Lenovo puts mobile gadgets in sharp focus

PUBLISHED : Saturday, 23 June, 2012, 12:00am
UPDATED : Saturday, 23 June, 2012, 12:00am


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For a company of its size, computer maker Lenovo has remained as agile and opportunistic as a start-up.

Those traits were apparent in December 2004, when Lenovo struck a landmark deal with US technology giant International Business Machines, to buy IBM's personal computer division for US$1.75 billion.

For Lenovo, founded in Beijing in 1984, the move marked expansion of its operations outside its core mainland Chinese market. The Hong Kong-listed firm answered all the early critics of that deal by becoming the world's second-largest supplier of personal computers. It now aims to unseat rival Hewlett-Packard as global market leader this year.

Emerging from the global financial downturn in 2008, Lenovo shifted gears again in November 2009 by deciding to re-enter the mobile devices market. It announced a deal to buy back for US$200 million in cash and shares the namesake handset-manufacturing firm it had sold in March 2008. The opportunity it saw was the mainland's fast-growing market for mobile phones and internet-ready 3G smartphones.

Lenovo Mobile Communications Technology was a loss-making subsidiary when it was divested for US$100 million to a group of investors led by Hony Capital, the private equity arm of Legend Holdings, the computer maker's parent firm. Unlike its immediate, large-scale foray into the big league after acquiring IBM's personal computer division, Lenovo's ambitious move to become a mobile devices powerhouse like iPhone-maker Apple needed further strategic investments, reorganisation and careful planning during 2010.

But senior management was unfazed. They saw the strategy as a way to bolster Lenovo's competitiveness and revenue over the long term.

For example, in November 2010, it made an initial 100 million yuan (HK$122.9 million) investment in a fund that provided mainland software developers with seed money to build programs for LeGarden, its Chinese online mobile applications store for users of its 3G smartphone and media tablet products.

'This is a battle we cannot lose. We must win no matter how much money we need to invest,' Lenovo chairman and chief executive Yang Yuanqing has said.

In January last year, the company created its Mobile Internet and Digital Home (MIDH) business unit that is responsible for its sharpened focus on select consumer electronics devices - smartphones, media tablets and internet-ready 'smart' televisions - in mainland China before entering international markets.

Yang said Lenovo's advantages on the mainland included a strong brand, a broad channel network that reached even the smallest towns, strong ties with the nation's three big telecommunications carriers, and a growing relationship with application providers, big or small.

Lenovo's MIDH division accounted for 5 per cent of the company's record US$29.6 billion revenue in its latest fiscal year ended March 31. It capped that year as the mainland's No4 supplier of smartphones, with a 9.5 per cent share in the quarter to March, and No2 provider of media tablets, with a 17.2 per cent share.

Bernstein Research forecast Lenovo will sell about 13 million smartphones in its current fiscal year to March, up from an estimated 6.2 million a year earlier, because of a booming domestic market for 3G handsets in the US$100 to US$200 price range.

Last month, Lenovo committed about 5 billion yuan over the next five years to build a new industrial base in Wuhan, the capital of Hubei province, that would manufacture smartphones, media tablets and other mobile internet devices from October next year.

Lenovo chief financial officer Wong Wai-ming sat down with the South China Morning Post to talk about strategy, sales and staying flexible in a fast-moving market.

Yang Yuanqing said the aim was to triple the volume of smartphone sales by the MIDH unit on the mainland next year? What is the target share of MIDH sales of Lenovo's total business?

Yuanqing has set a very aggressive target because it is our hope that the MIDH business will become the primary driver of growth for the group. I can also assure you that we are selling devices at a positive gross margin.

What we have is a moving target because the real issue is how fast the market is changing. Nobody thought that the decline in [basic 2G] feature-phone sales and rapid uptake of 3G smartphones would happen in the last six months on the mainland.

All of a sudden, we were selling about one million smartphones priced at 1,000 yuan and below. What I keep telling the analysts is that ... you have to look at how you can continue to sell a product that the market likes and quickly drive up the volume. Everybody likes smartphones, but not everyone in [mainland] China can afford to pay 3,000 yuan.

When will MIDH significantly extend its presence outside mainland China?

We aim to balance growth in scale and profitability. As a finance guy I always ask: If I have a dollar to invest, which country will give me the best return? MIDH will initially invest small and choose countries where we might have a big market share [in PCs] and have capability in distribution. We're selling between 400,000 and 500,000 media tablets each quarter, with China accounting for 60 to 70 per cent of total sales. Our second-biggest market for media tablets is Germany because of Medion [the consumer electronics company that Lenovo acquired last year].

So you must have not only the right product, but also reasonably good brand awareness before you press the button and try to grow big in a certain market.

Will the MIDH unit soon enter the market for higher speed 4G smartphones based on the advanced mobile technology long-term evolution (LTE)?

It will not be this year. We are a market-driven company. So far, the demand for 4G LTE smartphones remains small in markets where these networks now exist. We will definitely compete in that market if and when [Beijing] decides to issue 4G network licences that will cover the entire country. But as of now, a large portion of China's mobile market is not even on 3G. Of the mainland's 1.3 billion population, maybe 800 million are still using [2G] feature phones.

What are the prospects for Lenovo's smart television sales this year?

It's not going to be a significant number because we are at that stage where we must educate the market about its capabilities. The launch of our smart televisions at this year's International Consumer Electronics Show [in Las Vegas] has helped us gain much-needed attention for the rollout of these products.