This time last year Yang Yuanqing had good cause to celebrate. The 49-year-old executive had just seen his company Lenovo overhaul US giant Hewlett-Packard to become the world’s largest PC maker for the first time in its history.
The Beijing-based firm’s rise was all the more remarkable given that less than a decade earlier, most consumers outside of its native China had barely heard of Lenovo, let alone owned one of its computers.
Yang had taken the big bang approach to the PC industry; that is rather than grow the business organically, the company instead snapped up IBM’s computer division for $1.75bn in 2005.
Industry pundits widely derided the deal, perhaps not surprising given that the IBM business was bleeding red ink at the time.
In the years since, however, through a combination of savvy marketing and rigorous supply chain management, Lenovo has gobbled up an 18.6 percent share of the market, according to research firm IDC, shipping more than 15.3 million units per quarter.
With these same figures appearing to show that the traditional PC sector is in terminal decline, as consumers increasingly adopt more sophisticated mobile devices, Yang has now set his sights on conquering the huge global smartphone market.
Through this year’s acquisition of US handset maker Motorola from Google for $2.9bn, Lenovo is again hoping to buy its way to world domination by turning around an established, yet flagging, brand.
Not everyone is convinced though that he will be able to repeat the trick though. Of most concern was the possibility of loss-making Motorola eating into Lenovo’s profits, which increased 29 percent in its most recent quarter, in the short term.
“They basically are taking on a material headwind to profitability which will impact their results,” Alberto Moel, an analyst at Sanford C Bernstein & Co, told Bloomberg shortly after the deal was announced. “For the next few quarters we will be seeing earnings coming down. The question is how bad those earnings will drop and how low they will go before they start rising again.”
“The purchase seems to overvalue Motorola’s past success,” added Harrison Cho, an analyst at Samsung Securities, in a research note. “As the Motorola deal excludes patents, Lenovo is in effect paying $2.9bn for the Motorola brand — one with limited value in the current market.”
At present, Motorola’s global share of the smartphone market is estimated at less than 1 percent, a long way down from its dominant position in the late 1990s and early 2000s.
The company also haemorrhaged some of its best engineering talent while under Google’s stewardship. “The deal seems questionable for Lenovo as Motorola has continued to suffer from core R&D personnel defections and brand value deterioration,” Samsung’s Cho continued.
Yang himself is understandably far more upbeat. Lenovo is seeking to rival competitors Samsung and Apple in the smartphone space, where the former currently holds 4.7 percent of the global market, making it the fifth-largest handset vendor, according to analysis firm Strategy Analytics. This is despite only launching its smartphones outside of China in 2012, while they are yet to launch in mature markets like the US and Western Europe at all.
In its native China, however, Lenovo is already the second-largest player in the market, with a 12.5 percent slice behind Samsung, data from consultancy Analysys International shows.
Still, Yang says that the acquisition of Motorola, which despite its 80-year heritage is currently bleeding cash to the tune of $1bn per year, is required in order to get a foothold in mature smartphone markets.
“We had no choice [but to buy Motorola]. This is our strategy. This was the best target we could get in the market. These are very rare resources that are still remaining in the market for sale. I think it’s a very valuable asset, so that’s why we’ve bought the business,” Yang tells Arabian Business.
The Lenovo chairman and CEO is confident that he can make loss-making Motorola profitable within six quarters. The company, which was bought out by search giant Google for $12.5bn just two years earlier, benefits from strong assets including intellectual property (IP) and existing relationships with telecommunications operators in mature markets, Yang says.
“Why are we confident [we can turn Motorola around]? Because it has good assets, it has good brands, good IP position, good carrier relationships, a good engineering team and good talents,” he argues. “Those are all what we want if we want to sell in mature markets, [like] the US and Western Europe.”
In order to return the handset maker to profitability, Yang explains, Lenovo plans to implement its own stringent approach to supply chain and inventory management. Unlike many commercial hardware makers, Lenovo does not outsource its manufacturing to third parties such as Taiwan’s Foxconn Technology or Pegatron. The company says this allows it to keep its overall expense-to-revenue ratio reasonably low.
“[Motorola] still has a very, very good growth margin. Unfortunately, the expense-to-revenue is too high, but with Lenovo’s efficient operation platform, we’re very confident we can turn around the business,” Yang says.
He adds that while Lenovo will be seeking to streamline Motorola’s operations, it is not currently looking to cut the handset maker’s headcount. While under Google’s ownership, the Silicon Valley firm aggressively cut costs at Motorola by laying off about 5,200 workers.
“We don’t have a plan to further cut the headcount, because Google has already done that,” Yang says. “So most of them [that are left] are R&D people, and those people are a treasure to Lenovo.”
In terms of brand positioning, Yang says that things have not been worked through fully yet. A major reason for acquiring Motorola is to give Lenovo an immediate presence in Western markets through a recognisable brand, and he says this it is likely the company will market both Lenovo and Motorola handsets side-by-side. “Over 80 years [Motorola has] spent much more than $3bn on the marketing and the branding, so we should fully leverage this well-known and well-respected brand to do business,” he believes.
Lenovo handsets, which are either based on the Android or Windows 8 operating software, have proved popular in emerging markets outside of China, most notably Russia and the Arabian Gulf. The company says that it has plans to launch its devices step by step in more developed markets, but for now will leverage off of Motorola’s greater visibility.
“In mature markets, we’ll probably leverage Motorola. It could be [branded] ‘Motorola by Lenovo’, or these kinds of things,” Yang adds.
When it comes to the fickle, hype-driven consumer technology, the vendor landscape has shifted remarkably over the last 15 years. Prior market leaders such as Motorola, BlackBerry and Ericsson have flagged or pulled out altogether, while Apple, Samsung, LG and Huawei have emerged at the top of the pile as things stand.
Perhaps the most profound decline has been that of Finland’s Nokia, which for 14 years was the frontrunner in terms of mobile phone shipments globally. This run ended as the company failed to come up with a viable competitor for Apple’s iPhone, culminating in its eventual acquisition by Microsoft for $7.2bn.
Yang says that Lenovo, which was previously rumoured to be interested in buying Canada’s BlackBerry, did not consider rivalling Microsoft for the purchase of Nokia, which he dismisses as being “too expensive”.
Yang also denies the assertion that given Motorola’s diminished brand value, it may as well have entered the developed markets that it seeks to grow in organically. “IP is a big barrier for you to enter into the mature markets. If we tried to enter the mature market organically, we’d probably need to prepare much more resources, or pay more IP royalty to others,” he argues.
There is still the question of whether Lenovo will be allowed to complete its takeover of Motorola at all. Acquisitions of US technology companies by Chinese entities have been scuppered in the past due to regulators’ security concerns, most notably Huawei’s attempt to buy networking company 3Com in 2008.
Yang however is bullish that the deal for Motorola, as well as another multi-billion-dollar purchase of IBM’s small business server division, will be approved by regulators within “six to nine months” of the initial agreement date.
“[Smartphones are] just a volume product, everybody’s using it. We bought IBM PC before, and we’re very respectful of the approval process and we co-operate with all the government agencies to go through the process,” Yang believes. “After that, we comply with all the regulations and rules. We’re a good global citizen.”
Even if, as Yang anticipates, US regulators do pave the way for Lenovo to become the world’s third largest smartphone vendor by market share, given Motorola’s track record in recent years, the hard work will only just be starting.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.