Lenovo Is Hit by a Smartphone Slowdown in China

Lenovo is the world’s top name in PCs, with 20 percent of computer shipments worldwide. But to insulate itself from a protracted slowdown in PC sales, the company has been trying to earn more money by selling smartphones. As part of that strategy, Lenovo last month completed the acquisition of Motorola Mobility from Google for $2.9 billion. That deal helped catapult Lenovo into the No. 3 spot worldwide, behind only Samsung Electronics and Apple. “Lenovo will be No. 3 in the global smartphone market, but definitely we will not stop here,” Chief Executive Yang Yuanqing told Bloomberg News on Oct. 30. “We want to become the leader in the smartphone and mobile devices area.”

To achieve that goal, Lenovo is in need of a home-field advantage. Just as the company was able to take advantage of its dominance in China to become a global leader, Lenovo has been trying to get a lift from the strong demand for mobile devices among Chinese consumers.

After the company’s earnings announcement yesterday, though, investors worried about a slowdown in China have turned skittish about Lenovo. The company’s shares fell more than 5 percent in Hong Kong trading today, following a disappointing quarterly earnings report from the company. Lenovo reported sales of $10.5 billion, a 7.2 percent increase over the same period in 2013 and 1 percent higher from the previous quarter this year. However, that was the smallest increase in over a year and missed analyst estimates.

Contributing to the underwhelming results was a sharp decline in sales of smartphones and other non-PC devices in China. While Lenovo enjoyed a healthy 7 percent year-on-year increase in PC sales at home, its non-PC revenue in China fell 29 percent to $699 million. Worldwide, revenue for mobile devices fell 6 percent.

The smartphone performance was “the biggest disappointment,” Barclays analyst Kirk Yang wrote in a report published today. As it competes against Xiaomi and its hugely popular low-cost phones, Lenovo may be selling lots of phones (shipments increased 38 percent for the quarter) but at lower prices. The combination of lower sales but higher shipments “means a large drop” in average selling prices, according to Yang.

That may weigh down Lenovo stock in the weeks ahead. “We believe investors will become more concerned on the intensifying price competition in China’s smartphone market,” Daiwa analyst Steven Tseng wrote in a report published yesterday.

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