Lenovo Aims Higher

　　A Chinese IT company is on its way to challenging Apple and Samsung

　　In his two-minute Super Bowl commercial， famous U.S. rocker Bob Dylan had some advice for consumers： “Let Germany brew your beer， let Switzerland make your watch， let Asia assemble your phone.”

　　No doubt Chinese IT companies are more than willing to live up to such a reputation， and they are expanding globally in a more aggressive manner than ever before.

　　Lenovo Group Ltd.， a Chinese IT company known as the world’s top PC maker， has been making news headlines around the world for several weeks in a row after it announced two daring overseas purchases in January.

　　The company announced on January 30 that it would buy Google’s Motorola mobile handset business for $2.91 billion， the biggest-ever overseas acquisition by a Chinese company in the technology sector.

　　The deal came only one week after the Chinese company announced a $2.3-billion deal to buy IBM’s low-end server business. Both deals are now awaiting approval from U.S. government regulatory authorities.

　　Lenovo has become the world’s largest seller of personal computers (PCs) since the third quarter of 2013 by overtaking Hewlett-Packard (HP). Being on top of the PC world， however， can hardly allow Lenovo to become complacent.

　　With shrinking market demand and profitability in the PC sector， the Chinese IT company is scrambling to diversify its operations by turning to other more lucrative sectors in search of new sources of growth for the next decade.

　　Yang Yuanqing， Chairman and CEO of Lenovo， said the company is building two pillars of growth for the next decade： smartphones and tablets being one， and enterprise products such as servers and storage the other.

　　Lenovo’s smartphone business has grown rapidly as the company became the second largest smartphone vendor by shipments in China， trailing only Samsung.

　　In April 2010， Lenovo launched its first smartphone model. Two years later， the company started selling smartphones in emerging markets， such as Indonesia， the Philippines， India， Viet Nam and Russia. In 2013， the company made another overseas foray by selling smartphones in foreign countries including Thailand， Malaysia and Saudi Arabia.

　　Lenovo became the world’s fifth largest smartphone vendor with a 4.5 percent market share by shipment volume in 2013， according to research firm IDC. Its global presence， however， is still tiny compared to Samsung at 31.3 percent and Apple at 15.3 percent. Furthermore， it hasn’t yet released smartphones in North America or Western Europe.

　　“The Motorola deal will definitely give us a shortcut into the U.S. market and provide us with a world-wide footprint，” Yang said. “In the U.S. and other mature smartphone markets， Motorola’s brand recognition and strong relationships with carriers will help Lenovo.”

　　“Lenovo’s next goal is to challenge Samsung and Apple， which are both far ahead of Lenovo in terms of sales of intelligent terminals， including traditional PCs， tablets and smartphones，” Yang said.

　　Li Zhipeng， Deputy Director of the Institute of Overseas Investment under the Chinese Academy of International Trade and Economic Cooperation， said it’s quite likely that Lenovo will pose a threat to Samsung and Apple after the Motorola deal.

　　“History is full of examples of this kind of turnaround. For instance， Chinese telecom-equipment makers ZTE and Huawei have managed to take over previously dominant brands， such as Ericsson and Alcatel-Lucent，” Li told Beijing Review.

　　“The center of global high-end manufacturing has shifted from North America to other regions， including Japan， South Korea and the Chinese mainland. It’s not at all strange that a Chinese high-end manufacturer would pose a threat to previously dominant brands.”

　　A long shot？

　　The stock price of Lenovo shares plunged following the announcement of the Motorola deal as investors and analysts became increasingly worried that Lenovo had bitten off more than it could chew.

　　Things are worsened by Motorola’s red ink. The handset firm’s net loss widened to $928 million in 2013 from $616 million in 2012， according to Lenovo. Concerns that the deal will hurt Lenovo’s profitability led investors to dump the stock.

　　Investors reacted more positively when Lenovo announced the IBM server deal. When that news came out， Lenovo shares rose.

　　The Motorola acquisition is a correct move， but will lead to a multi-year negative impact on earnings， Jefferies analyst Ken Hui wrote in a note to investors， as he cut Lenovo’s stock rating to “underperform” from “hold.”

