A couple of interesting items on Lenovo (HKEx: 992) are making the headlines these last few days, as the company tries to figure out how to hold onto its crown as the world’s biggest PC maker after taking the top spot from longtime holder Hewlett-Packard (NYSE: HPQ) last year. The first and more intriguing of the moves is seeing Lenovo split its PC products into 2 distinct groups — one a higher-end product centered on its Think brand and the other a more mainstream product based on its older Lenovo brand. The second item has media reporting that Lenovo is moving towards a model that will see it make all of its own computers in-house, in contrast to the current industry model that sees most major PC brands outsource their manufacturing to other original equipment manufacturers (OEMs).
I’ll admit that I’m cautiously optimistic about the brand-splitting move for reasons that I’ll explain shortly; but I’m far less excited about the second move towards 100 percent in-house production, which to me seems to go against every major industry trend in the tech sector and thus could be doomed for problems.
Let’s start with the brand-splitting news, which will see Lenovo divide itself into the Think and Lenovo brands to target different segments of the market. (English article) The move, detailed by Lenovo CEO Yang Yuanqing in a New Year’s email, will take effect in April and see the Think business centered in the US while the Lenovo brand business will be run out of China. Yang explained that the move is designed to give the Think team room to build a premium brand that can ultimately compete with the likes of Apple (Nasdaq: AAPL).
From my perspective, this looks like a good move that could finally help Lenovo take a bigger share of the premium computer market where it has traditionally been quite weak. Lenovo inherited the Think brand with its landmark purchase of IBM’s (NYSE: IBM) PC business in 2005, and it looks like this move is designed to keep the former IBM business as a separate unit that will be run out of America.
That’s important because IBM traditionally was a premium PC brand, but the premium image of its ThinkPad computers suffered quite a bit after the Lenovo purchase. By giving the Think unit more autonomy and allowing it to be run out a major western market instead of China, Lenovo is clearly hoping it can return the brand to its more upscale image. Only time will tell if the strategy works, but I would give it a better than 50 percent chance of success and wouldn’t be surprised to see Think computers reclaim their place as a highly-respected brand within the next 5 years.
Meantime, the second bit of news isn’t all that surprising to me since I was already quite puzzled by the move in 2011 that led up to this rumored latest decision that will see Lenovo aim to manufacture all of its PCs rather than outsourcing the work to OEMs. That particular move saw Lenovo form a PC manufacturing joint venture with Taiwan’s Compal (Taipei: 2353), one of the world’s leading OEM PC makers. (previous post)
Now media are reporting that the joint venture in the city of Hefei has come on stream, and Lenovo is aiming to make most or all of its desktop, laptop and all-in-one computers there in the next 3-5 years. (English article) While Lenovo’s choice of Compal is certainly a good one for this venture due to Compal’s PC manufacturing exerptise, I’m still quite puzzled why Lenovo formed this joint venture at all.
The OEM model rose to prominence over the last 2 decades because it gives companies like Lenovo and HP greater production flexibility and greatly reduces costs by putting OEMs in charge of capital-intensive manufacturing. So from my perspective, this looks like a backward step for Lenovo and one that will only lead to headaches for the company in the future.
Bottom line: Lenovo’s splitting off of its Think brand looks like a smart move to develop the premium PC market, but its decision to move most of its PC manufacturing in-house looks like a step backward.
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