oseph B. Cahill Crain’s Chicago Business
CHICAGO-As economies from South Korea to Indonesia convulse, China has become the last line of defense in Asia for Motorola Inc. The importance of China to the Schaumburg, Ill.-based manufacturer of semiconductors and wireless communications gear became clear in Wall Street’s reaction to the company’s fourth-quarter earnings. Despite a report filled with gloomy results from Southeast Asia, analysts took hope from signs that China has so far escaped the turmoil gripping its neighbors.
If China avoids a serious slowdown, analysts think Motorola will weather the crisis with moderate earnings damage. A drastic slowing of China’s torrid economy, however, could squeeze profits hard.
“The million-dollar question is whether Japan and China get pulled into the problem,” says analyst Eric Buck of Donaldson, Lufkin & Jenrette Securities Corp. in New York.
Motorola’s millions-billions, actually-are riding on China. In the past decade, the company has invested about $1.2 billion in semiconductor, pager and cellular telephone factories there. That stake will double by 2000, Motorola says. Head count in China is nearing 10,000, and the country accounted for 12 percent of company revenues through November.
“Nobody has a greater stake in China than Motorola, except the Chinese,” says analyst Albert Lin of Soundview Financial Group in San Francisco.
Conditions in China could sour. Currency devaluations in Southeast Asia threaten China’s export-driven economy, while a flood of cheap cellular phones and pagers into China from Korea could undercut Motorola.
Asia’s linchpin
Perry Noakes, corporate vice-president and general manager of Southeast Asia for Motorola, knows China is the linchpin of Asia.
“It’s 50 percent of our market out here,” he says. “From that standpoint, it’s a very important market for us.”
And Asia has been the key driver of sales growth for Motorola as domestic markets for wireless products begin to mature and semiconductor demand fluctuates.
“Over the last 10 years, the largest growth for Motorola has been in emerging markets, and the area leading that growth has been Asia,” Noakes says.
Large populations and sparse telecommunications networks attracted Motorola to Asian markets. As economies soared, Motorola rushed to capitalize on booming demand for wireless communications equipment. Employment in the region ballooned to 40,000 as the company scattered 26 plants and 12 research centers from Tianjin, China, to Penang, Malaysia.
By 1996, Motorola was generating 28 percent of corporate revenues in Asia. So, when Southeast Asian economies choked on a toxic mix of debt and overvalued currencies, Motorola was among the first to suffer.
Orders for cellular equipment in Southeast Asia fell significantly in the fourth quarter, and the company shaved growth forecasts for virtually every country in the region.
The only bright spot was China, which has avoided the monetary and fiscal imprudence pulling down the “tiger economies.” But economists warn of potential spillover effects and internal pressures that could slow growth in China from rates estimated as high as 8 percent to 10 percent in recent years.
Newly devalued currencies in Southeast Asia could trigger an outpouring of cheap exports, sinking Chinese goods in world markets. Layoffs as China pares back a bloated state economic sector could further dampen domestic demand.
“They’re definitely slowing down,” says Northwestern University economist Michael Evans, who also heads Evanston, Ill.-based consulting firm Evans Group.
How much China will slow remains to be seen. Evans predicts gross domestic product growth could sink to 3 percent to 4 percent, while Robert Genetski, president of Chicago Capital Asset Management Inc., foresees 6 percent to 8 percent growth in the next two years.
And currency devaluations could put Motorola at a competitive disadvantage in China, which has not devalued its yuan. Rival telecommunications equipment manufacturers from Korea could snatch sales from Motorola in China with lower-priced cellular phones and pagers.
“One of the things these countries are trying to do is export their way out of it,” Noakes acknowledges.
Working in Motorola’s favor is a shift to Asian-based manufacturing. Noakes estimates that 80 percent of the pagers Motorola sells in Asia are made there, as well as the majority of two-way radios and cellular phones. That reduces manufacturing costs as local currencies decline, keeping prices competitive.
Helping customers critical
“We’re seeing some significant cost savings, and that allows us to ride this out,” Noakes says.
Motorola also is helping customers weather the storm by extending payment terms. Noakes says that is essential to maintaining Motorola’s position in economies he believes will continue to lead long-term global growth.
Economists agree, but warn that the situation could get worse before it improves, particularly if Chinese authorities succumb to the temptation to stave off a slowdown by devaluing the yuan.
Says Genetski: “It would be an absolute disaster if China devalued.”
