New leader Lenovo plays it smart

Updated: 2013-08-16 09:05

By Gao Yuan (China Daily)

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 New leader Lenovo plays it smart

As its competitors focus on software development and services, Lenovo seems to be sticking to the manufacturing sector. Geng Guoqing / For China Daily

As demand for personal computers fades, China's global computer giant is busy creating a new future

Lenovo Group, the newly crowned king of the global personal computer industry, is looking to increase its control of electronic hardware manufacturing amid a worldwide decline in its major business.

The Beijing-based company has been rolling out consumer and enterprise-level products since the beginning of this year in response to weakening PC demand in China and overseas.

Consumer mobile devices and business hardware markets will be the company's new focus, said chairman and CEO Yang Yuanqing.

Yang made it clear to his staff and the media in April that the company's major competitors will be Apple Inc and Samsung Electronics Co rather than traditional PC makers such as Hewlett-Packard Co and Dell Inc.

Two months after Yang's announcement, Lenovo became the world's biggest PC vendor in terms of shipments, overtaking the US giant HP.

The Chinese company took 16.7 percent of the worldwide market in the second quarter, according to international research firms IDC and Gartner. HP's market share dropped to 16.4 percent.

But there was no time for Lenovo to enjoy the title as global PC demand was shrinking quickly at the same time.

Global PC shipments slumped 10.9 percent year-on-year to 76 million units in the second quarter of this year, the fifth consecutive quarter of decline, Gartner warned.

"We are seeing the PC market reduction directly tied to the shrinking installed base of PCs, as inexpensive tablets displace the low-end machines used primarily for consumption in mature and developed markets," the US consultancy said.

Virtually every major PC manufacturer except Lenovo has had sharp falls in shipment this year. Lenovo shipped at least 12.6 million PCs in the second quarter compared with 12.8 million a year ago. The decline was the smallest among the top five PC vendors, data from IDC showed.

International manufacturers are desperately looking for alternative sources of profit as the PC business falls apart.

The former No 1, HP, is trying to turn itself into a software and service company.

Dell, the third-largest, also hopes its 1-year-old software group can bring it income of at least $2 billion in three years.

Yet Lenovo seems committed to the manufacturing sector, a business that has taken Lenovo-branded IT products around the world.

Consumer electronics will be where the company will increase its profits, Lenovo executives say.

This year Lenovo has set the smartphone market as its major battleground with Apple and Samsung, both of which are strong competitors in the consumer electronics sector.

Lenovo is putting its chips on high-end users who are willing to spend more than 3,000 yuan ($490) to buy a smartphone. At present, high-end smartphones make up no more than 15 percent of the Chinese market.

On May 16, the company released a flagship gadget, the K900. It set the retail price at 3,299 yuan, a little higher than the company's standard for a high-end device. The new device is clearly targeting Chinese buyers who are interested in Apple's iPhone 5 or Samsung's Galaxy Note series.

Although overseas brands have a majority share of the market in China, Lenovo claimed it was the No 1 local manufacturer.

Lenovo's advantage in channel and production capability in China will fuel future earnings growth, according to Nicole Peng, research director of industry consultant Canalys China.

Lenovo will become the biggest smartphone maker in China in two years, says Liu Jun, its senior vice-president.

Liu, who also heads Lenovo's mobility business, says smartphone sales turnover is on track to make up more than 15 percent of the company's total sales by the end of this year.

But, as Guangdong-based telecom equipment provider Huawei Technologies Co Ltd also launched an aggressive smartphone campaign this summer and released similarly priced devices, Lenovo may spend more time and energy on competing with local brands.

In the meantime, the Chinese company is pushing its Lenovo-branded smartphones onto the global stage.

India, Russia, Indonesia and Vietnam are among the biggest markets for Lenovo's smartphone, says the company, which refused to provide sales figures for individual markets.

Compared with enterprise-level businesses, the consumer market is an easier place to generate revenue in the short term because individual buyers are more likely to be attracted by advertisements and promotional campaigns.

The company plans to sell 100 million terminals, including smartphones and tablets, before the end of this year. With smart televisions joining the portfolio later this year, some industry observers say Lenovo could reach the sales target before December.

The company's optimistic view of the consumer market reflects prospects only for the mid-term.

Lenovo's long-term investment will be directed at making and selling products for use by enterprises.

Developing enterprise-level products will provide higher profit margins for Lenovo than for its consumer electronics business. In addition, most of the production processes are similar to those in traditional PC making. However, products for use by companies require better after sales and upgrading services than consumer products.

For a company with such a strong PC background, Lenovo could take its first steps into this new field by concentrating on the server business. Earlier this year, Lenovo released co-branded server and storage products with US data-storage company EMC Corp. Chen Xudong, senior vice-president and general manager of Lenovo's China unit, said the company plans to turn the server and storage arm into one of its major revenue sources in the next three years.

The server products are targeting the Chinese market now because Lenovo has far stronger channel partners in China than in overseas markets.

However, the company is obviously mapping out a bigger rollout for its new server unit. In April, Lenovo was in talks to buy International Business Machines Corp's server unit. Industry insiders said the deal, which is similar to the massive $1.25 billion purchase of IBM's PC unit in 2005, could be a shortcut to beef up Lenovo's enterprise hardware sector. Negotiations broke down because of disagreements on price.

Looking ahead, Lenovo has a good chance of being able to move away from a major decline in the PC market.

According to Lenovo's latest financial report, the company posted record sales and earnings in the past financial year, which ended on March 31.

Its full-year sales climbed to $34 billion, a year-on-year increase of 15 percent. Annual net income reached $635 million, up 34 percent.

Both figures indicate the company was able to create new ways to increase its income well before the PC business, its major source of profits, went into decline.

Its consumer business, led by smartphones, will need more time to create a clear lead in markets outside China. The major consumer markets are most likely to be emerging economies in Southeast Asia, Africa and Latin America.

Lenovo's enterprise business, partnered with EMC, will try to make profits in China first. The server business is a long-term investment and may not enjoy returns for some years.

gaoyuan@chinadaily.com.cn

(China Daily European Weekly 08/16/2013 page22)