China's Lenovo to cut 3,200 jobs amid profit decline, slow sales

PUBLISHED : Thursday, 13 August, 2015, 11:46am
UPDATED : Friday, 14 August, 2015, 10:28am

Chinese technology giant Lenovo Group plans to lay off 3,200 employees under a sweeping restructuring plan, after posting a 51 per cent decline in net profit for its first fiscal quarter ended June 30.

In the face of financial results that did not meet its expectations, Lenovo said on Thursday that a realignment of its businesses would help return it to profitable, sustainable growth and achieve its long-term goals.

This effort is expected to reduce expenses by US$650 million in the second half of its fiscal year to March and US$1.35 billion on an annual basis.

The company’s share price slumped 9.09 per cent to HK$7.70 at the end of trading on Thursday, its lowest close since reaching HK$7.55 on September 6, 2013.

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“We expect near-term share price weakness on the back of soft earnings,” Kirk Yang, Barclay’s head of technology hardware research for Asia, said in a report on Thursday.

Lenovo, the world’s largest supplier of personal computers, said the layoffs will be completed in this quarter to September, eliminating about 10 per cent of its non-manufacturing workforce around the world.

That equates to about a five per cent reduction of Lenovo’s total worldwide staff of around 60,000 people.

The company, which operates in more than 160 countries, will incur US$600 million in restructuring costs and a US$300 million write-off of its smartphone inventory as part of the reorganisation at its mobile business.

“Last quarter, we faced perhaps the toughest market environment in recent years,” Lenovo chairman and chief executive Yang Yuanqing said in a media conference call on Thursday.

Lenovo faced significant declines in the global personal computer and tablet markets, as well as slowing growth and increasing competition – especially in mainland China – in smartphones. There were also macroeconomic challenges in the South American market, especially in Brazil.

Large currency fluctuations and intensifying competition hurt the profitability of Motorola Mobility’s smartphone business, which Lenovo acquired last year from Google for US$2.91 billion.

Lenovo said it was also hurt by “a rapidly shifting technology demand landscape” in the enterprise business, following its purchase of IBM’s x86 server business for US$2.1 billion last year.

Jefferies equity analyst Ken Hui said in a report that Lenovo’s personal computer and smartphone shipments could decrease further in the quarter to September.

Yang said the plan was to “further integrate elements of the acquisitions with our legacy businesses in mobile and enterprise, while building the right business model and cost structure”.

“We will reduce costs in our PC business and increase efficiency to leverage industry consolidation, increase share and improve profitability,” he said. “We will come through these efforts as a faster, stronger and better aligned global company.”

The company will restructure its Mobile Business Group by making the Motorola team responsible for designing, developing and manufacturing smartphones. Global sales will be handled by Lenovo’s international marketing team.

Yang said there was plenty of room for improvement. He estimated that Motorola spent US$2 billion a year in its smartphone operations before the acquisition, compared with the Lenovo handset unit’s US$400 million annual expenses.

“We expect to turnaround our mobile business in two to three quarters,” Yang said.

Watch: Lenovo cuts jobs alongside plunging profits

The Enterprise Business Group will sharpen its focus on cost-competitiveness in selected market segments.

Gianfranco Lanci, Lenovo’s president and chief operating officer, said the company was integrating the manufacturing supply chain for its personal computer and server products to bring down costs and boost efficiency.

He said the restructuring plan would allow the firm to boost the number of its research and development team for both the enterprise and personal computer businesses.

Amid consolidation in the personal computer industry, Lenovo said the aim was to seize a 30 per cent market share in the global market. It cornered a 20.3 per cent share in the quarter to June even as its personal computer shipments fell 7.5 per cent year on year to 13.4 million units.

The company reported on Thursday a 51 per cent decrease in net profit for its fiscal first quarter ended June 30 to US$105 million, down from US$214 million in the same period last year, as Motorola posted a US$300 million loss that became a drag on earnings.

Total revenue advanced by just 3 per cent to US$10.72 billion from US$10.39 billion a year ago.

That was impacted by a 13 per cent year on year decline in Lenovo’s core personal computer business during the quarter to US$7.28 billion.

In addition, there was a 47 per cent increase in operating expenses during the quarter to US$1.55 billion, up from US$1.06 billion a year earlier.

Wong Wai-ming, Lenovo’s chief financial officer, said the recent devaluation of the yuan would have no significant impact on Lenovo’s operations.