Having conquered the global market for personal computers, China’s Lenovo is setting its sights higher.
“Lenovo is the best company in the world at balancing innovation and efficiency.” So declares Yang Yuanqing, the chairman of the Chinese computer-maker.
The boast is at least half right. The firm has certainly displayed its ruthless efficiency of late, by keeping costs down and grabbing market share from its big Western rivals. Lenovo has recently bested HP to become the top peddler of desktop computers worldwide. From a negligible share a few years ago, it is rising fast in the global smartphone market too.
It has managed this expansion while remaining in rude financial health. On May 21st Lenovo announced its full-year results (its fiscal year runs to the end of March) in Hong Kong, where it has been listed since 1994.
Its revenues were 14% higher than in the previous year, at $US38.7 billion. For the first time, pre-tax profits topped $US1 billion, rising by 27% on a year earlier. The firm had a cash pile of $US3.5 billion at the end of March–and at the end of April it raised another $US1.5 billion in its first bond offering.
This news will cheer investors, who have raised some questions about the firm’s strategy of late. For a number of years, Western institutional investors have favoured its shares. This is partly because Lenovo has, unusually among Chinese companies, strong corporate governance.
It was also because Mr Yang has had a clear growth strategy and his firm has delivered predictable earnings. But at the end of January there was a heart-stopping moment, when the firm announced two startling acquisitions in the space of a few days.
The first deal, worth $US2.3 billion, involves Lenovo buying the part of IBM that makes low-end computer servers. These servers should bolster Lenovo’s efforts to appeal to corporate clients.
The other, more controversial, deal is a $US2.9 billion purchase from Google of Motorola Mobility, a pioneer in mobile phones that has fallen on hard times. If regulators approve–America’s are sure to scrutinise the IBM deal carefully, since its government agencies buy those servers–both deals should close by the end of the year.
The size and suddenness of these purchases, and concerns about them turning sour, upset even loyal investors. Pressed to defend his buying binge, Mr Yang promises no more big acquisitions for the foreseeable future. But he defends his firm’s ability to make a go of these two. “We have a good track record turning money-losing businesses into treasure,” he says.
He points to Lenovo’s first big foray overseas, when it bought IBM’s unprofitable PC business in 2005. Many doubted that an obscure Chinese firm could save a Western premium brand in trouble, but that is precisely what Lenovo has done.
Indeed, it is perhaps the only Chinese firm so far to have developed world-class marketing skills. Big Blue’s former PC division is now a cash cow, Mr Yang declares, smiling broadly. So too is the Chinese market, where the firm has a vast distribution network and universal brand awareness: “We have two cash cows.”
The firm’s recent financial performance is impressive, but two big questions still hang over Lenovo’s future. First, how can it keep making money as demand for PCs shrinks? Second, how can it keep up with the formidable Samsung and Apple in smartphones? The answer to both questions springs from the other half of Mr Yang’s boast: innovation.
Most industry experts think the mobile revolution means that desktops and laptops are headed for the dustbin of history. Mr Yang disagrees: “This is still a very big industry, and with innovation there will be further growth.”
He reels off a long list of features his firm is working on: longer battery life, “always on” modes, thinner and lighter designs, better touchscreens and so on. He points to the runaway success of the Yoga, his firm’s touch-screen PC, whose screen folds completely back to transform it into a tablet computer.
The firm’s challenge in handsets is even more daunting. Chinese rivals offering smartphones for less than $US100 are nipping at its heels even as Apple and Samsung surge ahead with ever whizzier offerings. Mr Yang is not worried about the cut-price rivals–not even Xiaomi, a fast-growing Chinese firm offering cheapish but clever handsets.
None of those will be profitable over the long run, he insists, whereas Lenovo’s handsets are already profitable outside China. He points out that it beat back similar challenges from low-end Chinese PC-makers with unsustainable business models years ago.
Fine, but how will he catch up with the innovative global giants? At the moment, most of Lenovo’s handsets are of middling sophistication and it has not penetrated America. It has come up with high-end offerings, but when it tried to sell them in advanced markets it was forced to pay 25% of revenues to patent holders.
Such payments are the “club fees” to enter the elite fraternity of global smartphone firms, explains Alberto Moel of Sanford C. Bernstein, a research firm. This is not such a problem in emerging markets, where patent enforcement is spotty: in China, it spends barely 2% of revenues on licensing.
So, over the past couple of months, the firm has scooped up thousands of smartphone patents from NEC, a Japanese electronics firm, and Unwired Planet, a patent-gathering “troll”. The Motorola deal gives Lenovo royalty-free access to Motorola patents retained by Google; it also makes Lenovo party to useful licensing deals Motorola had struck with others. Now, says Mr Yang, entering America should cost a more manageable 10% of handset revenues.
That pragmatic approach offers a clue as to how Lenovo really innovates. Last month, at a black-tie event attended by the leading lights of Silicon Valley, Mr Yang won an award for championing innovation at Lenovo. But Mr Moel argues that the Chinese firm is not an imaginative innovator like Apple, whose radical designs transform whole markets.
Rather, its ability to turn firms around deftly, execute strategies economically and overcome obstacles nimbly suggests that a better description of its strength would be “frugal innovation”, an ideal that has been much touted in recent years but seldom achieved.
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