One year later, Lenovo looks for second act

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.

 

The first time IBM approached Lenovo about a potential acquisition, management had declined. "They thought they weren't ready," Pan said. He joined the company three years ago in Bejing and worked closely with Lenovo's executives during the IBM negotiations in 2004. At the time of the first discussions, Lenovo was locked in the middle of a tough fight for market share in China and wanted to focus on shoring up its presence in its home country, he said.

But by 2004, Lenovo was looking for new places to grow. "Over that time, the management and business leaders became a lot more mature and could handle very complicated situations and understood the PC business a lot better," Pan said. IBM was still looking to offload its low-margin PC business, and the companies reconnected on what became a $1.75 billion deal.

"It's very natural, because a country goes through different stages. Korea and Japan...also encountered similar experiences when their companies tried to expand in the U.S."

--Paul Pan, Lenovo's director of strategy

IBM PC group executive Stephen Ward came over to run the newly merged company following the completion of the deal, but former Dell executive Bill Amelio was named to the top job in December, somewhat abruptly in the views of some analysts. Amelio was better equipped to lead the company's international growth, Lenovo said when it announced the deal.

Lenovo's largest move since the acquisition has been the introduction of the Lenovo 3000 series PCs, its first product designed for a global audience, as well as the first product jointly designed by IBM and Lenovo engineers. Those systems borrow some things from the design legacy of the ThinkPad, such as its keyboard, but employ less powerful configurations to focus on small- and medium-size businesses, Locker said.

To cater to those customer segments, Lenovo has also moved quickly to expand its distribution channels in the U.S., signing deals with Office Depot and Best Buy.

But the primary concern of many Lenovo watchers has been whether notoriously conservative enterprise IT managers would accept a change in their ThinkPad suppliers. The company has also had to deal with the U.S. government's concerns that Lenovo could pass intellectual property secrets to the Chinese government, which owns a 27 percent stake in the company.

Pan acknowledges that Lenovo faced more scrutiny as a Chinese company coming into U.S. corporate accounts than another U.S. company might have.

"It's very natural, because a country goes through different stages. Korea and Japan...also encountered similar experiences when their companies tried to expand in the U.S. The Chinese companies, especially the forerunners like Lenovo, have to experience similar situations and prove they can add value to our customers," Pan said.

Lenovo has lost a few customers because of this mindset, and its competitors did their share of trying to spread the FUD (fear, uncertainty, doubt) about their new overseas rival. But for the most part, Lenovo seems to have held onto its high-profile customers, Kay said.

That's probably because many of the personal relationships developed during the IBM days disappear under new management. Almost all the people who worked on the ThinkPad at IBM have moved to Lenovo since the acquisition, Locker said. "That's why it's not going to change."

To use a baseball analogy, while the company hasn't hit any major home runs in its first year as the world's third-largest PC company, it has cranked out a steady stream of singles. It hasn't dramatically expanded its market share, but it hasn't lost much ground, either. "Everything they've said they were going to do, they've executed," Bhavnani said.

Lenovo has also shown hardware companies in Europe and Asia that they can expand in the U.S. through an acquisition, Bhavnani said. Struggling PC vendor Gateway has come up as a potential acquisition target for companies like Fujitsu or some of the Taiwanese contract manufacturers that know how to design and build PCs, but don't have brand recognition in this country.

"Lenovo has set a model for how this could work. Fujitsu executives in Japan must be looking at this and saying, 'This can happen, it's doable,'" Bhavnani said.