SMARTPHONES: Lenovo Overhauls Mobile Unit Around Motorola

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Bottom line: Lenovo’s plan to reorganize its mobile division around its struggling Motorola operations looks misguided, and doesn’t address why the company’s smartphones have become such industry laggards.

Lenovo reorganizes mobile unit around Motorola

Just a week after I called on PC giant Lenovo (HKEx: 992) to write off Motorola, the company is doing just the opposite and betting bit on the sinking US smartphone brand. That’s the latest word coming from reports that Lenovo is preparing a major overhaul for its struggling mobile operations, which are being reorganized with Lenovo’s recently acquired Motorola operations as the centerpiece.

All of this comes as Lenovo is rapidly emerging as the first major loser in the ongoing war for market share among China’s big smartphone makers. Lenovo reported dismal quarterly results a couple of weeks ago, including a miserable performance for smartphone operations that it hopes will someday replace fading PCs as its core business. Leading the poor results were a 31 percent drop in sales for its Motorola phone division, which Lenovo purchased last year from Google (Nasdaq: GOOG) for $2.9 billion. (previous post)

I wrote last week that Lenovo should do the smart thing and write off the Motorola investment, but clearly the company isn’t listening to me. (previous post) Instead, it’s reportedly getting ready to launch a major overhaul that will see Motorola become the hub of its mobile division, leading all of its future efforts in cellphone product design, development and manufacturing. (Chinese article)

The source of the news was a posting on the microblog of Lenovo’s mobile chief Chen Xudong, who assumed his position in June as part of an effort to turn the unit around. In the post, he added that his primary goal is to make Lenovo’s mobile division profitable, with less focus on gaining market share.

Chen certainly has his work cut out for him, and is trying to show some quick new initiative in a bid to resuscitate a division that will be critical to Lenovo’s future. The company didn’t break out financial results for its mobile division in its latest quarterly report released earlier this month. But it previously said its mobile division posted a $370 million pre-tax loss for its latest fiscal year that ended on March 31. (previous post)

Sinking Shares

The company’s shares have lost about half of their value since April on the poor outlook for its cellphones, which are failing to gain traction as it faces a long-term decline in demand for its traditional PC business. Earlier this week, data tracking firm IDC forecast that global PC sales would fall 8.7 percent this year, continuing a trend of the last few years, as people use smartphones, tablet PCs and other mobile devices to do more of their computing.

Lenovo had big hopes for Motorola when it purchased the brand last year, and had largely kept the brand’s operations separate from its older Lenovo line of cheap smartphones. Its plan to integrate operations for the 2 brands looks relatively logical from an operational perspective, since such a move should help it to reduce costs. Lenovo has already moved much of Motorola’s operations to China where costs are lower, so that should help too.

But the bottom line is that Motorola is a brand that has lost its edge, which was why Google decided to sell it in the first place. The brand was once known for its cutting-edge designs, and commanded a reputation similar to what Apple’s (Nasdaq: AAPL) iPhones now enjoy.

But those glory days are a distant memory now, and Lenovo’s ongoing attempts to resuscitate the brand are showing no signs of gaining momentum. I can’t really blame Chen for focusing on Motorola with his latest move, since I certainly wouldn’t want to tell my boss that he should jettison such a major investment. But this kind of overhaul doesn’t really contain any major strategic plans for how Lenovo will resuscitate its sinking mobile ship. Instead it looks more like a simple cost saving plan, which won’t address the more fundamental issue of why Lenovo’s smartphone business is struggling so much.

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