The Spark Plug

By Jyoti Thottam / Schaumburg

Amid the chaos and crowds of Coney Island, Ed Zander learned an early lesson in the value of hustle and patience. The son of a furrier in Bensonhurst, Brooklyn, Zander loved the Parachute Jump, the Silver Streak and, of course, the Cyclone. After school he and his brother would stand at the exit to Steeplechase Park for hours and charm people out of unused ride tickets, hoarding them in a rented locker. "We had, like, 3,000 free rides," Zander says. By summertime, they could spend all day in the park without ever buying a ticket.

Zander tells the story with a baby boomer's nostalgia for his 1950s childhood and a true salesman's pride. Now CEO of Motorola, Zander, 58, doesn't hide the fact that he has tried to animate the company with his particular brand of Brooklyn moxie. He acknowledges that Motorola has a storied past. (Its engineers invented the cellular phone and the walkie-talkie, and it was one of the world's first manufacturers of semiconductors.) But in the years before Zander took over, Motorola had been losing ground to the market-leading muscle of Nokia and to the stylish, inexpensive new products from smaller rivals like Samsung and LG. "People were telling me, 'You gotta save this American brand,'" Zander recalls, rolling his eyes. "Don't give me this religious thing. I never really looked at it as a mission from God."

He did, however, see a lack of fire. After a few disappointing quarters, some product misfires and layoffs that cut 60,000 employees, the company had become "gun-shy," Zander says. When he arrived in January 2004, he set out to change Motorola from the inside out--turning an engineer's company into a design powerhouse, an American icon into a global player and Motorola's conservative culture into one that embraces risk. As Zander puts it, "You gotta celebrate taking a swing."

The emblem of Zander's vision for a new Motorola--one that marries innovative engineering with bold design and marketing--is the Razr. Nearly a year after the wafer-thin phone was launched, sales are still accelerating. Motorola sold 6.5 million Razrs in the third quarter of 2005. In that period, the Razr accounted for 1 in 25 phones sold by any major carrier. The Razr is on track to surpass the best-selling phone of all time, Motorola's StarTAC. If that phone, the world's first clamshell, was Motorola at its geek-chic best, the Razr is just chic. Initially sold in silver, a black Razr made its debut as a gift to nominees at the Academy Awards this February. For Christmas, the company is selling the hot-pink Razr, promoted mainly as a red-carpet accessory to Hollywood starlets.

Even though its mobile-phone shipments grew twice as much as Nokia's or SonyEricsson's in the third quarter, Motorola is still facing huge challenges. Manufacturers in China and South Korea are hot on Motorola's tail. When they figure out (and that is when, not if) how to make phones as cool as the Razr, there's little doubt they will produce them faster and more cheaply. Motorola's stock is up 58% since Zander took over as CEO, but it has been hovering around $20 for the past four months, despite seven straight quarters of double-digit revenue growth. The fear, as Merrill Lynch analyst Tal Liani explains it, is that despite the Razr's success, "in the long run, the company will face commoditization pressure."

Unless Motorola can keep its costs down while continuing to roll out new, innovative phones that sell at a premium, it could meet the fate of so many other U.S. manufacturers: crushed under the weight of price competition. IBM sold its PC business last December to the Chinese firm Lenovo after failing to make a reasonable profit on ever cheaper PCs. A year after its launch, the price of the Razr has fallen from $500 to $200. Motorola has high hopes for such new products as the Q, a device similar to the BlackBerry that will launch early next year, and the Pebl, a curvy counterpart to the Razr. But its music-playing Rokr, which made its first appearance this fall, has been a disappointment. Meanwhile, competitors like Samsung are introducing their own superslim phones.

