Motorola tells infrastructure unit to shape up

Ben Klayman and Yukari Iwatani

CHICAGO: Motorola Inc.'s money-losing infrastructure unit has told employees

it has 18 months to whip itself into shape. If not, analysts said, more job cuts

or a sale of the entire business could result.

The chief of the Chicago area-based company's global telecom solutions

segment (GTSS), which makes equipment for the world's wireless providers, told

employees in an internal memo Thursday that the unit's performance must improve

amid a deteriorating market. Motorola said Thursday the unit, which posted a

$1.4 billion loss last year, would cut 3,000 jobs, or 20 per cent to 25 per cent

of its work force.

"In order for GTSS to break out, we must first break even," Adrian

Nemcek said in the memo, a copy of which was obtained by Reuters. "In other

words, Motorola GTSS must do one thing: establish profitable operations in the

short and long term."

"The next 18 months are critical for GTSS," he said later in the

memo. Shares in Motorola, which announced a total of 7,000 job cuts on Thursday,

closed up 41 cents, or almost 3 percent, at $14.45 on the New York Stock

Exchange.

Nemcek said the unit must break even in the third quarter of 2002, become

profitable in the fourth quarter and then further lower its break-even point to

ensure ongoing profitability next year. He did not say what would happen if

those targets were not achieved, and he was not available for comment. A

Motorola spokeswoman said the unit's employment was based on the assumption of

no further market deterioration or unforeseen political or economic disruptions.

On a conference call Thursday, discussing the job cuts and a decision to take

$3.5 billion in charges, Motorola said its wireless infrastructure unit now had

the right number of employees for the current weak environment.

"We feel like we now have it sized to be able to handle the level of

business we see over the next 18 months until the market...rebounds,"

Motorola president and chief operating officer Ed Breen said.

Return to profits or else



Analysts said Motorola's implied message is that either the unit returns to
profits or else more layoffs or even the sale of the whole business are

possible.

"The 'or else' is there will be deeper cuts," J P Morgan analyst Ed

Snyder said. "The Street will be very bearish on Motorola if that division

doesn't improve." Failing that, Motorola would likely have to sell or close

the money-draining business, analysts said.

"Motorola will need to shut down the infrastructure business altogether

(or) they can form a strategic partnership (or) they can be bought," said

Jane Zweig, CEO of wireless consulting firm the Shosteck Group. US Bancorp Piper

Jaffray said Motorola has three options: make the unit successful, which could

still entail more job cuts, or sell it, or wind it down, in that order of

desirability.

Any way it goes, Motorola needs profits, SoundView Technology analyst Matt

Hoffman said. "It's in Motorola's interests to make this as profitable as

possible because that enhances the sales prospects," he said. "Across

the board, profitability is better than growth right now."

Some analysts have pushed Motorola to do something with its money-losing

businesses, including the wireless infrastructure group and the semiconductor

business, and they would not be disappointed to see internal funds freed up to

reinvest in other areas where the return would be greater.

Making it hard for Motorola, however, is a tough market for wireless

equipment that has battered even stronger rivals like Sweden's Ericsson and

Finland's Nokia. Analysts have said the market needs fewer, stronger players,

and Motorola said last month it wants a partner to strengthen the infrastructure

unit by adding a switching product.

While Motorola said it is talking with everyone, rumors at various times have

linked the unit with similar operations from Canada's Nortel Networks Corp. and

Germany's Siemens AG.

Nemcek said the global wireless infrastructure industry is expected to

decline by more than 10 per cent this year, followed by flat demand in 2003 and

2004, with modest growth likely in 2005. He said a return to days of

double-digit growth, as seen in the late 1990s, was not expected.

The 3,000 job cuts in the Motorola unit will begin as soon as July and

continue into 2003, said Nemcek, who called the cuts the largest aspect of the

turnaround plan.

(C) Reuters Limited.