Handset making migrates from U.S.

Motorola closed its last domestic cell phone production plant as part of its long-term strategy to cut costs and streamline its business. While Ericsson also made similar changes to its U.S. production strategy, handset leader Nokia is not expected to follow suit.

Although 2001 is expected to be a difficult year for handset makers, it could be the year players redefine their business plans to keep pace with an industry that seems capable of transforming overnight.

“This industry is changing rapidly, and what it takes to be successful is different than how it was a few years ago,” said Leif Soderberg, head of strategy for Motorola's PCS business. “This was not driven by near-term economic factors or specific events. We want to get the right balance between capacity and demand.”

Motorola last week cut 2500 manufacturing jobs at its Harvard, Ill., plant, claiming it has more than enough global capacity at its other less-costly sites. The company plans to consolidate the remaining manufacturing activity into lower-cost locations and to its outsourcing partners. Motorola's cell phone manufacturing will be done at international plants, some of which are located in Mexico, Brazil, China and Germany.

Refocusing and restructuring could help handset players such as Motorola evolve with the industry as it moves from 2G to 3G.

“We have been around for more than 75 years, and I don't think the acid test [for success] is whether we actually manufacture products,” Soderberg said. “We now want to be able to program the phone the way the operator wants it.”

The company wants to redirect its focus to the varying technology innovations wireless operators will come to demand such as software-based solutions that will be embedded in phones, he said.

“Motorola's strength always has been on getting the premium product out there,” said David Kerr, director of wireless for Strategy Analytics. “They are smart in getting out of low-end manufacturing because operators want design expertise for user interface or anything that is remotely intuitive. Technology such as voice navigation and different display choices are the areas network operators are more willing to pay more for wholesale, which will produce wealthier margins.”

In addition, this move could allow Motorola to focus more on other areas of its business such as distribution, which has proved to be more of an economic driver than manufacturing, Soderberg added.

“There might not be manufacturing in place domestically, but the value-add in distribution centers will be beefed up,” he said.

Motorola received some negative publicity recently after announcing less-than-stellar—but expected—fourth quarter earnings. However, some analysts believes the company has the right strategy.

“The company was quite savvy in deciding to concentrate its resources where they could be maximized,” Kerr said. “I am impressed with the strategy Motorola has in place to maximize its margins.”

However, with Motorola exiting the volume segment of the handset business, it could become easier for Samsung to enter the market and surpass Ericsson in terms of market share, Kerr said.

Although it has been rumored that Ericsson will spin off its handset business or shift it as Motorola has, Kerr predicted Ericsson will experience a gradual retreat of its handset business as opposed to a dramatic exit.

In October, Ericsson announced that it was “taking aggressive action to prepare for strong 3G demand” when it moved mobile phone production from Kumla, Sweden, and its U.S.-based facility in Lynchburg, Va., to other suppliers. Because it will release its earnings at the end of the month, Ericsson refused to comment regarding its handset business strategy.

Kerr does not expect Nokia to reduce its manufacturing capabilities. Nokia currently has two domestic mobile phone manufacturing plants in Fort Worth, Texas.

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