Opinion | Lenovo: PC king with margin malaise

Lenovo's weak margins reflect a company that has sacrificed profits for market share, and the situation is unlikely to improve in the next year.

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Yang Yuanqing, chairman and chief executive officer of Lenovo Group, speaks at Lenovo Group's annual results announcement meeting in Hong Kong on May 23, 2012. Photo: SCMP

Published: 1:59pm, 9 Nov 2012

Everyone else is commenting on the latest quarterly results from global PC leader Lenovo (0992.HK), so of course I need to give my own opinion on this company that could soon find itself facing a number of challenges following its recent taking of the global PC crown from Hewlett-Packard (NYSE: HPQ).

I should start with a look at investor reaction to the latest results, which seems to be a yawn of indifference and perhaps some impatience with the company. Lenovo shares lost 2.7 per cent after the result came out on Thursday, even though the company's profit was ahead of expectation. Shares bounced back in early Friday trade and were up more than 4 per cent, but the conflicting movement again reflected the growing fatigue investors are feeling toward this company and all of its big talk.

Lenovo Chairman Yang Yuanqing has boasted nearly nonstop in the last since month his company finally overtook HP to become the world's PC leader in the third quarter of this year. Lenovo used the earnings announcement to talk about its recent big gains in smartphones and its broader inroads in markets like Japan and Germany where it has made recent acquisitions.

The company pointed out that its smartphone business has made rapid advances in China, going from a relative bit player to one of the nation's top 5 names with 13 per cent market share in the most recent quarter. The company is less vocal about the fact that its smartphone business is still losing money, unlike global rivals like Apple (Nasdaq: AAPL), Samsung (Seoul: 005930) and even recently faltering HTC (Taipei: 2498), which all earn profits from their businesses. But Yang did say he expected the company's smartphone business to be profitable soon, which is certainly an encouraging sign.

The situation with smartphones reflects a broader mentality at Lenovo, which has become a company obsessed with gaining market share, often at the expense of profits. Such an obsession led to the rapid rise and then equally fast decline of Taiwan's Acer (Taipei: 2353), which soared to prominence on rapid market share gains only to rapidly fade when it failed to find a sustainable business model.

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.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Lenovo's weak margins reflect a company that has sacrificed profits for market share, and the situation is unlikely to improve in the next year.

Lenovo's weak margins reflect a company that has sacrificed profits for market share, and the situation is unlikely to improve in the next year.