Lenovo Confident Of Lifting Margins By Selling Phones, Tablets
Last update: 2/17/2011 5:47:24 PM
By Ian Sherr
Of DOW JONES NEWSWIRES
SAN FRANCISCO (Dow Jones)--Lenovo Group Ltd. (LNVGY, 0992.HK), one of the world's fastest-growing PC makers last year, now aims to dive into the smartphone and tablet markets, a move executives said should help the company's profitability. The Chinese computer maker seeks to offer a full line of traditional and mobile computing products that work together and have been specially fitted with software designed by the company.
To help spread its new message, Lenovo also is planning a brand-awareness campaign. "We believe that we can gradually improve our margins through innovative products and through better brands," Chief Executive Yang Yuanqing said in an interview Thursday with Dow Jones. The discussion came after Lenovo earlier reported its largest profit in two-and-a-half years because, in part, of lower component costs.
The company's third-quarter gross margin was 11.2%, on par with local rival Acer Inc. (2353.TW) but almost half of U.S. rival Dell Inc. (DELL) and less than a third of Apple Inc. (AAPL). Lenovo became a global PC player after buying that business from International Business Machines Corp. (IBM) in 2005.
In 2010, it had about 10% of the global PC market by unit shipments, according to research firm International Data Corp., placing it fourth behind Hewlett-Packard Co. (HPQ), Dell and Acer. However, Lenovo was the fastest-gaining member of the group, growing 37% over the course of the year, the data tracker said.
Lenovo has since expanded into smartphones with the LePhone--which means "Happy Phone" in Chinese--and a forthcoming LePad touchscreen tablet, both of which leverage Google Inc.'s (GOOG) Android operating system. The company also plans to release a slate of tablets in the U.S. during the summer.
Yang said the company had been researching tablets for the past four to five years, and feels it's prepared to compete in the hot market by using innovative designs such as the IdeaPad U1 hybrid notebook, whose screen can detatch from its keyboard to be used as a touchscreen tablet. Chief Operating Officer Rory Read added that Lenovo invested $50 million in marketing and development last quarter.
Starting in April, the company is also preparing to launch a brand-awareness campaign and attract people to their products. "By increasing that awareness, people will understand the value proposition, the reliability, the quality and innovation," he said. Further helping Lenovo's recognition is a recent tie-up with Japanese computer market leader NEC Corp. (6701.TO).
The partnership will offer Lenovo the chance to grow its brand and benefit from higher sales prices, while giving NEC access to Lenovo's discounted component prices. "We have a lot of room to improve the joint venture's profitability," Yang said.
Those investments will likely push up the company's expense-to-revenue ratio in the current quarter, but Read said it is part of a larger campaign to expand brand awareness and improve margins over the next three to four years--a crucial time period in which sales for smartphones, touchscreen tablets, laptops, desktops, smart televisions and other Internet-connected devices are going to increase substantially.
Those increased sales will likely drive hardware costs down and allow Lenovo more flexibility on pricing, he said, a trend that will likely increase the company's profits. Yang and Read said Lenovo is not ignoring the core computer market.
While profits for laptops and desktops are trending lower than those for smartphones and tablets, both said they see an opportunity to further grow market share as competitors, such as Dell and Apple, focus on faster-growing parts of their business, whether that be newly acquired business arms or hugely popular mobile devices.
"You won't see us acquiring a services arm because that puts us in competition with our channel partners," Read said. "That makes no sense." Instead, both executives said they will focus on building products both corporate customers and consumers alike will find appealing. "This is not a short-term growth strategy," Yang said.
"We have to invest for a long time." From two years ago, Lenovo's stock has more than tripled; however, shares have been stagnant over the past year. -By Ian Sherr, Dow Jones Newswires; 415-439-6455; ian.sherr@dowjones.com (END) Dow Jones NewswiresFebruary 17, 2011 17:47 ET (22:47 GMT) |
