Lenovo Eyes Western Smartphone Markets

Lenovo smartphones on westward journey

I have to commend Yang Yuanqing, chairman of PC giant Lenovo (HKEx: 992), for his company’s latest quarterly results that look quite solid, but even more for his ability to stay on message. Just a year ago, Yang took every opportunity to talk about his desire to overtake US rival Hewlett-Packard (NYSE: HPQ) to become the world’s biggest PC brand. That message has clearly become yesterday’s news, replaced by the latest mantra that China’s consumer tech giant is setting its sights on smartphone leaders Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930) as its next targets.Never mind that Lenovo briefly gained the global PC crown last year, only to lose the title again to HP. That doesn’t seem to matter anymore, and Lenovo’s latest results certainly seem to reflect that changing priority. It reported its laptop PC sales actually fell 2 percent in its latest reporting quarter through the end of March, while desktop PC sales were flat. (company announcement) Of course anyone who follows the industry knows that PCs are a dying product line, and Lenovo is hardly unique in seeing this kind of slow growth or even contraction. Still, it’s not helpful that laptop and desktop PCs still account for more than 80 percent of Lenovo’s overall revenue.

Meantime, Lenovo is placing its bets for the future on smartphones and tablet PCs, 2 areas now dominated by Apple and Samsung, a message that Yang delivered yet again at a news conference to discuss the latest results. The company said its smartphone sales tripled in the latest reporting quarter, though they still only account for 9 percent of its total. I should also add the big picture figures that Lenovo’s overall revenue grew a relatively small 4 percent for the quarter even as it profit jumped 90 percent, indicating the company is starting to benefit from its many acquisitions over the last couple of years.

But returning to Yang’s central message, the picture for the company’s smartphone business looks a bit murky at best, as does its enterprise business that has suddenly become a future focus area. Lenovo now sells its smartphones mostly in developing markets, with China accounting for a big portion of the figure. Yang says he wants to change that by introducing the company’s smartphones into more lucrative but also highly competitive western markets.

This strategy looks filled with risk to me, as many other developing market companies have tried but failed to break into these western markets due to stiff competition. What’s more, consumers in these western markets are less focused on price and pay more attention to service and product reliability than developing markets, a concept that many Chinese firms don’t fully understand.

A few Asian companies have had limited success in the space, such as smartphone maker ZTE (HKEx: 763; Shenzhen: 000063) and laptop PC maker Acer (Taipei: 2353). But the number of failures has been far larger. Lenovo might get some help due to its strong presence in the US from its 2005 acquisition of IBM’s (NYSE: IBM) PC business. But even so, I would still only give it a 50-50 chance of success at gaining significant business in western PC markets in the next 2 years.

Speaking of IBM, Lenovo’s CFO also commented indirectly on the recent talks between the 2 companies on a sale of IBM’s low-end server business to Lenovo. I’ve previously said that such a sale would be smart for both sides (previous post), and I do expect them to eventually close a sale. But the latest remarks from Lenovo’s CFO Wong Wai Ming do seem to indicate that the talks have stopped for now over price. Such pauses often happen in deals of this size, and I fully expect the 2 sides to return to the bargaining table in the second half of the year and reach an agreement by the end of 2013.

Bottom line: Lenovo’s plan to sell smartphones in the west stands a 50-50 chance of success, and it should reach a deal to buy IBM’s low-end server unit by year-end.

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