The $30bn dollar man

Yang Yuanqing is in charge of the world’s biggest computer company. But as the winds of change sweep through the PC industry, how is Lenovo adapting?
Lenovo’s business is heavily dependent on in its expertise in marketing and selling desktop and laptop PCs to both consumers and businesses worldwide.
By Daniel Shane
Fri 03 May 2013 11:28 AM

It is a Friday night in one of downtown Beijing’s swankiest restaurants and Yang Yuanqing is moving nimbly from table to table, engaging guests with conversation on everything from China’s new-found appreciation for red wine to what it is like running the world’s largest computer company.

As chairman and CEO of Lenovo, 48-year old Yuanqing is at the helm of a $30bn-a-year business, or one roughly the size of American Express.

He has good reason for feeling convivial. Just recently Lenovo overtook US tech behemoth Hewlett-Packard to become the biggest player in the PC market. Figures from IT analyst firm Gartner show that Lenovo now ships more than 13 million computers per quarter, helping the firm to corner a more than fifteen percent global market share. Today, Lenovo is number one in five of the world’s seven top PC markets.

These statistics mark the latest milestone in the quite astonishing ascent of a company founded less than 30 years ago in a ramshackle Beijing garage.

In its formative years, Lenovo specialised in making technology that allowed users to type in Chinese on English-language keyboards, before moving into making desktop PCs proper. In 1994, the company listed on the Hong Kong Stock Exchange, but the firm was largely unheard of in the West until 2005, when it snapped up IBM’s PC-making unit in a controversial $1.75bn buyout.

Today, Lenovo’s business is heavily dependent on in its expertise in marketing and selling desktop and laptop PCs to both consumers and businesses worldwide. According to the company’s latest set of quarterly financial results, PCs accounted for 82 percent of the group’s total revenue.

Perhaps troublingly though, Gartner data shows that while Lenovo may be the world’s top PC maker, the industry as a whole shrank by eight percent in the last twelve months.

Given both of these observations, is Yuanqing anxious about future growth? Putting it bluntly, no.

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“The PC market is still $100bn of business — that business has not suddenly disappeared. We’re very confident that the traditional PC area will recover the [lost] growth, probably in the second half of the year,” he tells Arabian Business, adding that he expects purchases to pick up on the back of the recently released Microsoft Windows 8.

At least part of the PC market’s decline can be blamed on the rise of so-called ‘smart’ devices over the past couple of years, most notably smartphones and tablets, of which about 250 million are now sold every quarter.

“The industry is changing, no doubt about that. Smartphones and tablets are growing fast, so in the short-term there is some impact on the traditional PC, but we believe the traditional PC will not die,” Yuanqing, who is an also eight percent shareholder in Lenovo, believes.

Rather, Yuanqing predicts that the global technology industry is moving to a “PC-plus era”, as he puts it. It may sound like marketing guff, but he insists there are solid market fundamentals behind the concept.

Yuanqing believes that there will remain a long-term requirement for PCs for more heavy-duty computational tasks that require the processing might only a desktop unit can provide. Outside of this, however, Lenovo has poured research and development funding — $450m in 2012 — into developing other mobile form factors.

“The PC industry is entering the PC-plus era, so we have more opportunity beyond the PC: tablets, smartphones, as well as smart TVs,” Yuanqing explains. “Over the past couple of years we’ve invested a lot in innovation.”

Lenovo’s products in this area include Yoga, a laptop that can niftily be bent backwards to become a tablet, and Horizon, a flatscreen computer roughly the size of a coffee table designed for use by an entire family at once. Yoga took four years of research to develop, says Yuanqing.

Lenovo is also aggressively targeting the smartphone space, albeit primarily in its native China for now. Since launching its first handset in the country in 2010, Lenovo has soared to become the second largest seller of smartphones in China after Samsung with a twelve percent market share.

