Lenovo: Big profits a few years off

Chairman Yang Yuanqing said at the Reuters China Century Summit that Lenovo was prepared to defend--and expand--its 7.7 percent global market share. But investors looking at the bottom line should have patience as Lenovo absorbs IBM's loss-making PC arm, he said.

"Right now, our margins are just 1 to 2 percent--that's definitely not a healthy business," Yang, 42, said. "Our goal is to return to the old-Lenovo P&L statement," he added, referring to the period before it bought the IBM unit.

The Chinese PC titan, one of a handful of Chinese firms trying to forge a global brand, racked up net margins of 4.5 to 5 percent before it bought the IBM business for $1.25 billion in 2005.

"But nobody should think it will happen anytime soon. It won't happen in a year or two, perhaps we need a three- or five-year plan," he said.

An added problem has been Microsoft's delayed rollout of its new operating software, Vista, which has held consumers and businesses back from buying new PCs. The delay would somewhat depress the normally strong Christmas sales, Yang said.

Lenovo's profitability is taking a back seat--for now--to growth in a cutthroat market where market leaders Dell and Hewlett-Packard are expected to keep waging a costly price war.

"The last quarter was the first since the IBM acquisition that volume growth beat the market average and beat our main competitors," Yang said. "I hope that we can maintain that trend."

In the Lenovo's fiscal first quarter ended June 30, the company increased shipments by 12 percent, surpassing the industry's global average of 9 percent as it branches out to cater to small businesses and consumers.

Expanding into the hinterland
But margins were wafer thin in the first quarter, when Lenovo eked out a profit of just $5 million on revenues of $3.5 billion.

"Certain competitors have become more aggressive in pricing the last quarter and this quarter, Yang said. "We hope that our investors will have patience, but we are confident that our development plans will succeed."

Lenovo's mainstay greater China business--which makes up almost two-fifths of revenues and generated a $90 million operating profit in the first quarter--is benefiting from expansion into China's hinterland where it's often the only game in town.

The business in secondary cities now makes up 20 to 30 percent of total China revenues after growing around 50 percent in the first quarter, compared with 32 percent overall, Yang said.

The weak spot is the Americas business, which posted an operating loss of $24 million in the first quarter. Yang would not commit to a timeframe for profitability, saying the priority is to keep the big corporate customers and start rolling out products for small businesses and consumers.

"Our plans to improve our profit will come only step by step," Yang said. "We have to build our relations with customers, raise our levels of service, which will take time."

A fierce price war is convulsing the PC market, as average selling prices for notebook PCs alone fell 15 percent in the first half, industry executives estimate.

Dell sent shockwaves through the industry this summer by warning quarterly earnings would fall nearly a third shy of forecasts. Lenovo is under pressure to safeguard its market share amid speculation that Dell--the world's top vendor with a 19.2 percent share--may launch a price war.