With home turf advantage in the world’s biggest computer market and a foothold in major emerging economies, China’s Lenovo Group is looking to turn market share into profit, heaping more pressure on U.S. rivals Hewlett-Packard Co. and Dell Inc.
Concern that global tech spending, particularly in the developed world, is weakening faster than expected has battered Dell shares and prompted HP to axe some 27,000 jobs. To counter weakness in consumer spending in major cities in the world’s second-largest economy, Lenovo is casting its net wider.
“We are seeing strong growth in smaller Chinese cities,” Chairman and CEO Yang Yuanqing said this week, unveiling a 59 per cent jump in quarterly net profit. He noted that personal computer penetration in China is still just 20-30 per cent versus 99 per cent in the United States.
China has been Lenovo’s traditional stronghold, contributing 42 per cent of group revenue and boasting the business’s highest operating margins. Lenovo has around a 30 per cent share of the Chinese PC market, well ahead of Acer, Dell, Asustek and HP, all with single-digit market share, according to data from research firm IDC.
Lenovo sold 2.5 million PCs in China in January-March, according to IDC, and company data showed the average selling price across its products rose 1.5 per cent from the previous quarter to $545. In the fast growing tablet segment, its Lepad trails some way behind Apple Inc.’s iPad, but outsells Samsung Electronics’ Galaxy Tab.
Analysts note that while Dell has focused on high-margin products, Lenovo has aimed for volume sales to gain market share. The key for Lenovo, which has risen to the world’s No.2 PC maker after its 2005 acquisition of IBM’s PC business, is how to turn that market share into profit.
In the year to end-March, Lenovo’s operating margin was below 2 per cent - though it was 4.5 per cent in China – compared to more than 7 per cent at Dell and HP. Mr. Yang said Lenovo would look to turn a profit in emerging markets once it hits a certain volume – or 10 per cent market share. This would allow it to hook in customers and profit later when they upgrade their products, particularly corporate clients, analysts said.
After quarterly profit fell sharply at both HP and Dell, investors are asking questions about their product strategies and management focus in a weak global economy.
Sunny Chung, Allianz Global Investors Taiwan Domestic Equity head, said a slowdown would cause some build-up in PC inventory as there would be more uncertainty over demand later this year. Allianz Global Investors owns Lenovo shares.
Lenovo lags HP by 4-5 percentage points as global PC market leader, but analysts expect the Chinese firm to take the top slot this year or next.
Lenovo has unveiled a series of consumer products in China as it moves aggressively into smartphones, tablet PCs and smart TVs, though some analysts question whether all its products will have the same level of success it has had in PCs.
“Lenovo’s strategy in China is to continue building its own ecosystem, such as notebook, desktop, tablet, smartphone and TV. This could be kind of a dream as it’s not easy to generate large profits from building hardware,” said Angela Hsiang, an analyst with KGI Securities in Taipei.
Lenovo has been winning market share in other emerging markets, such as Russia and India, where it is the top vendor, but that has been at the expense of operating losses due to aggressive pricing.
Mr. Yang said his company’s focus over the coming quarters would be to improve profitability in these markets by increasing volume sales and controlling costs in areas such as hard disk drives. In mature markets, which generate more than 40 per cent of Lenovo’s revenue, the company has taken market share more by acquisition.
Last year it bought Medion in a deal that valued the German consumer electronics retailer at around $900-million, and signed a joint venture with NEC Corp to sell laptops in Japan.
Chief Financial Officer Wong Wai Ming says Lenovo is open to more acquisitions.