Case study

KE1140

May 13, 2019

©2019 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Russell Walker. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Some details may have been fictionalized for pedagogical purposes. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing.

R U S S E L L W A L K E R

Motorola India: On Razr Thin Ice In 2006, more than 5 million people were newly subscribing each month to mobile phone

service in India and total subscriptions were growing at a far higher annual rate than in China and the United States (see Figure 1).

Figure 1: India Cellular Subscriptions (millions)

2000 2001 2002 2003 2004 2005 2006

India 3.6 6.5 13.0 33.7 52.2 90.1 166.0

China 85.3 144.8 206.0 270.0 334.8 393.4 461.1

USA 109.5 128.5 141.8 160.6 184.8 213.0 241.8

Source: ITU World Telecommunication / ICT Indicators Database

Motorola had foreseen the economic potential in the country of 1.08 billion people and had entered India’s market in 1995, just as telecom reform was taking shape. It employed a two- part strategy, creating an R&D hub while also becoming a player in the mobile phone handset business.1 By 1998, estimates of Motorola share of handsets in India ranged from 25% to 31%.2

As the market grew, however, Motorola lost handset share rapidly, falling to 4% in 2006 (see Figure 2).

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Figure 2: Handset Market Share in India

Company FY 2002–2003 FY 2003–2004 FY 2004–2005 FY 2005–2006

Motorola 8% 8% 9% 4%

Samsung 21% 13% 10% 7%

Nokia 45% 30% 55% 55%

LG NA 34% 12% 18%

Others 26% 15% 14% 16%

Source: ITU World Telecommunication / ICT Indicators Database

Despite its global brand and an early mover advantage, the company lagged even as millions of Indians bought cell phones each month. Company officials could only wonder why. . . .

Motorola Motorola had a long history of innovating in the communications business. Since its founding

in 1928, the company had released such groundbreaking devices as the first handheld two-way radio (a walkie-talkie), during World War II; the first commercially viable portable cellular phone, in 1983; and the first flip phone, in 1996, named the sixth-greatest gadget of the last half of the twentieth century.3

In 2004, the company was again on point with another widely popular device when it debuted the Razr, a flip phone that was much thinner than rival products and came in a variety of fashion colors (see Figure 3). The device, initially $500 and available for $200 a year later, was a sales juggernaut: In the third quarter of 2015, Motorola sold 6.5 million Razrs, doubling quarterly sales volume of the phone; when Motorola released the Razr previous November, it had projected sales of as many as 750,000 per quarter.4

Overseeing this success was CEO Edward Zander, the former president and chief operating officer of Sun Microsystems Inc. Zander had succeeded Christopher Galvin, the grandson of the Motorola founder, when he became CEO in 2004. Galvin had run Motorola since

1997 and had overseen the development of the Razr. He also had been a member of the leadership team that in the early 1990s decided to move on the Indian market.

Under Galvin’s leadership, however, Motorola lost global market share leadership in handsets to Nokia. Analysts criticized him “for not spinning off Motorola’s semiconductor or cell phone divisions once they began experiencing less demand.”5 In 1997, Motorola’s global market share was 31 percent; in 2002, this was down to 13 percent.6

Figure 3: Razr Handset in 2004

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India Emerging After gaining independence from the British in 1947, the new Indian government employed

protectionist economic measures, which kept India from becoming a fully integrated member of the global economic community. In 1991, the country experienced a balance of payments crisis and obtained a loan package from the International Monetary Fund, which spurred economic reforms. The government both privatized and liberalized, including reducing international tariffs to 20 % (2004) from average rates of 113%.7 This boosted exports, and by 2006 trade was growing by 25% a year. The growth in trade contributed significantly to increasing private-sector efficiency and enhancing productivity via:

• Domestic firms accessing superior (and cheaper) inputs, ideas, and technology

• Increased competition from actual and perceived imports, which improved efficiency8

In just over 15 years, India had become a major player in the global economy. According to predictions by PwC, India could surpass the United States to become the second largest economy (after China) by 2050.9

Telecommunications One sector that specifically benefited from privatization reforms was telecommunications,

which was previously owned and operated by the government. The industry had long been viewed as extremely inefficient and receptive to bribes. As a result, in 1991, a telephone was considered a luxury good. Few Indians had one, and wait-lists for installation were years long. By 1995, only one in 100 Indian citizens had a telephone, compared with two out of 100 citizens in Indonesia, four in China and eight in Thailand.10

The Indian government addressed these issues with legislation, including the 1994 National Telecom Policy that set the following goals:

• Telephones should be available on demand by 1997.

• All villages should be covered by 1997.

• In the urban areas, a public call office (PCO)* should be provided for every 500 persons by 1997.