　　“Without cutting expenses， Motorola has to double sales to break even， which is challenging，” Hui said.

　　If the recent deals both come through， Lenovo will have to integrate two big businesses in very different areas simultaneously. “This time， Lenovo is going one step too far，” said Sanford C. Bernstein analyst Alberto Moel.

　　Sun Yongjie， an IT commentator in China， doubted the wisdom of Lenovo’s decision to buy Motorola， which was purchased by Google roughly two years ago and was unloaded to Lenovo following Google’s failed experiment to turn Motorola around.

　　“The value of the Motorola brand has greatly shrunk in past years. It’s losing ground quickly， even in the U.S. market. The less than 1-percent global market share has shown that its cooperation with telecom operators is useless.”

　　“It’s hard to tell how much help the flagging Motorola brand can provide to Lenovo’s overseas expansion. How to integrate two vastly different product lines and how to avoid the loss-making Motorola from dragging down Lenovo’s already low-profit smartphone business will be challenges that Lenovo will encounter.”

　　Taking on the challenge

　　On February 13， Lenovo reported upbeat quarterly profits， which rose 30 percent to a record high on strong smartphone sales.

　　Profit for the three months ended December 31 was $265 million， the company said. Quarterly revenue topped $10 billion for the first time， rising 15 percent to $10.8 billion.

　　Sales of laptop computers that supply half the company’s revenue rose 11 percent to $5.4 billion while sales of desktop PCs rose 12 percent to $3.2 billion.

　　In sharp contrast， sales of smartphones and other mobile devices rose as fast as 73 percent to $1.7 billion. The company has said it expects mobile technology to supply the bulk of its revenue in coming years.

　　Lenovo CEO Yang acknowledged that the Motorola deal could have a negative impact on Lenovo’s earnings in the short term， but he argued the acquisition is good for their shareholders for the long term.

　　Yang claimed the Motorola deal will give Lenovo five assets—the brand， over 2，000 patents， technology， a product line and better access to key markets such as the United States.

　　For the past few years， Lenovo has demonstrated an ability to increase revenue and squeeze out profits even when most traditional PC makers saw their sales decline. Lenovo bought IBM’s loss-making PC unit in 2005 and turned it into a bigger， more profitable business. The company so far has built its success largely on a ruthless ability to cut costs.

　　“We have already identified areas where we can cut expenses. With the combined scale of Lenovo and Motorola after the acquisition， we can significantly reduce costs in terms of material procurement and the supply chain. When we complete the acquisition， from day one， we can start working on those cost synergies. Most likely it will take a couple of quarters to turn around the Motorola business. But I definitely believe we can have a profitable business over time，” Yang said during an interview with The Wall Street Journal.

　　Li， the Deputy Director of the Institute of Overseas Investment under the Chinese Academy of International Trade and Economic Cooperation， said Lenovo’s two purchases within one week can hardly be called abrupt， especially against the larger backdrop of faster-than-ever overseas investment by Chinese companies.

　　In 2013， China’s overseas investment in non-financial sectors totaled $90.2 billion， surging 16.8 percent from 2012.

　　Manufacturing companies accounted for the bulk of the overseas investment. It’s a very good way for domestic manufacturers to buy valuable assets from developed countries in order to upgrade and achieve business transformation， Li said.

　　“The IBM purchase and successful integration after the purchase has offered great experience that Lenovo can refer to in the Motorola deal. Besides， Lenovo has become a very mature multinational instead of merely a Chinese company. Traditionally， Chinese companies have international business departments to deal with overseas businesses. Lenovo， however， has set up operation centers based on business types.”

　　Lenovo CEO Yang said Lenovo has the required knowledge and experience in business integration after large-scale acquisitions.

　　“Thanks to business integrations following previous mergers and acquisitions， Lenovo has made impressive progress in the PC unit in a lackluster global PC market. The total profit margin hasn’t been compromised，” Yang said.

　　By using Motorola as a springboard to North American and Latin American markets， Lenovo will sell more than 100 million smartphones in 2015， he said.

　　After the Motorola acquisition， Lenovo ranks No.3 in smartphone shipment volume， he said.

　　By Zhou Xiaoyan