continues to support its legacy customer base. Related Research and Ratings: Motorola s Chairman and CEO Retires Motorola s Exit May Weaken Symbian as Nokia s Power Grows Motorola s 2003 Terminals Need More Than Brand and Color Rating Definition: Strong Positive Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. 28 October

6 Positive Strong Negative Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key BOM CMOS PCS SPS bill of materials complementary metaloxide semiconductor personal communications services Semiconductor Products Sector Core Topic Mobile Communications ~ Telecom Motorola Semiconductor Products Sector Headquarters: Schaumberg, Illinois Web Location: 28 October