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Lenovo Seeks to Bring Chinese Success to U.S Smartphone Markets
By Christopher De - June 4, 2013

Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Lenovo Group (NASDAQOTH: LNVGY.PK), the second largest personal computer (PC) manufacturer, views the smartphone market as a new channel to drive growth in the company. Yang Yuanqing, Lenovo's Chairman and CEO, believes the PC market presents limited growth for the company's future success. Mr. Yuanqing wants his company to start selling its smartphones in the U.S market within a year.

Impressive Earnings

Lenovo boosted investor confidence with its latest earnings report. For its fiscal year ending March 31, the company reported a net profit of $126.9-million, up 90% year-over-year (YOY) from $66.8 million. Revenues ballooned to $7.8 billion, up 4.5% YOY. The company recorded a gross profit of $963 million, up 20% from last year Gross margins remain strong, sitting at 12.3%. Operating profit climbed to $169 million, up 67% YOY. Lenovo’s Board of Directors declared a final dividend of 1.81 cents for the fiscal year ended March 31, 2013.

China

Beijing-based Lenovo introduced its first smartphone to customers in China during the first fiscal quarter of 2010, following the acquisition of Lenovo Mobile to tap into the growing market for mobile Internet devices. Since then, Lenovo has competed well in China—the biggest smartphone market by volume—against its local rivals ZTE Corp., Coolpad and Huawei Technologies Co.

In the quarter ended March 31, Chinese consumers purchased 67.4 million smartphones. Samsung Electronics (NASDAQOTH: SSNLF) topped the Chinese smartphone market with its Galaxy line of smartphones in the mid-low price segments. According to research firm Strategy Analytics, Samsung sold 12.5 million smartphones and gained 18.5% market share, up 2.2% from the previous quarter. Lenovo sold 7.9 million smartphones and captured 11.7% market share. Samsung may continue to deliver strong volumes in China and global markets during the second quarter with its highly demanded flagship Galaxy S4 smartphone.

Huawei edged Lenovo with 12% market share, placing Lenovo as the second largest local smartphone vendor.

Smartphone Vendor Shipments (millions) Market Share %
Samsung 12.5 18.5%
Huawei 8.1 12%
Lenovo 7.9 11.7%
Coolpad 7.0 10.3%
ZTE 6.4 9.4%
Apple 6.1 9%
Source: Strategy Analytics

On May 16, Lenovo released the K900 in China—the company's latest smartphone. Lenovo wants to increase its market share in price segments where it lacks presence. The K900 retails for a suggested price of ¥3,299 (about $538). It targets the high-end smartphone market where customers search for different options other than Samsung's Galaxy S4 and Apple's iPhone 5. The K900 aims to fulfill that demand.

United States

Lenovo is not against the idea in taking its smartphone business outside of China. Since last year, the company has successfully entered and sold its smartphones in emerging markets, including Indonesia, India, Malaysia, Philippines, Russia and Vietnam. Lenovo's main objective is to enter the European and U.S market to bolster brand recognition.

Mr. Yuanqing shows an interest in forming strategic alliances and acquisitions in North America to help the company compete in the U.S market. "If an acquisition helps us build capability, we would consider it," he told the Wall Street Journal in an interview.

Wong Wai Ming, Lenovo's CFO, shared the same outlook when interviewed at the World Economic Forum meeting in Davos, Switzerland. "We are looking at all opportunities—Research in Motion (now BlackBerry (NASDAQ: BBRY)) and many others. We'll have no hesitation if the right opportunity comes along that could benefit us and shareholders," Mr. Ming said.

BlackBerry: Licensing Opportunity

According to a Bloomberg report, "Lenovo has spoken to BlackBerry and its bankers about various combinations or strategic ventures." Lenovo purchasing BlackBerry is highly unlikely due to Canadian and U.S regulations. Lenovo needs the approval from regulators because the transaction would exceed $344 million. Lenovo said its cash reserves of $3.1 billion gives the company an opportunity to pursue acquisitions, but BlackBerry may be out of the question.

BlackBerry has looked into licensing its BlackBerry 10 operating system for low-cost entry-level devices. A strategic alliance between Lenovo and BlackBerry would benefit both parties. BlackBerry would provide the sales channels needed for distribution and differentiate Lenovo's smartphones from the Android community with the BlackBerry 10 platform.

BlackBerry's presence in China is non-existent. Lenovo utilizing the BlackBerry 10 platform in China would increase BlackBerry awareness. It would form additional revenue streams, increase the number of subscribers and improve BlackBerry's market position in China.

In the PC market, Lenovo made a number of strategic investments to expand its PC business. It made five purchases in 2011, including the PC units of Tokyo-based NEC Corp. and German-based PC maker Medion AG. Last year, the company acquired Comércio de Componentes Electrônicos (CCE), a Brazilian manufacturer of PCs and consumer electronic products, for $147 million. With these acquisitions, the company has outperformed the declining PC market with impressive sales and margins, while stealing PC market share from Hewlett Packard and Dell.

Lenovo may need to purchase or form business relationships in North America to enter the U.S market. Lenovo aims to sell 50 million smartphones this fiscal year, but it needs to diversify its smartphones, increase its marketing budget and ramp up its distribution channel if it wants to lure customers away from Samsung and Apple.

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