Re-Shoring Jobs With The Moto X

Recent news in and around the smartphone space points to an increasingly challenging environment:

• Weaker-than-expected shipments from Samsung;
• Weaker-than-expected June quarter shipments followed by price cuts and layoffs at Research in Motion – Blackberry;
• A sour outlook from HTC that calls for a sharp sequential drop in revenue;
• Apple AAPL -0.88%’s iPhone shipments fell 16.5% sequentially in the June quarter;
• Even though Nokia NOK -1.93%’s smartphone shipments grew 21% sequentially to 7.4 million units in the June quarter, the company’s average selling price dropped 17.8% on the same basis. The net result was had Nokia’s smartphone business revenues treading water.

After rattling those data points off, one would think the smartphone market is on a downward spiral, yet the latest figures from Strategy Analytics confirm the market continues to grow. In the June quarter, the third party research firm tabulated more than 229.6 million smartphones were shipped, up 10% from the March quarter and 47% compared to the year ago quarter. Looking at data from the GSM Association, there are more than 3.2 billion unique mobile subscribers as of August 2013 and that firm forecasts continued growth to 3.9 billion by 2017.

While there may be slower growth ahead, there is still growth to be had as smartphones continue to take share from basic and feature mobile phones. That shift is best seen in Nokia, which reported a sequential 4% drop in mobile phone shipments in the June quarter. On a year over year basis, the shift is far more evident as Nokia’s mobile phone shipments dropped  nearly 27%.

PowerTalk with Motorola Mobility MMI NaN% on the Moto X and bringing jobs back to the U.S. One company that is doubling down on the smartphone opportunity is Motorola Mobility, which is now owned by Google, the company behind the Android mobile operating system. This past week the two companies introduced their first jointly developed smartphone – the Moto X – and I was fortunate enough to speak with Mark Randall, Motorola’s Senior Vice President of Supply Chain and Operation, about the Moto X and what it means for job creation here in the U.S. Mark was formerly of Amazon and as he tells me he helped design the Fort Worth plant where the Moto X will be assembled, back when he worked with Nokia.

During our conversation, Mark talks about the high degree of customization that is possible with the Moto X and while he is tight lipped about what may be next for Motorola Mobility he does point out the size of the Fort Worth, Texas facility. At roughly 500,000 square feet, Motorola and its partner Flextronics International aim to employ 2,200 people when the Moto X ramps to full production. Reading between the lines, it sounds like the Fort Worth facility could be the home for more products and potentially more jobs.

Given the market share gains by Chinese mobile phone and smartphone vendors like Huawei, ZTE and Lenovo, many are concerned about the about the ability to compete with those vendors and be profitable while manufacturing in the U.S. Given the high degree of customization that Motorola Mobility is offering with the Moto X, Mark points out it would have been far more difficult doing this with China based manufacturing partners. He also tells me the closeness of the design team and the manufacturing-assembly team was also crucial and that the labor costs between manufacturing in the U.S. and China were not as far off as many might think.

Moto X will be available in the US, Canada and Latin America starting in late August/early September at AT&T, Sprint Nextel, Verizon Communications, T-Mobile and other carriers as well as at Best Buy stores and Motorola.com.

Given the not only lower than expected job creation numbers reported in the July Employment Report from the Bureau of Labor Statistics but also the low quality nature of the report, the re-shoring of jobs by Motorola is welcome news.

While I am all for re-shoring jobs back to the U.S., as investors we have to wonder how successful the Moto X will be. The smartphone space is crazy competitive, and a single product can carry you only so far. Longtime followers of Motorola remember the RAZR craze, but without a killer follow-up product, Motorola soon began to lose its way. Time will tell how successful the Moto X will be and if there will be follow on products, but given its association with Google, Motorola Mobility now has some deep pockets to fall back on and that means it is far from out of the smartphone race. Those deep pockets are making a good sized bet on the Moto X  given the $500 million in marketing and advertising that Google is going to spend on the new smartphone.

Because the Moto X will have a little more than one month of availability at best in the current quarter, that marketing and advertising blitz likely means even greater losses at Motorola for the near term. In the June quarter, Motorola Mobility lost more than $200 million on the operating line on $998 million in revenue. Some quick math shows that an incremental $500 million will sap $1 per share in earnings for Google in the coming quarters, but that’s small potatoes compared with the better than $43 per share that Google is expected to earn this year. If the product receives positive buzz, it will be a positive for Google shares.