As it fights PC rivals worldwide, Lenovo has always been able to count on an ace. The Chinese company may be a laggard in the U.S. compared to Dell (DELL) and Hewlett-Packard (HPQ). And it may recently have fallen behind Taiwanese archrival Acer, which became the No. 3 company after taking over Gateway last year (BusinessWeek.com, 8/27/07). But nobody has been able to come close to Lenovo in its Chinese backyard.
Thanks to Lenovo's well-known brand, widespread service network, and advantage as the hometown favorite, the company is No. 1 in China, the world's second-largest computer market after the U.S. China accounts for 34% of Lenovo's sales and 71% of the company's profits. That Chinese stronghold has helped put Lenovo back into BusinessWeek's IT 100. The company, which wasn't on the list last year in part because of the challenges it faced as it digested the acquisition of IBM's (IBM) PC division, makes a solid return this year, at No. 46. That's behind HP's 30 but well ahead of Acer at No. 71. Meanwhile, Dell doesn't make the list at all.
But as Lenovo's shares plunged today in Hong Kong trading, some investors are wondering whether that advantage still holds. Lenovo on May 22 announced it had earned $140 million in the quarter, on sales of $3.74 billion. Greater China sales growth for the quarter was 18% better than the same quarter a year ago, compared to just 3% in the U.S. And while Lenovo has unloaded its cellular handset business, selling the division for $65 million earlier this year, the company continues to be in the driver's seat in China when it comes to PCs. According to a May 23 report by Merrill Lynch (MER) analysts Daniel Kim and Ronnie Ho, Lenovo's "dominant position in China" is an important factor in their belief that the company "has all the ingredients for further success and solid profits."
Not everyone is so sanguine about Lenovo's prospects, however, or its position in China. Alan Hellawell and K.C. Kao, Deutsche Bank (DB) analysts, released a report after the earnings downgrading Lenovo to "hold." One concern they cited was "heavier competitive pressures in China." That downgrade, and the concerns that other investors had after going through Lenovo's numbers, helped send down the company's Hong Kong-listed stock on Friday. Lenovo shares plunged 6.8% and are now down 14% for the year. That's still better than Dell's negative 15% and only slightly worse than Hewlett Packard's minus 11%. The only one of the four major PC makers with a stock price in the black for the year is Acer, up 1% year-to-date.
The most recent market statistics from market research firm International Data Corp. provide some indication that there's reason for Lenovo to be a little worried about China. Lenovo is still the biggest in Asia Pacific ex-Japan, a region that is dominated by China. Lenovo has 16.4% of the market, up from 15.8% a year ago, according to IDC's preliminary first-quarter figures released last month. Lenovo's rivals may be behind, but they're gaining Asian share even faster. For instance HP was at 13.8% a year ago and is now at 15.1%. Dell was at 7.2% and has gone to 9.1%. Acer has gone from 5.6% a year ago to 7.2% now. "Lenovo is holding its own in China, but increasingly there is pressure coming up from Dell and HP," says Bryan Ma of IDC. More aggressive movement by the Big Two "is not going to dethrone Lenovo," Ma adds. "But it is going to put pressure on it."
The big losers for now are China's also-ran computer makers. Companies such as Founder have benefited from a five-year government program to supply computers to schools in the Chinese countryside. That $290 million program has now concluded, though, and while the government is likely to continue buying PCs from local vendors for the education sector, demand isn't going to be as high as before. That's bad news for the smaller Chinese companies. "Some of the local vendors are heavily dependent on the local education segment," says Ma.
Lenovo has a much wider base of support in China, so a slump in education sales won't hurt the company dramatically. However, as HP and Dell further establish themselves in the Chinese market, the Lenovo rivals will be better positioned to start chipping away at Lenovo's dominant position. And with sales in the U.S. in the doldrums because of the American economic downturn, the fight for the Chinese PC market is going to get even tougher.