“We will definitely be the leader in China and we will definitely be more aggressive in emerging markets,” adds Yuanqing. The opening of an $800m factory in the central Chinese city of Wuhan, said to be capable of making up to 40 million smartphones per year, will not hurt this cause.

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Yuanqing says Lenovo’s strategy in mobile devices will see it follow its Chinese launches with those in emerging market nations such as Russia, Indonesia and India. The company will seek to introduce some of its smartphones to Saudi Arabia and the UAE in the next financial year, followed by a European launch. The company is also evaluating bringing its devices to the Levant.

Yuanqing refutes the suggestion that Lenovo has been slow to capitalise on the emergence of the smartphone market. The company began researching the technology in 2006 before taking its first device to Chinese consumers in 2010.

Lenovo will not launch its ranges of smartphones in Western Europe until 2014. In contrast, Apple — widely acknowledged as one of the leaders in this space — began selling smartphones in 2007.

“When you prepare the product, you need to take some time. Secondly, you must choose the right market to enter,” he explains. “We thought that China is the appropriate market for us to break through first.”

Lenovo is not only highly leveraged in the PC business — which accounts for more than four-fifths of revenue — but also in its home country of China, where it derives almost half of its annual turnover. So steep is Lenovo’s penetration in this market, the firm claims, it is not uncommon to see donkeys delivering its computers in China’s most rural outposts.

Yuanqing says that when the company enters foreign shores, it does so with the intention of being number one. It may sound like grandstanding on his part, but given that the company operated at a razor-thin pre-tax profit margin of 2.6 percent in its last fiscal quarter, it seems gaining critical mass quickly is essential to Lenovo’s success in new markets.

“If you don’t have enough scale, if you don’t have enough volume, it’s hard to make money. If you don’t have enough market share, it’s hard to make money,” Yuanqing says. “That’s why we enter the markets one by one. When we enter a market, we want to quickly get double-digit market share.”

While Lenovo owns most of its own manufacturing capabilities, the vast majority of its products’ components are bought in from third party providers. Yuanqing asserts that Lenovo is not just a glorified computer assembly line and that it has invested massively in new form-factors such as Yoga, as well as software for its devices.

“This is not just putting components together. We have developed for many years on these kinds of products,” he argues. “We’re investing in software and application eco-systems.”

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Earlier this year, in an interview with a French newspaper, Yuanqing alluded to the possibility of Lenovo acquiring struggling smartphone maker BlackBerry, saying a deal “could possibly make sense, but first I need to analyse the market and understand what exactly the importance of this company is”. His comments led to a spike in BlackBerry’s share price, before Lenovo quickly poured cold water on a potential deal.

On a few levels, the agreement could make sense. Lenovo would instantly be handed access to millions of existing customers in developed markets through a tried-and-trusted brand. Just as significantly, the purchase of the Canadian phone firm would also give Lenovo its own software platform in the BlackBerry operating system.

This would relieve Lenovo from paying Microsoft licensing fees to use Windows 8, as well as differentiating its handsets from other manufacturers that use the Android software, like Samsung and LG.

Yuanqing declines to comment on the possibility of a deal for BlackBerry, but says that major acquisitions are very much on the cards. “We’d better not comment any further. I will make trouble again,” he says. “We think acquisition is a good tool to help a company to grow, so we will definitely continue to make the effort in this aspect.”

Pressed on whether there were any particular areas that Lenovo look to acquire in, Yuangqing replies: “We’re interested in companies that are consistent with our strategy, and definitely smartphones are our strategy.”

The Lenovo chairman says that the company has “no debt” and is sitting on cash reserves of approximately $4bn, although it could leverage on its assets to access multiples of that to finance any acquisition.

In 2005, Lenovo’s acquisition of a huge heft of IBM’s business brought the firm founded in a Beijing garage global attention and put it on the road to becoming the dominant company in this industry. If Lenovo is to capitalise on the rapid rise of smartphones and tablets, a similarly bold move may be needed.

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