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Lenovo is the world’s biggest PC maker. Too bad

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Sometimes it is easy to get so enmeshed in the battle that you lose sight of the prize. Has this happened to China's biggest PC maker? Lenovo has overtaken Hewlett-Packard to become the world's biggest PC maker by volume, with a 17 per cent share of the market by unit shipments. But PC demand overall is shrinking – it fell 11 per cent from a year earlier during the past quarter. If it continues retreating at the same pace, less than one in 50 people will be buying a PC annually by the end of the decade from one in 20 today.

Lenovo, which bought IBM's PC business in 2005, has won the battle by using cut-throat volume tactics – selling entry-level products in high-growth regions. Emerging markets account for almost two-thirds of its $34-billion (U.S.) of annual revenue. China alone accounts for 43 per cent. But that has come at the cost of margins. Lenovo's group operating margin of 2 per cent is less than half that of the likes of HP. In growth markets outside China, Lenovo's operating margin is a measly 0.3 per cent. So while its earnings have grown at an average 70 per cent per annum over the past four years – twice the rate HP experienced in the four years up to the financial crisis – Lenovo's earnings are still just a tenth of HP's earnings during the boom years.

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The trouble is that if the PC market goes on declining, Lenovo has little else to fall back on. While it has moved into smartphones, it faces similar aggressive competition. Its businesses outside of PCs including laptops make up just 16 per cent of total revenue. What is more, Apple has shown that cheap gadgets are not the only way to succeed in emerging markets. According to surveys by China Confidential, Apple's Macs are just as desirable as Lenovo's PCs despite costing consumers more than twice as much. True, Lenovo is playing a different game to the U.S. PC makers, but the company must not forget about its earnings.

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