Motorola: China Experience (Case #18, Notes)
Overview
The case analyzes Motorola's operations in China, the overall Chinese cellular phone industry, and Motorola's current marketing strategies. An overview analysis of market structure, including the wireless service providers controlled by the central government is provided in the case. This control by the socialist government's company planning and reward structure presents a unique situation for corporate competitive planning with unusual market barriers to entry. The large consumer base makes developing operations in China potentially extremely profitable and worthwhile despite the unique government regulatory structure. Due to telecommunication's recent modernization in China, competition in the cell phone industry is intense among foreign and domestic firms. Motorola no longer maintains a dominant market share, so it must leverage its in-house marketing and production capabilities to regain market position. China's market size, growth rate, and competitive forces present unique challenges for Motorola and the other companies entering the cell phone market there.
An underlying problem identified in the case is the report on market competition that Brian Lu, a Motorola China executive, has just received. The competitive pressure from the locally owned producers and the government's support of these producers has Brian worried. Dealing with competition from other foreign producers has been challenging enough, and now the company must find a way to take advantage of its current market leadership to the companies best advantage. Brian is now ready to move forward and work in the company to solve this key issue, so Motorola China will have the best opportunity to maintain success.
The Emerging Chinese Brands
Although the Chinese cell phone market is still dominated by foreign companies, the market share of local manufacturers is growing rapidly. China's Ministry of Industry and Information wants Chinese manufacturers to have 45% of the domestic market by the end of next year, and ultimately 80% by the end of 2005. It sounds too ambitious, but not impossible. Take color televisions as an example: 12 years ago, all color televisions in China were imported; now Chinese manufacturers completely control the market. There is no doubt that the Chinese government will follow suit to develop domestic manufactures of cell phones. International cell phone makers, like Nokia and Motorola, have started to pay more careful attention to local brands. So far, there are more than 40 local brands, among which TCL Mobile, Bird and Kejian are big players. Over 20 Chinese enterprises have license from the government for producing. Currently Chinese brands tend to lean toward consolidation: weak players will retreat from the market; some brands will definitely survive and have the ability of competing with big international players. Local industry estimates show that market share of Chinese manufacturers jumped to 15% from only 2% in 1999. Almost all foreign brands are losing market share to local brands. According to data from CCID Consulting, TCL Mobile accounts for 6.8% of 3rd quarter's sales in 2002, outranking Siemens by nearly 2 percentage points.
The rapid growth of Chinese manufacturers can be attributed to several reasons. Firs of all, global electronics manufacturing is shifting to China. Market saturation in the US and European countries has resulted in the reducing in profit margins of cell phone producers. In order to cut cost, global cell phone providers have tried to make advantage of the local low cost of production by increasingly moving their manufacture base to China. The Chinese share of world production reached 23% last year and is expected to cross 50% by end 2005. Accordingly some global suppliers for components have set up indigenous Chinese production to satisfy the demands from their clients, like Motorola and Nokia, which has also given Chinese manufacturers convenient access to components purchasing. Also, local outsourcing of foreign brands has fostered the development of skilled domestic suppliers. Although there were complaints about the inferior quality of the first domestic cell phones, now many big local names have overcome this problem and gotten increasing support from consumers.
Local brands also benefit from their expertise in other electronics related industries. They are not pure "startups" but experienced players in some other electronics markets. For example, TCL Mobile is a subsidiary of TCL, a leading domestic provider of color televisions. These companies are knowledgeable in local consumer preference as well as management of distribution channels. Their strategy of indirect attack is to avoid intense competition in major metropolises, like Shanghai, which require heavy expense in advertising and promotion, and go for medium and small size cities where foreign brands usually do not have sales forces.
Finally, though no individual domestic manufacturer has the ability to compete with global providers in developing new technology, a strategic alliance called China Mobile Communication Alliance has been formed among 17 domestic producers for research and development. Its objectives are not only to fight for domestic market, but also to carry out international expansion to other countries, such as Russia and India.
Because of poor performance in the U.S. and European market, Motorola, to some extent, relies on the Chinese market. Hence, how to deal with the emerging domestic competitors is becoming a critical issue for Motorola to sustain its current No.1 position. Instead of directly competing with Chinese brands, Motorola has started to cooperate with them in production. Currently Motorola has signed a licensing contract with TCL Mobile, which allows TCL Mobile to use Motorola's GPRS technology for mobile phone manufacturing. Half of Chinese manufacturers have gotten technology from Qualcomm, which created the CDMA technology, for production of CDMA mobile phones.
The Expanding Lower-Priced Segment
Cell phones used to be a luxury product when first introduced into Chinese market. People saw it as a symbol of wealth and a successful career. Most buyers preferred mobile phones with luxurious appearance at higher prices comprising some special numbers that sounded like "making fortune" in Chinese. New models were priced as high as US$1,200. As the first brand of cell phones in Chinese market, Motorola had been devoted to developing high-end products for years. However, in recent years, the demographics of consumers are changing: the growth rate of demand for high-end mobile phone is declining, while the market size for low-priced products is expanding tremendously. According to CCID's statistics, shipments in the 3rd quarter of 2002 grew 0.3% from the 2nd quarter, while revenue slipped 2.5%. More new subscribers are from Social-Life Lovers than from the other three groups. For Social-Life Lovers, shining looks plus fantastic functions is not their major preference. Cell phones are becoming a standardized commodity leaving much lower profit margins than before.
Compared to Nokia and Chinese manufacturers, Motorola does not have a good performance in low-priced mobile phone because of difficulties in lowering the cost. Unlike Nokia's cell phones, different models of Motorola phones do not share the same components or parts, which certainly hinders the company in further cutting manufacturing cost. Also, the relatively high expense in R&D, including salary structure and facility, is a reason that Motorola can hardly price the new models it develops under $100.
Discussion Questions
1. How should Motorola appropriately react to the emerging local brands, head-to-head competing or cooperating in some fields? Will licensing manufacturing technology to Chinese manufacturers weaken Motorola's core competency?
2. Facing the expanding low-priced segment, how should Motorola, traditionally known as a brand for high-end mobile phone, position itself? Is the company's current branding strategy effective in penetrating into this segment? If not, what kind of marketing strategy should Motorola follow?
3. What should Motorola do in order to effectively cut costing in developing low-priced mobile phone?
4. What should Motorola do to regain market share?