Bottom line: Lenovo has done remarkably well since defying skeptics with its landmark IBM PC buy a decade ago, and could stand a 50-50 chance of remaining relevant a decade from now in the fast-changing world of high-tech gadgets.
Global PC leader Lenovo (HKEx: 992) is commending itself on how far it has come since its landmark purchase of IBM’s (NYSE: IBM) PC business 10 years ago, setting it on a path that has made it the world’s top computer seller. (company announcement) I’ll admit I was a skeptic at the time of the IBM deal in 2005, and have become much more bullish on Lenovo since then. Still, the company hasn’t completely convinced me that it has the necessary skill and vision to move past its global PC crown, which is fast becoming yesterday’s news as traditional computers rapidly lose ground to newer devices like smartphones and tablets.
Before I look at the challenges that Lenovo is facing, I want to start by personally congratulating the company on its huge accomplishments over the last decade since it announced it would purchase IBM’s storied PC business for $1.25 billion. I and many others predicted at the time that Lenovo could stumble badly with the move, since it had no experience at running such a major foreign business that was clearly in decline and need of restructuring.
Other Asian companies attempted similar moves that all proved disastrous, including the purchase of Siemens’ and Alcatel’s cellphone businesses by Taiwan’s BenQ and China’s own TCL (HKEx: 2816), respectively, also about a decade ago. Lenovo’s IBM purchase wasn’t exactly smooth sailing either, and the company had to undergo a major restructuring a few years after the deal as it struggled to redefine itself as a global PC company and not just a Chinese name.
But since then the company has done remarkably well, embarking on a string of additional acquisitions in such far ranging markets as Brazil, Germany and Japan. At the same time it moved aggressively into smartphones, doing reasonably well where other PC giants like Hewlett-Packard (NYSE: HPQ) and Dell had failed. It further showed its ability to focus on the future with 2 major deals last year, buying IBM’s low-end server business for $2.3 billion and faded US cellphone maker Motorola for $2.9 billion.
As someone who has followed Lenovo for more than a decade, I have come to respect this company that has been one of China’s biggest success stories on the global stage. Despite the early stumbles, Lenovo really seems to have positioned itself as a firm with 2 global headquarters, one in its own hometown of Beijing and the other in North Carolina where the former IBM PC business was based. Investors who believed in the company have been well rewarded, with Lenovo’s Hong Kong-listed shares rising more than 5-fold since the original IBM acquisition in 2005.
Top executives at companies that get acquired typically leave within the first year or two, as they are replaced by executives from the acquirer. But in the Lenovo case, at least 2 of the original top IBM executives are still in North Carolina working for Lenovo 10 years later, testifying to its attractiveness as a global employer. That pair are Thomas Looney, who joined IBM in 1974 and is now Lenovo’s general manager for North America; and Peter Hortensius, who was at IBM for 17 years before joining Lenovo and is now the company’s chief technology officer. I also have a lot of respect for Lenovo’s current CEO Yang Yuanqing, who has gained a reputation for running a very western style company that does reasonably well in the markets it enters.
But I wouldn’t be completely honest if I didn’t say I still remain slightly skeptical of Lenovo’s future prospects, especially in its gamble on smartphones. The general concept of moving into smartphones looks prudent and necessary, as Lenovo realizes its core PC business is destined to contract and eventually disappear. But the company’s own smartphones have developed a reputation as cheap, low-quality products that won’t win it any awards or the loyal customers it needs to ensure its longer-term success in this critical space.
Here again, I have to credit Yang Yuanqing and his team for realizing this major shortcoming and trying to rectify the situation through their Motorola purchase. I attended a major European telecoms trade show in March, and was surprised to see the Motorola phones at Lenovo’s large booth attracting far more attention than its own-branded phones, despite the US brand’s recent rapid decline.
Lenovo has hinted that it has big plans for the Motorola name, and we’ve seen some early signs that there could still be some excitement for a brand that helped to define cutting-edge and cool cellphones a decade ago. In my earlier days I would have given Lenovo’s Motorola strategy just a small chance of success, perhaps at 20 percent or less. But I’ve learned over the years not to underestimate the company, and would perhaps give it a 50-50 chance of succeeding in smartphones and remaining relevant in the fast changing world of mobile gadgets another 10 years from now.
(NOT FOR REPUBLICATION)