How Motorola Plans to Survive

Smartwatches, which have been side shows for Android makers and even Apple, “need to be phone-independent,” he says. That means they need to have built-in radios and modems in order to connect to the Web on their own—but without draining battery life to less than one day per charge. He didn’t give timelines for such moves.

A pioneer of smartphone technology, Motorola is now trying to remain relevant when sales growth has slowed in key markets and hardware is becoming commoditized. (For more on why that’s happening, see this article.) Newer entrants or smaller players like OnePlus, Blu Products and Gionee India can order good phones from Chinese factories without doing almost any R&D of their own, and they sell them cheaply.

When the China-based Lenovo acquired U.S.-based Motorola from Google a year ago, Motorola's prospects were looking surprisingly good. Handset sales had doubled year over year, reaching around 30 million by the end of 2014, and there were internal expectations that the firm would operate profitably by now. The combination of Motorola with Lenovo’s smartphone business made the combination the No. 3 smartphone seller globally.

Instead, the company has been hit by a slowdown in the Chinese and Brazilian markets. Combined with the influx of newer low-price competitors, the combined Motorola/Lenovo has dropped in market share rankings to No. 5 and it ships just one-fourth to one-third as many phones as Samsung Electronics. The business lost $292 million in the second quarter of this year and has said it may not turn profitable for another year.

Mr. Osterloh, the top Motorola executive who was put in charge of the combined Motorola-Lenovo smartphone operations in June (when Lenovo’s mobile group chief Liu Jun left), has been empowered to implement Motorola’s strategy at Lenovo. That entails shrinking its portfolio of phones to just a handful, focusing on simplicity in software, and avoiding extra features on top of Google’s Android operating system that would slow down the performance of the phone.

“You can concentrate your volume in a smaller set of SKUs and end up with a terrific business,” he says. Meanwhile he is working on new hardware improvements to distinguish Motorola from its rivals, including better camera technology.

Apple and Oranges

A Los Angeles native, the 43-year-old Mr. Osterloh studied industrial engineering at Stanford University and got his business degree there too. He cut his product-management teeth at Good Technology, which offered security for mobile devices at businesses. It sold to Motorola in 2007, and he stayed for three years to help run its nascent Android phone business.

He left in 2010 to help restructure Skype, then owned by private equity firms, but returned to Motorola in 2012, after it had been acquired by Google. After becoming the top product executive, he was promoted to the firm’s top executive soon after Google announced it was selling the unit to Lenovo in early 2014.

To reduce costs amid its struggles this year, Motorola thinned its herd from 3,500 employees to 2,500 in recent weeks, and it shuttered two U.S. offices and one in Canada. (Two years ago Motorola had 11,000 mobile device employees, which included a China-based manufacturing business.) Lenovo shifted 1,000 of its mobile device employees, who cost less than workers in the U.S., to the Motorola org to make up for that hole and give it closer ties to Chinese retailers, carriers and manufacturers that actually make the devices. (Lenovo’s China-based mobile unit also has around 3,500 employees.)

In the U.S., Motorola has all but given up on competing against Apple and Samsung on the high end, which requires big (and risky) brand advertising campaigns. Lenovo, the parent company, isn’t willing to spend the billions on marketing in places like the U.S. to have even a chance of taking share in the higher-margin phone business—especially when the profit pool available to Android phone makers is shrinking. For now, Motorola is happy working with Verizon Wireless on “Droid”-branded phones and it’s trying to ride the growing wave of “unlocked” phones sold by retailers, not carriers.

Given Apple’s dominance of the high-end of the market, Mr. Osterloh says he has to “ignore them” and focus squarely on gettable tiers of the market—namely, lower-priced devices in emerging markets.

Much of the smartphone battles are shifting to markets where most of the growth will be in the coming years: southeast Asia, Latin America, the Middle East and Africa.

Racing to the Bottom

Much of the smartphone battles are shifting to markets where most of the growth will be in the coming years: southeast Asia, Latin America, the Middle East and Africa. Sub-$100 smartphones, which have little room for profit for hardware makers and sellers, are the norm in those areas. Thankfully for Motorola, it’s been anticipating this trend for a while.

“We helped start it,” Mr. Osterloh says of sharp price declines in smartphones. Two years ago, the Moto G phone took the Indian market by storm because it retailed at about $200; it required a set of microchips that could support a high-definition screen at a cost of just $20.

Today the Moto G retails for $180 in India and the U.S. Mr. Osterloh says Motorola is getting 10%-plus gross profit margins even from lower-cost handsets in countries like India, though he expects margins to shrink to the single digits for all Android handset makers over time. “It’s going to look like the PC industry,” he says.

And rapid reductions in cost of hardware like screens and camera lenses means that in the next couple of years, he says, “People...will not be able to tell the difference between a $150 phone and a $600 phone. We’re close to that point now.” 4G smartphones now retail for as little as $65 in places like China.

To gain an edge over rivals, Mr. Osterloh says he’s now focusing on camera technology, implementing components from camera maker Sony and hitting industry benchmarks that rival Apple’s iPhone camera. “Cameras are the new dial-tone,” he says. He says he’s working on other hardware improvements in order to stand out from the pack, as difficult as that may sound. After all, Motorola, like almost all other Android phone companies, outsources manufacturing to Chinese firms and is only able to do limited hardware R&D.

To close the gap with Samsung in Android-device sales, Mr. Osterloh says Motorola will also increasingly take advantage of markets where Lenovo operates (and has retail and carrier relationships) but Motorola doesn't, and vice versa. “It will give us a good lift,” Mr. Osterloh says. That’s the “synergy” Lenovo chief Yang Yuanqing promised when he acquired Motorola. Combining radically different systems and sales teams simply takes a long time, Mr. Osterloh says.

China was his biggest headache this year. Motorola produced significant volumes of phones for its re-entry into the country but got stuck with unsold inventory when that didn’t pan out. Mr. Osterloh says Motorola “went back too early” to China and didn’t have a “strong security solution” for consumers, nor did its phones have a lunar calendar. “It wasn’t properly localized,” he says. People familiar with Motorola’s inner-workings say Mr. Yuanqing pushed the company to go big in China and take the risk. (Mr. Osterloh says it was a collective decision.)

But in the second half of this year, Mr. Osterloh says, the biggest challenge facing Motorola is supply constraints.

“We were bracing for lower volumes,” he says, “But that has not come to pass.”