Motorola executives maintain that real innovation is not that easy to copy. Looking at the Razr on her conference table, Padmasree Warrior, Motorola's chief technology officer, sees a marvel of mechanical engineering. She points to the body, made of aircraft-quality aluminum, and notes that the keypad keeps its slim profile because the numbers are etched into it, not raised on buttons. She is proudest of something you can't see: a foldable antenna encased in the phone. That idea came from Motorola's designers, who wanted to create the first clamshell without an annoying pull-out antenna. Her engineers worked for months and eventually patented a J-fold design for an antenna that is supple enough to fit around the mouthpiece but can still carry a signal. "That's very hard to do," Warrior says. Motorola Labs, which once worked purely on such esoteric design challenges as those, will be brought into the process much earlier, and Warrior says its strategy will be better aligned with the rest of the company so that even the research engineers are always working on projects that eventually touch the customer.

Even if Motorola can keep its edge in innovation, it will not be able to escape the shifting economics of the mobile-phone industry. Today wireless carriers subsidize the cost of handsets. Thanks to rebates and discounts, some consumers brag about never having paid a cent for their phones. Indirectly, they do. Carriers make up the difference with charges for souped-up services or long-term contracts. "It's the biggest single drag on the carrier's income," says Ping Zhao, a telecom and wireless analyst for New York City--based CreditSights. Now, under pressure to improve their margins, carriers are cutting those subsidies, forcing handsetmakers, which rely on the carriers to sell most of their phones, to bear the cost while keeping retail prices low. Zhao calculates that since the beginning of this year, Cingular, one of Motorola's largest customers, has cut its subsidies to handsetmakers by two-thirds. Those savings accounted for $162 million of Cingular's $215 million in operating profit in the third quarter, and it could soon put pressure on margins at Motorola, which are already lower than Nokia's.

That kind of hand-wringing about margins gets under Zander's skin. At an investors' conference in September where he intended to promote the Rokr, he was instead peppered with questions about how the company would shore up its profit margins once sales of the Razr start to slow. At the end of the meeting, an exasperated Zander started venting to an attendee about the evils of short-term thinking on Wall Street. "I work for shareholders," he said in an interview in his Schaumburg, Ill., office three weeks later. "But, that said, are you a long-term shareholder or a short-term shareholder? There seems to be more and more of a focus on short-term results, which makes investing for the longer term that much harder."

For investors willing to stick it out, Zander has a bold vision, one that focuses on the next decade's hot new country rather than the next quarter's hot new product. Even as Motorola continues to develop high-end phones, he is pushing the company to go after the lowest end of the spectrum: a sub-$40 phone aimed at farmers and the striving urban masses in India, several nations in Africa and, to a lesser extent, China. But he doesn't want to sell just cheap phones; he wants to transform those markets into a new base of customers for every product the company sells.

India in particular is a high priority for Zander, who has made that country his personal project. His partner on the India team is Warrior, a 21-year veteran of Motorola who was born and educated in India. (Zander tried twice to recruit her to Sun when he was chief operating officer there, and a running joke at Motorola is that he took the CEO job just to work with her.) Instead of flooding India with cheap products, Warrior says, the company is introducing pared-down phones that share a design language with more expensive ones. They use the same accessories and logo, the keypads look similar and the body of the low-tier phones is made of a high-quality plastic that looks and feels like brushed metal. When a farmer in rural India spends a third of his household's monthly income on a phone, she says, "we want to make sure that people are proud of what they have." The strategy is modeled on Nokia's. By far the leader in India, with 65% of the market, Nokia pioneered the portfolio approach to selling phones in a developing market.

Motorola's advertising too is the same no matter where you go, promoting the company's most expensive, best-looking phones. Ron Garriques, who runs Motorola's mobile devices unit, says that even though sales of the Razr in India are small, its image is attracting people to Motorola's other products. "In India only about 1% of the population has the ability to afford the Razr," Garriques says. "The real pull for us is the other 1.1 billion people who can't afford a Razr." To reach them, Motorola is working with local carriers to take their phones into rural areas and in some cases help arrange financing. "We have vans, buses, jeeps, carts," Garriques says. "We go right to them."

To refine its products for emerging markets, Motorola is turning to its local experts. One-third of its engineers work outside the U.S. Engineers at Motorola's software-development center in Bangalore, India, suggested that the address books for phones sold in India ought to allow more room for surnames beginning with S to accommodate all the Singhs, Sens and Srinivasans. In China, the challenge is different. There are more high-end consumers, but Motorola has to distinguish itself from market leader Nokia and a host of Chinese competitors. Again, Motorola drew on the local knowledge of its engineers in Shanghai to develop a phone, sold only in China, that can recognize 6,000 Chinese characters written with a fingertip on the touch-sensitive screen. Competitors' phones in China require a stylus.

