Mainland personal computer giant Lenovo Group said an 'irrational' domestic price war after it switched strategy to compete in the lower end of the market was to blame for the firm's disappointing quarterly earnings announced on Tuesday. The red chip saw revenue for the three months to September, the second quarter of Lenovo's fiscal year, fall 9.5 per cent from a year earlier to $5.65 billion, even though the company sold 14.6 per cent more personal computers during the quarter. The announcement saw Lenovo's shares dive 11.2 per cent to $2.775, wiping out the counter's one week of gains. Chief executive Yang Yuanqing said cut-throat competition had driven average prices down 15 per cent in the second quarter. 'Our rivals have been cutting prices irrationally, willing to sell their products at losses. If we don't react according by adjusting our business strategy, we'll not only keep losing market share but also long-term profitability,' Mr Yang said, adding however, that the company expects a turnaround in the third quarter as computer prices are already at rock bottom. Inflated by a $110.26 million gain from the disposal of non-core assets, such as selling off its information technology services business, Lenovo recorded an 11 per cent year-on-year increase in net profit to $290 million. This fell short of most analyst's expectations of $300 million to $330 million. Excluding disposal gains, Lenovo's operating profit for the three months fell by 16.7 per cent from a year ago to $202.83 million. For the first half Lenovo reported profit of $626.87 million on turnover of $11.53 billion. Investors were also disappointed with the refusal by chairman Liu Chuanzhi to make any comment on market rumours that Lenovo was in talks to acquire IBM's personal computer business in China by setting up a joint venture with the United States-based giant. Lenovo has reshaped its distribution network by setting up 108 sales zones spanning 18 regions to allow a deeper penetration to lower-tier cities as well as introducing direct-to-customer sales. It also shifted strategy to tap the low-end market by introducing a series of budget personal computers that cost as little as 2,999 yuan to curb market share loss. The budget computers, which made up more than 20 per cent of Lenovo's shipments in the second quarter, had helped lift the firm's market share to 27.3 per cent, from 25.7 per cent a year earlier. But the market share gain was at the expense of gross margins, which fell to 13.81 per cent from 14.24 per cent the previous quarter. 'This set of results confirmed our view that the manufacturing sector did not have long-term prospects because of irrational competition, rising costs and a shortage of experienced management,' said UBS Warburg's head of China Research Joe Zhang. 'Lenovo is one of the best managed Chinese companies, but it is a very difficult sector,' said Mr Zhang, who has a 12-month target price of $1.80 on Lenovo.