Caixin
Dec 13, 2016 07:11 AM
BUSINESS & TECH

Lenovo Fights to Retain Tech High Ground

Lenovo Group Ltd. launches new models of the Moto Z and Moto Z Play cellphones in New Delhi, India, on Oct. 4. Lenovo has become one of top three cellphone players in terms of market shares in India, Brazil and Russia. Photo: Visual China
Lenovo Group Ltd. launches new models of the Moto Z and Moto Z Play cellphones in New Delhi, India, on Oct. 4. Lenovo has become one of top three cellphone players in terms of market shares in India, Brazil and Russia. Photo: Visual China

Once China's biggest PC success story, tech giant Lenovo lately has been losing its edge.

In 2013, Lenovo Group Ltd. became the world's top PC maker, selling more PCs worldwide than the Hewlett-Packard Co. In the same year, Lenovo also sold around 45 million smartphones and was second only to Samsung in the Chinese smartphone market.

However, the company's fortunes have declined, due in large part to unsuccessful experiments in its smartphone business.

Lenovo's 2016 interim results, released in November, show that its PC and tablet businesses are shrinking. And its smartphone business, which accounts for 20% of the company's revenue, loses an average of more than $100 million each quarter.

Motorola: a difficult merger

In late 2013, Eric Schmidt, Google CEO at the time, contacted Lenovo CEO Yang Yuanqing with a question: Would Lenovo be interested in buying Motorola Mobility?

Motorola Mobility was the telecommunications and cellphone spinoff business that had emerged in 2011, alongside Motorola Solutions, from the then-83-year-old Motorola Inc.'s 2007-09 meltdown and subsequent restructuring. Motorola had once been an iconic brand at the cutting edge of the cellphone industry, but it had failed to keep up with its competitors in the smartphone era.

Google took a gamble when it purchased Motorola Mobility for $12.5 billion in May 2012. The gamble didn't pay off. By 2013, Motorola was bleeding hundreds of millions of dollars per quarter, and it was no longer clear how the company fit into Google's long-term strategy. Google was looking to offload the struggling Motorola brand and quickly found an eager buyer.

Lenovo had always relied on mergers and acquisitions to fuel its growth. Back in 2005, Lenovo acquired IBM Corp.'s PC business, including the ThinkPad laptop, for $1.25 million and assumed an additional $500 million of IBM's debt, making Lenovo the third-largest computer maker worldwide by volume.

Between 2011 and 2013, Lenovo had managed to take Hewlett-Packard's place as the world's top PC seller through the joint venture it had formed after acquiring Germany's Medion AG, Brazil's CCE and Japan's NEC.

Yang had reason to be optimistic about what Motorola Mobility could bring to Lenovo's smartphone business. In fact, Lenovo had previously approached Google when the American firm first acquired Motorola, unsuccessfully asking to purchase Motorola's hardware business. So this time, Yang quickly accepted Schmidt's offer.

But Yang's optimism was misplaced.

In January 2014, Lenovo agreed to take over Motorola Mobility's hardware business for $2.91 billion — almost $10 billion less than what Google paid in 2012. Google was to retain Motorola's treasure-trove of patents while licensing them out to Lenovo.

At that time, Lenovo was facing falling smartphone sales within China because the country's three big telecommunications firms (China Mobile Communications Corp., China Unicom, and China Telecom Corp.) were cutting off the subsidies they had offered to smartphone buyers in the early days of China's 3G network.

For a while, when 3G mobile internet was still taking root in China, Lenovo led the pack as China's top low-cost smartphone brand and was the second-best-selling smartphone brand in the country in 2013, after Samsung. Its share of the domestic smartphone market rose from just 1% in early 2011 to 12% in 2012. But after the telcos turned off the subsidy tap in 2014, Lenovo's domestic smartphone sales dropped from 12.96 million sets in the second quarter, to 10.12 million in the fourth.

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Its cheap LePhones (marketed as IdeaPhones outside China) were floundering, and Lenovo's acquisition of Motorola Mobility looked like a chance for the Chinese firm to revitalize itself and enter the high-end smartphone market. But Lenovo's re-introduction of Motorola phones into the Chinese market was marred by a series of miscalculations.

Overestimated brand appeal

The second-generation Moto X, Moto X Pro, and Moto G arrived in China in February 2015. Motorola smartphones had disappeared from the Chinese market after Google acquired the brand, largely because Moto phones depended heavily on Google applications that were now blocked in China. Lenovo thus had to rework the Moto operating systems for the Chinese market, but the new local versions were awkward and unattractive to sophisticated users in China's now-mature smartphone market.

