Motorola ChinaFailure of SuccessOctober 10th 2007

Internation Trade and Competition in High Tech

Jing Yuan

Wei Xu

Kin Wong

Joseph Wofford

Alex Ingles

Final recommendations

•Use Motorola brand only for high-end market•Focus on profitability, branding

•Acquire local manufacture to exploit low-end market•Don’t yield market segment

Design a business strategy that enables Motorola to be competitive in both high and low end markets.

High End Low End

Motorola leadership in China – 1981 to 2001

Market environment in China• Had just opened • Need for new technology• Foreign companies hesitate to enter in fear of political instability

Market environment of competitors • No domestic competitors• Global competitors are rare

• Nokia has not started to focus on cell phones Motorola Strategy

• Branding from pager business in China• Built a bureaucratic network in China, favor of Chinese government • Attracts local talent and traini them

• benefit for employees, localized R&D, relationship /JV with local company, localized supply chain

• Vast investment and view China as a strategic market• Manufactures handsets in China both for export and domestic sales• Good public relation

Motorola competitive advantage erosion – 1998 to 2004

Technology Change: In 1996, GSM become the standard for 2G in China. From analog to digital, Motorola losses its advantages.Technology Change: In 1996, GSM become the standard for 2G in China. From analog to digital, Motorola losses its advantages.

Market Change: Market in large cities has changed. Growth is in small cities and rural area. Development of low end market.Market Change: Market in large cities has changed. Growth is in small cities and rural area. Development of low end market.

Demand Change: Shifting in demand (in cell phone,headset) from simply fashion to fashion combined with sophisticated technology.Demand Change: Shifting in demand (in cell phone,headset) from simply fashion to fashion combined with sophisticated technology.

Company Operation Change: Losing the relations with the locals Not doing well globally Inconsistent change in marketing and styles.

Company Operation Change: Losing the relations with the locals Not doing well globally Inconsistent change in marketing and styles.

Domestic Competitors: 1. From assembly to clone to R&D.

2.Penetrate to lower end market,e.g. rural areas,

small cities.

3. Pricing advantages.

4. Design to Chinese customers’ taste.

Domestic Competitors: 1. From assembly to clone to R&D.

2.Penetrate to lower end market,e.g. rural areas,

small cities.

3. Pricing advantages.

4. Design to Chinese customers’ taste.

Global Competitors: 1. Nokia has lower cost of headset.

2. Perform better in GSM phone.

3. Has distribution channel to small cities and develop

lower end market.

Global Competitors: 1. Nokia has lower cost of headset.

2. Perform better in GSM phone.

3. Has distribution channel to small cities and develop

lower end market.

Risks and Challenges

•Intensive competition • Chinese suppliers were getting too good. • Their quality, low-priced parts had helped create new,

homegrown and extremely aggressive competitors. • Numerous global competitors. • Short life cycles for new products.

•Government policy to insulate domestic companies.

•Need for distribution network to reach small cities.

•New products, designed to Chinese consumer’s taste by local companies.

•The Tiananmen Crisis in 1989.

•Change of preference from CDMA to GSM .

How can Motorola regain its leadership

•Preserve the Motorola brand•Use Motorola brand only for high-end market

•In 2004, Motorola is the leader with 40% of market share•Don’t “tarnish” the brand for high-end phones•Focus on profitability within Motorola’s traditional area of strength•Leverage R&D assets•RISK: Becoming a niche brand rather than dominating the market•ALTERNATIVE: Differentiate high end models through other means

•Don’t Yield the Bottom of the Market•Acquire local manufacture to exploit low-end market•Use established distribution network•Leverage local (cheap) supply chain•Aligned with their current positioning•RISK: Lack of approval from the government•ALTERNATIVE: Enter a joint-venture with a local firm

“Within their value chains, firms have partnered with potential competitors within their industries-suppliers and customers-to create and capture value.”†

†-S. Godfrey, C. Rynbrandt, C. Stunson, C. Sullivan, “Understanding Porter’s Five Forces In the Digital Age”, 2000.

Focus on both profitability and market share

Rivalry 20+ competitors International AND local

competition High-end AND low-end

competition

Suppliers High-end: a) Vertical

integration for some components and b) dependency on suppliers for others (e.g.: high-density flash memory)

Commoditized market for low-end components

Customers Carriers/retailers (main

customers): strong bargaining power

Final consumers: High price sensitivity Local trend followers Low brand loyalty

Cell phone industry in China TODAY – Porter’s 5 forces

Entrants High-end - High capital investments required Low-end – lower investments (buy components

in the market) but low margins Regulatory barriers

Substitutes Landline - difficult to get UTSTARCOM – low-end market VOIP – difficult to get Not have one

Low force

Medium

High force

Motorola Earnings Announcement Jul 07

Cell phone industry TODAY

China 2004 (case): 336 millionChina June 2007: 500 millionWorldwide Jan 07: 2.7 billion

Number of mobile phone users

Nokia: 21.1%

2004: 14.5%

2004: 16.9%

Worldwide Market share Q1 2007

2004: 15.4%

2004: 30.7%

2004 (case): 674 million2007 Q1: 256 million

Worldwide Sales (units)

Comments from last class

According to Exhibit 11 in the case, in 2004 Motorola was the absolute leader in the high-end segment.

“Motorola didn’t have a premium brand”

Nokia AND Motorola have gained significant market share from the local competitors from 2004 to 2007

“International OEMs can’t compete in the low-end market”

Although this is the case in most countries, in China retailers are also major players in selling handsets.According to CCID, in 2003 the carriers were responsible for only 18.4% of handsets sold.Still, the retailers also have a strong bargaining power over the manufacturers.

“The only customers of manufactures are the carriers”