One year later, Lenovo looks for second act

Having reorganized after buying IBM's PC business, Lenovo plots its next moves at home and abroad.

A correction was made to this story. Read below for details.
Howard Locker, the man who holds the future of the ThinkPad in his hands, likes being the top dog for a change.

One year after Lenovo completed its acquisition of IBM's PC business, employees like Locker, the chief architect for desktop and notebook design, are relishing the chance to work for a company that is completely focused on PCs. "When you plotted IBM's portfolio, we were not the most important thing IBM did. Now in Lenovo, we are the most important product in the company," he said.

Lenovo inherited the third-largest PC business in the world last May, when it finalized the deal first announced in December 2004. It has spent its first year shoring up its operations and molding a new company. As Lenovo enters its second year as a reborn PC vendor, it's planning to move beyond its core markets in the U.S and China. But as it ventures into countries around the world, the company must continue to fend off challenges to its base from top players like Dell and Hewlett-Packard.

"My sense is they've set up a strong platform to grow. But they need to show some imagination and take it to the next step," said Roger Kay, an analyst with Endpoint Technologies Associates.

Although IBM's interests have always included higher-margin businesses like servers, software, and services, IBM played a historic role in the development of the PC industry--and for a time IBM and the PC were synonymous to many consumers. Loyal ThinkPad users gave it a strong presence inside some of the world's largest corporations. But concerned about profitability and managing its other divisions, IBM decided it was ready to let go of the PC group.

IBM's revenue has slipped a tad in the year since the sale, but its profit jumped 27 percent in its most recent quarter. IBM did not return a call seeking comment on the Lenovo anniversary.

Sam Bhavnani, an analyst with Current Analysis, thinks that the continuity between the pre-Lenovo IBM group and the post-acquisition company has helped assuage fears that IBM's customers would balk at dealing with a Chinese company. "Any potential company wavering on buying ThinkPads, as soon as they talk to one of the spokespeople or executives, those fears dissipate," Bhavnani said.

Of course, not everyone made the transition. There were a few growing pains involved, such as the layoffs that led to the departure of 1,000 employees in March.

Expect to see more belt-tightening from Lenovo in the coming year, said Paul Pan, director of strategy the company. Lenovo wants to focus on becoming more profitable over the coming year and taking advantage of its Chinese base in manufacturing and supply chain operations, he said.

IBM's PC business was not profitable while part of Big Blue, but Lenovo has turned a profit from that group over the last three quarters, it said when announcing its third-quarter results in January. The entire company recorded a $49 million profit on sales of $4 billion, in U.S. dollars. Still, in the low-margin PC business, every company is always looking for ways to improve profitability.

Dell and HP, while having had problems of their own in recent quarters, seem to have regained their footing, Kay said. Lenovo's best chance at expanding in mature markets like the U.S. is to take market share from smaller players like Toshiba, Acer and Fujitsu, he said. During the first quarter, Dell and HP led the worldwide market with 18.1 percent and 16.4 percent of the market, respectively, according to IDC.

Lenovo lost a little ground during the quarter, recording 6.4 percent market share, down from the 6.5 percent that the combination of IBM and Lenovo's shipments would have accounted for last year, before the deal was final. Acer is fourth in the world with 5.5 percent of the market, while the combination of Fujitsu and Fujitsu-Siemens is fifth with 4.4 percent.

Lenovo also plans to expand into emerging markets, such as India, while it expands its U.S. presence with small businesses and larger enterprises, according to Pan. U.S. consumers aren't on the short-term road map, but Lenovo is very much a consumer PC company in its home country and will target consumers in other countries, Pan said.

As part its plan to step onto the world stage, Lenovo ran a comprehensive ad campaign during the Winter Olympics, introducing itself to many television viewers around the world. The company is looking forward to using the 2008 Summer Olympics in Beijing as a showcase for its products.

IBM first tried to get rid of the PC group as early as 2001, according to Pan.


Correction: This story incorrectly spelled the last name of Lenovo chief architect Howard Locker.
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