China's Lenovo Reboots After Losing PC Crown to HP

By Kathy Chu Features Dow Jones Newswires

China's Lenovo Group is shaking up its operations as it seeks to reclaim the title of global leader in personal computers and shore up its smartphone business.

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For the first time in four years, Lenovo--a company that gained acclaim a decade ago for turning around storied U.S. personal-computer maker IBM--slipped from the top spot this year to No. 2 in the personal-computer market, behind rival Hewlett-Packard. Lenovo has also fallen to No. 8 in the number of smartphones shipped globally, from No. 3 when it acquired another U.S. brand, Motorola, in late 2014.

Lenovo's Hong Kong-listed stock has fallen nearly 60% since the Motorola acquisition.

Behind Lenovo's woes is a maturing personal-computer market where demand is slowing as consumers increasingly use smartphones and other devices for daily activities including checking the internet. Lenovo also faces fresh challenges from rivals such as Huawei Technologies Co., which has rolled out its own hybrid laptop tablets.

In response, the company is restructuring and installing new management in China to better compete against rivals in a market known for fierce cost-cutting in both personal computers and mobile phones.

"The challenges are always there," said Yang Yuanqing, Lenovo's chief executive, in an interview Thursday. "We don't care what the market share is today as long as we can grow at a premium to the market."

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Lenovo's back-to-back acquisitions three years ago of Motorola and IBM's low-end server business were attempts to diversify Lenovo's operations into faster-growing industries. But these industries have proved tougher for Lenovo to penetrate than expected.

Lenovo faces stiff competition from Dell and HP in selling servers to corporate data centers.

The global smartphone business, meanwhile, is dominated by Apple Inc. and Samsung Electronics Co. at the premium end, while upstart competitors have eroded Lenovo's dominance even on more affordable phones sold in China.

"The market is rapidly changing and Lenovo needs to respond to market demand," said Tim Bajarin, president of Creative Strategies, a technology research firm. "They have struggled with these new acquisitions."

Lenovo said Thursday as it reported fiscal fourth-quarter earnings that it is seeing positive momentum in its business, with overall revenue growing again after five quarters of decline. Gross profits, though, remain challenged, falling nearly 10% in the latest quarter from a year ago, after a 67% drop in the third fiscal quarter ended Dec. 31.

Mr. Yang said last week on his Weibo social-media account that the changes in the China business sought to respond to the world's fastest changing smart-devices market. Lenovo's business in China will now be split up into a data center group and a consumer division for PCs and smart devices, he said.

Lenovo said it was also bringing back Liu Jun, a PC industry veteran.

"We are a company to learn quickly, no matter from success or failure," Mr. Yang said Thursday. "You have to make adjustments to make the organization better than before, and to make it stronger than before."

The restructuring is part of a raft of management changes and cost-cutting moves Lenovo has made in the past three years to try to regain its footing.

Lenovo has axed at least 2,000 U.S. jobs since buying Motorola.

Kitty Fok, IDC's managing director for China, cautioned against reading too much into Lenovo losing its No. 1 position in the PC market to HP. The first quarter is traditionally Lenovo's weakest quarter, so this slide may only be temporary, Ms. Fok said.

Meanwhile, even though Lenovo's smartphone business is still not profitable, its global shipments are stabilizing, according to Strategy Analytics executive director Neil Mawston. Lenovo holds only a 1% market share in China, but is growing rapidly in India, where its market share has risen to 9% from 7% in the past year, according to the research firm.

"For Lenovo at the moment, China is a dark cloud, the U.S. is a gray cloud, while India is a sunny day," said Mr. Mawston.

The analyst said that if Lenovo can cut costs further and continue to expand in India, its smartphone business could return to profitability by 2018.

An executive who left in the past year says the cost-cutting measures have taken their toll on company's shrinking resources.

"The company needs time to turn around," said the executive. "You can't keep fiddling with the business."

A Lenovo spokeswoman said the company is focused on "profitable growth" through innovation.

Write to Kathy Chu at kathy.chu@wsj.com

(END) Dow Jones Newswires

May 25, 2017 05:16 ET (09:16 GMT)