Blurring the lines between engineering, design and marketing comes naturally to Zander. He may be an engineer by training, but he has always been more of a salesman at heart, more interested in getting products to market than making them. After graduating from Rensselaer Polytechnic with a degree in electrical engineering, he took a job at Raytheon, mainly to avoid getting drafted in the Vietnam War. Although he was proud of contributing to Raytheon's work on the Apollo space program, "it was hypocritical," he admits. "I was against the war, but I worked for a defense company." That was the last time he worked on something he didn't believe in. He got his M.B.A. and then went to Data General, where he eventually talked his way into a marketing job. At Motorola he tries to stay close to customers and to his products. On a five-day, three-city tour of India this summer, he met with all of Motorola's major Indian customers. At home, he spends at least one day a week in Motorola's downtown Chicago design center. "I go out and hang out there," he says. "It's great. I'm the old guy."

In many parts of the world, great phones and aggressive marketing will not be enough. The infrastructure to support mobile-phone service doesn't exist. So Motorola is making another calculated risk, pushing to sell the backbone networks for new mobile-phone systems in developing countries. As with its full-spectrum strategy for mobile phones, Motorola pitches itself as a company that can provide an initial network that is easily and cheaply upgraded as a country's mobile-phone market develops. Warrior acknowledges that building the network is no guarantee that consumers will buy Motorola phones and use them, but "Motorola handsets will work better," she says.

One potential advantage is an agreement that Motorola expanded in September with a trade group called the GSM Association to sell phones priced at less than $30 to 10 carriers operating in 17 Third World countries. That deal could add as many as 6 million phones and an estimated $192 million to Motorola's revenue in the first half of the year. Alongside those basic phones, Motorola will sell models with radios and cameras. "Everyone has realized that cellular-telephone service is not a luxury," particularly where there is no conventional phone service, says Raghu Rau, head of strategy for Motorola's networking business.

Making the broad push into emerging telecom markets will require Motorola's disparate working parts--half network infrastructure, half consumer products--to work together in a way they rarely did before Zander arrived. "The leaders of the business units would have tried to optimize the business for themselves," Rau says. Under Zander, part of senior executives' compensation is now tied to Motorola's overall performance, not just that of their own units. They meet in person more often, and each of the top 14 executives is now personally responsible for two major customers or regions. Zander won't make a major change, including a big hire, without knowing that all 14 are behind him.

Unlike many outsider CEOs, Zander kept most of the existing top managers. He did get rid of the CEO's palatial executive suite, complete with private bathroom and treadmill. With so much space, "Who do I talk to?" he asks, laughing. He now sits with the other top managers in a cluster of modest glass-fronted offices. His isn't even the largest, and his secretary gets the view. Ask Motorola executives about their CEO, and they are almost as likely to tease him--about his taste for what he calls cooked sushi or his complaints about the commute to Schaumburg--as praise him.

Some of that informality reveals the influence of Silicon Valley, where Zander spent more than 15 years at Sun Microsystems and then a private equity firm. He is trying to bring some of the Valley's spirit to the Chicago suburbs. He has challenged everyone--not just the mobile-phone designers--to come up with Motorola's next iconic product. Rau says his team was inspired by the Razr to develop the "zero-footprint base station," equipment for mobile-phone carriers that takes up less real estate than a standard cell-phone tower.

It doesn't always work. At a new-products lab near the company's headquarters, Motorola engineers excitedly demonstrated a new device, the Ojo, which works as a regular mobile phone and then seamlessly docks into a videophone at home. Zander isn't satisfied. He's thrilled that it works but says the Ojo is too hard for the average consumer to install. "It's a product that wasn't thought through," he says. Still, he's happy that they're taking a swing. Like a summer at Steeplechase, innovation is worth the wait.