Lenovo NEC: Here to Stay?

Lenovo's share of the Japanese PC market is likely to top out around 27 percent, and then gradually decline as its joint venture with NEC stumbles and eventually ends in divorce.

PUBLISHED : Thursday, 30 August, 2012, 9:37am
UPDATED : Friday, 31 August, 2012, 9:29am

A year after announcing their landmark joint venture, Lenovo (0992.HK) and NEC (Tokyo: 6701), the leading PC makers in China and Japan, are releasing some numbers to try to convince the world that their marriage was correct and the venture will dominate the difficult Japanese market. I'll admit that I'm not quite a skeptical as I was when the two sides first announced their joint venture, as they seem to be taking a relatively cautious approach to the business. Still, I would only give this venture a relatively modest chance for success, perhaps around 40 percent, versus a previous prediction for around a 35 percent.

Let's look at the latest information coming from Lenovo, which said it now controls about 25 percent of the Japanese PC market, up a bit from the combined 23.6 percent market share for Lenovo and NEC when they announced their US$175 million joint venture a year ago. The company said it aims to boost its market share in Japan to 30 percent in the next three years, using a hybrid strategy of offering its own Lenovo brand computers for the value-conscious consumers while retaining the NEC name as a premium brand.

This strategy differs a bit from Lenovo's previous purchase of IBM's (NYSE: IBM) PC assets in 2005, since Lenovo received rights to use the IBM for just 5 years under that agreement. This deal is clearly different since it's not an outright sale and instead NEC is a partner in a long-term joint venture.

But if you look at the bigger picture, the real reason that NEC brought in Lenovo as a joint venture partner is simple: NEC knows the PC business is a difficult and very low margin one. The company has seen its global market share rapidly shrivel over the last 5 years to the point where it's barely a player in any global markets except Japan, where consumers often prefer domestic brands. Thus in my view, NEC's decision to form the Lenovo joint venture was simply part of a longer-term plan to eventually exit the PC market completely, much the way that IBM did.

If that's the case, then the big question becomes: when exactly will NEC sell out its stake in the joint venture, and how long will it allow Lenovo to continue using the NEC name after that? My guess is that NEC brand computers will slowly lose their premium image in Japan over the next 2-3 years, as consumers start to notice little cut-backs and other cost-cutting changes under new management. As that happens, NEC, which makes a wide range of IT products, will grow increasingly alarmed about damaging its bigger image and decide it wants to exit the joint venture.

I would expect the actual divorce to come within the next 3-4 years, and that the joint venture will eventually lose the rights to use the NEC name as part of the break-up. This kind of divorce, due to its very gradual nature, would have a big advantage over the IBM deal, which was a one-time sale with no partnerships involved.

Still, I would expect shaky times ahead for the joint venture, and seriously doubt it will be able to reach its 30 percent sales target. Instead, its market share could grow for a little while longer, perhaps reaching as high as 27 percent, before the NEC image starts to fade and sales begin to decline. At the end of the day, Lenovo could still end up with around 20 percent of the Japanese PC market, not bad for a foreign company but also a relative disappointment if it's really hoping for 30 percent.

Bottom line: Lenovo's share of the Japanese PC market is likely to top out around 27 percent, and then gradually decline as its joint venture with NEC stumbles and eventually ends in divorce.