At the same time, Lenovo overestimated the Motorola brand's global appeal and priced the three new models too high. In the second quarter of 2015, global sales of Motorola smartphones amounted to 16.2 million sets, a 34.4% decrease from the 24.7 million sets sold in 2014's fourth quarter, when Lenovo took over the brand.

Nevertheless, Lenovo went ahead with developing what was referred to within the company as "Yang Yuanqing's pet project" — the modular Moto Z. Introduced to the Chinese market in September this year, the Moto features 16 built-in contact points that allow users to attach "Moto Mods" — external speakers, covers, and projectors designed exclusively for the Moto Z.

"In terms of software, smartphones today rely primarily on Apple and Android app stores to expand their functionality. But Motorola's Mod concept involves innovation on a different level — it creates a whole new hardware ecosystem," Lenovo Vice President He Zhiqiang told Caixin.

In an increasingly homogenized market, the Moto Z is part of Yang's plan to bring back some of the glory of Motorola's heyday, when innovative hardware helped the sleek, fashionable Razr take the world by storm.

But the Moto Z has received a lukewarm response from consumers so far. About 1.06 million Moto Z handsets were sold in China within the smartphone's first three months on the market — a lackluster performance compared with the Huawei P9, also released this year, which sold 4.5 million sets in its first three months.

Lenovo isn't giving up just yet. In early November, Yang revealed that Lenovo intends to move its entire smartphone business, including the ZUK and LePhone brands, under the Moto umbrella. "This will make us more focused and productive," Yang said.

Customer service a bad fit

Lenovo's smartphone business isn't the only thing weighing the company down — its data center business, which the company began developing after 2012, still loses money.

In 2013, after U.S. National Security Agency contractor Edward Snowden revealed the large-scale involvement of IT companies in U.S. government surveillance, many Chinese government departments and state-owned enterprises began to turn to homegrown firms like Inspur, Huawei Technologies Co. Ltd. and Lenovo for server solutions. Lenovo's domestic server sales grew exponentially.

But at the same time, company executives realized that the customer service approach they had honed over years of selling hardware was a bad fit for its new data centers. "Selling servers means our customer service staff needs to be familiar with storage, network, and software issues, which they never had to deal with in the past," Lenovo China President Tong Fuyao told Caixin.

Lenovo launched an internal campaign to reteach its staff how to deal with its new customers. The company partnered with enterprise cloud company Nutanix and American network innovation firm Juniper Networks in 2015 and 2016 respectively, with the hope of increasing its share of the global data center market.

While Lenovo waits for its smartphone and data center efforts to bear fruit, its PC business is feeling the pinch.

Research firm IDC reported that by the third quarter of his year, Lenovo's had a 21.3% market share and that its lead over Hewlett-Packard had slipped to just 0.1 percentage points.

Lenovo was still on top, but barely.

This was because the Asia-Pacific and Latin American PC markets, which accounted for much of Lenovo's customer base, had shrunk in recent quarters, the IDC report said. At the same time, the PC market in developed countries, where Lenovo's competitors had an advantage, was finally bouncing back from years of decline.

Additionally, Lenovo's competitors are willing to cut prices more aggressively, but "Lenovo needs to use its PC profits to feed its smartphone and server businesses," Yang said at a news conference earlier this year.

Lenovo's prospects

There is still some hope for Lenovo's smartphone business, Gartner analyst Lü Junkuan told Caixin. "Two or three years ago, the iPhone looked invincible. But today it's reached a growth plateau. This industry changes so quickly — nothing is impossible."

The company could also make up for the stagnation in its PC business by turning to growth areas like mobile internet, IDC China Vice President Wang Jiping told Caixin. But Lenovo could expect to be stuck in its current rut for a while, he said.

In the meantime, Lenovo is looking to inject some fresh blood into its operations. Most recently, former Eastman Kodak President Laura Quatela was appointed chief legal officer at Lenovo this November. Kirk Skaugen, who was previously general manager of Intel's Asia Pacific Solutions Group, has joined as executive vice president and president of Lenovo's Data Center Group, and Microsoft veteran Rui Yong is now Lenovo's chief technology officer.

"Let's all be patient for now," Yang said at a management meeting this October, where he said that Lenovo's current financial outlook was tolerable, if not ideal. "We may have been too impatient in the past, and it was probably my fault."

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