Forget about Hewlett-Packard (NYSE: HPQ), the US computer giant that overtook China’s Lenovo (HKEx: 992) to retake the spot as the world’s biggest PC maker late last year. In discussing its latest quarterly results released late on Wednesday, Lenovo’s talkative chief executive Yang Yuanqing had scant time to discuss his company’s recent loss of the global PC crown to HP, a previous obsession for him for much of the previous 2 years. (results announcement) Instead, Yang appears to have turned his sights to some equally big targets in the form of Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL), the world’s top 2 makers of smartphones, as Lenovo makes its own aggressive push into the space.
I’m not really sure what Yang was thinking, since both Apple and Samsung are premium brands in the smartphone space, with their models usually costing $500 or more. By comparison, Lenovo’s models are much more lower-end, usually costing $200 or less. Lenovo said it generated $998 million from mobile phone sales in its latest fiscal reporting quarter, up 77 percent from a year earlier, with the big majority of that coming from smartphones.
Based on those figures, mobile phone sales now account for just over 10 percent of the company’s total sales. Let’s take a closer look at the smartphone numbers, since that was clearly what Lenovo wanted investors to focus on, despite the fact that the company posted a record profit for its latest reporting quarter, with PCs still accounting for the vast majority of its sales.
The company sold 9.4 million cellphones in its latest reporting quarter through the end of December, with the big majority of that, about 9 million units, coming from smartphone sales. If you do a little math, it doesn’t take a genius to discover that Lenovo sold its smartphones for very cheap — around $111 apiece, to be exact. Assuming various markups along the way to end users, these phones probably ultimately retailed for anywhere from $150-$200, not exactly in the same league as Apple’s iPhones and Samsung’s Galaxy smartphones that typically cost 2 or 3 times that much.
Lenovo’s smartphone surge has come mostly in its home China market, with the company coming from nowhere to recently become the market’s second largest player behind only Samsung. But oddly enough, I haven’t seen many Lenovo phones around on the streets of Shanghai, where the brand is still perceived largely as a low-cost name without a particular record for quality.
My guess is that Lenovo has risen rapidly in its home market by selling to third tier and lower cities, where consumers want smartphones to surf the web but are much more price sensitive. If that’s the case, then perhaps Lenovo’s smartphone expansion strategy that targets developing markets is a good one, with the company recently starting to sell its smartphones in Indonesia, Russia, the Philippines and Vietnam.
Seeking a niche in low-cost smartphones isn’t necessarily a bad strategy, except for one major problem: that same strategy is already being followed by domestic rivals Huawei and ZTE (HKEx: 763; Shenzhen: 000063), which are also flooding the world with their own low-cost smartphones. ZTE just announced it plans to boost its smartphone shipments by 50 percent this year, and Huawei has also soared in the rankings to recently become the world’s third largest smartphone maker. (previous post)
With all those big names vying for limited space in the low-cost segment, I see some big clashes coming up in the next 2 years. Lenovo has already said it will initially sacrifice profits to gain global share in smartphones. That, combined with equally aggressive tactics from Huawei and ZTE, mean we could see some bloody price wars in the global low-end smartphone space in the next 2 years before 1 or perhaps even 2 of these big players ultimately leave the space or greatly scale back their presence.
Bottom line: Lenovo’s aggressive push into low-end smartphones is likely to move the company into direct conflict with Huawei and ZTE, resulting in some bloody price wars over the next 2 years.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.