• All value-added services available internationally should be introduced in India to raise the telecom services in India to international standards, preferably by 1996.11

The Telecom Regulatory Authority was formed to oversee these targets, enable competition, and increase foreign investment. Change in the industry was extremely rapid compared to other newly privatized industries, such as electricity. Observers credited this to the fact that there never had been political pressure to set artificially low prices for phone calls, that there were fewer vested

* A public call office is a telephone facility located in a public place in India.

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interests in telecom, and that telecom policy was exclusively a federal issue over which India’s 28 states had no say.12

Cell Phone Demand From 2000 to 2006, the total of subscribers to mobile phones grew on average by about 100

percent year on year in India (see Figure 1). Growth was phenomenal because few of India’s citizens had access to fixed-line options, and the mobile option was more economical. This was particularly the case in rural villages, where a new fixed line was three times the price of a mobile line.13

Although economy of scale was an attractive feature of the Indian market, low GDP per person and the popularity of prepaid cellular plans kept average revenue per user (ARPU) at $8 per month in 2006; the global average was $21.30.14 By 2006, GDP in India was less than half of China’s and only 2% of that in the United States (see Figure 4).

Figure 4: GDP Per Capita in India (in Constant 2000 USD)

2000 2001 2002 2003 2004 2005 2006

India 453.0 469.0 479.1 511.5 546.0 588.8 634.6

China 949.2 1,020.5 1,106.0 1,209.0 1,323.2 1,464.1 1,640.9

USA 35,080.7 35,102.3 35,405.7 35,976.4 36,920.2 27,701.6 38,341.6

Source: World Development Indicators (pulled August 2011).

The Indian market was lucrative because of the emerging middle class and the millions of new mobile subscribers, but firms entering the market needed to be sensitive to the country’s cultural diversity. Languages, food habits, religious practices, and lifestyles varied across the dozens of states. Indian consumers also varied depending on age and socioeconomics, displaying everything from “price sensitivity-based value expectations to high levels of indulgence showcasing brand symbolism.”15

Avoiding More Share Loss Despite its early-mover advantage in a country that was just opening to the global market

and on a pathway toward a stable democracy with growing GDP, Motorola was floundering. CEO Zander needed to take action to avoid further market share loss both in India and globally. However, he needed first to identify where the company had gone wrong—because billions of dollars were at stake.

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Endnotes 1 “We Are Developing Product Concepts in and for The Indian Market,” Financial Express, October 10, 2005,

http://www.financialexpress.com/news/story/150988/. 2 Sanjay Anand, “Mid-Range Cellulars Replacing Low-Priced Ones,” Times of India, January 30, 1998. 3 Dan Tynan, “The 50 Greatest Gadgets of the Past 50 Years,” PC World, December 24, 2005,

https://www.pcworld.com/article/123950/the_50_greatest_gadgets_of_the_past_50_years.html?page=2. 4 Mike Hughlett, “Motorola’s Razr leads way to sharp profit increase,” Chicago Tribune, October 19, 2005,

https://www.chicagotribune.com/news/ct-xpm-2005-10-19-0510190064-story.html. 5 Ben Charny, “Motorola Chief To Step Down,” CNET, September 21, 2003, http://news.cnet.com/Motorola-

chief-to-step-down/2100-1039_3-5079606.html#ixzz1LECaEva9. 6 Leslie Wayne, “Chief Decides to Step Down at Motorola,” New York Times, September 20, 2003,

http://www.nytimes.com/2003/09/20/business/chief-decides-to-step-down-at-motorola.html. 7 Arvind Panagariya, “India’s Trade Reform,” India Policy Forum, 2004, https://www.brookings.edu/wp-content/

uploads/2016/07/2004_panagariya.pdf. 8 Petia Topalova  and Amit Khandelwal, “Trade Liberalization and Firm Productivity: The Case of India,”

Review of Economics and Statistics, January 2010, https://www0.gsb.columbia.edu/faculty/akhandelwal/papers/ productivity_21.pdf.

9 “The World in 2050,” PwC Global, https://www.pwc.com/gx/en/issues/economy/the-world-in-2050.html, accessed May 5, 2019.

10 “A Tale of Two Sectors: What Can Indian Telecom Firms Teach the Power Industry about Reforms?” Knowledge@Wharton, February 15, 2007, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1660.

11 http://dot.gov.in/national-telecom-policy-1994. 12 “A Tale of Two Sectors,” Knowledge@Wharton. 13 Ibid. 14 John Sun, “The Diffusion Group: India’s Mobile Market Subscribers to Top 350 Million by 2010,” Mobile

Analyst Watch blog, August 2, 2006, http://mobileanalystwatch.blogspot.com/2006/08/diffusion-group-indias- mobile-market_02.html.

15 S. Ramesh Kumar, “Addressing Diversity: The Marketing Challenge in India,” Wall Street Journal, October 20, 2009, https://www.wsj.com/articles/SB125601922922896025.

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