Lenovo Soars in China, Struggles in U.S.

If you're the executive of a computer company that's struggling to win customers in the U.S. and other big countries, it's good to have one of the world's largest PC markets as your safety net. Lenovo, the top computer vendor in China, reported on Feb. 4 net income of $79.5 million in the last quarter of 2009, reversing a $96.7 million loss a year earlier, on sales of $4.8 billion, up 33% year-on-year. Lenovo, which has long dominated the Chinese market, the world's second-largest, now has 9% of the market worldwide. "We have achieved our highest ever global market share for the third straight quarter and notably increased profitability," CEO Yang Yuanqing said in a statement.

Much of the growth comes from Lenovo's home turf. In China the company has benefited from the government's economic stimulus policies, with Beijing offering subsidies to make it easier for ordinary Chinese to buy computers and other electronics. Lenovo's market share in China is now 33.5%, the company reported, an increase of 2.8 percentage points. Lenovo recorded $2.3 billion in China sales, accounting for almost half of the company's total revenue for the quarter. Sales in other emerging markets, including India, Brazil, and Russia, jumped 53%, to $857 million. That performance has helped drive up Lenovo's Hong Kong-listed shares, which have more than tripled in the past year.

The picture in more developed countries isn't so bright, though. Lenovo said in a statement that its market share "was down slightly year-over-year in North America." Lenovo did gain market share in Australia and New Zealand, rising 1.7 percentage points, and the company also picked up 1.5 percentage points of market share in Japan. Sales went up by a fraction in Western Europe.

Out of the Top Five

The results for the U.S. and Canada indicate that Lenovo's acquisition of the IBM PC division has not succeeded in helping the company expand beyond its core home market. In 2006, the year after Lenovo made the IBM purchase, the combined company had 7% of the U.S. market, the world's largest. At the time, that share put Lenovo third behind only Dell (DELL) and Hewlett Packard (HPQ), and Lenovo had hopes of closing the gap with the biggest players. Now, though, Lenovo has dropped out of the top five. In the third quarter of last year, Lenovo had just 4% of the market, says Tracy Tsai, an analyst in Taipei with market research firm Gartner.

Indeed, Lenovo is now more China-centric than it has ever been since the IBM deal. China accounted for 48% of the company's revenue for the first half of 2009, according to data compiled by Bloomberg. In the most recent quarter, China accounted for 47% of sales, the company said. At the time of the IBM acquisition, the China business was 37% of sales.

The U.S. is a particularly tough challenge for Lenovo, which is suffering from the IBM legacy in the American market. Big Blue traditionally was strong in corporate sales, a strength that Lenovo inherited and has maintained. Yet unlike rivals HP and Acer (2353:TT), Lenovo is relatively weak in sales to U.S. consumers. The recession therefore left Lenovo especially vulnerable, as companies cut back aggressively on new PC spending. In the U.S. market, "the major growth in 2009 all came from consumers," says Gartner's Tsai. "That's why their share has been lost. For the consumer market, their brand is still not very well recognized."

Marketing to Consumers

Lenovo is still trying. Bryan Ma, director of personal systems research in Singapore for market-research firm IDC, credits the company with launching more consumer-friendly computers at the annual Consumer Electronics Show in Las Vegas last month, where Lenovo showed off new laptops in white and red. "Back in the old IBM days, you could get a ThinkPad in whatever color you wanted, as long as it was black," says Ma, who also likes the way Lenovo is focusing more on its consumer laptop brand, the IdeaPad. When it comes to marketing, "Lenovo is making strides," he says.

On the consumer front, Lenovo and other PC makers now must also cope with the threat from Apple's (AAPL) new iPad tablet computer. At the CES show in Las Vegas, Lenovo launched a preemptive strike at the Apple device with the IdeaPad U1. The company calls it a hybrid PC, with a screen that can detach and function on its own as a tablet. Success won't be easy, warned Bank of America Merrill Lynch analysts Daniel Heyler, Frank Lee, and Tina Chang in a Feb. 4 report. "Lenovo's high-profile launch at CES of its new product line has also raised investor excitement over its potential consumer PC strategy," they wrote. "However, we believe lack of support from Microsoft coupled with Apple's aggressive iPad pricing strategy could limit upside potential of new product line-up."

To make real inroads again in the U.S., Lenovo will need a recovery in corporate demand. With an economic rebound underway in the U.S. and other developed economies, there are some signs that the corporate segment will start lifting Lenovo. Corporate buyers that had put off PC purchases are likely to start spending again, says Ma, and last year's launch of Microsoft's (MSFT) Windows 7 operating system should help, too. Commercial PC shipments, which fell 12% worldwide last year, should turn around and grow 7% in 2010, Ma says. "Lenovo potentially benefits from that."

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