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Company in focus: Lenovo loses out on Motorola bet

Mobile phone diversification debacle sees Chinese maker revert to its PC strong suit

Lenovo's logo and products displayed in an electronics shop in Beijing (Photo by Akira Kodaka)

BEIJING/HONG KONG Chinese electronics maker Lenovo Group has put together an impressive streak of acquisitions over the last decade. It took over IBM's PC business. It snapped up German electronics manufacturer Medion and also bought NEC out of a joint PC venture. All these takeovers have helped Lenovo transform itself into the world's largest PC maker by units shipped.

But the purchase of fading U.S. mobile phone maker Motorola Mobility has proved to be a significant blot on Lenovo's copybook.

"We will restart it from zero," Chairman and Chief Executive Yang Yuanqing promised at the Mobile World Congress in Barcelona in March when he talked about the company's troubled mobile phone business, which posted a 23% fall in revenue to $2.18 billion during the three months ended December 2016.

The performance was not what Yang expected when Motorola was bought from Google for $2.91 billion in October 2014.

The very first mobile phone that Yang himself bought in the 1990s was a Motorola, and there are no doubts it is an iconic brand. Although clearly showing signs of losing its luster, Yang saw the company as a key platform to expand in the mobile sector in developed markets.

As demand slowed, Lenovo recognized the need to grow outside of its core PC business -- which accounts for 70% of its revenue.

Shortly after acquiring the company, Yang reportedly told employees at Motorola's headquarters in Chicago that the deal would help propel Lenovo into global leadership in the consumer electronics sector. Lenovo did become the world's third-largest smartphone maker in 2014, taking a 6.9% share of global shipments, behind Samsung Electronics and Apple, according to market research company IDC.

But performance has since stumbled. In 2016, its global share stood at 3.5% having slipped to eighth place.

The company's weak earnings results have not helped matters. For the full year ended in March 2016, the company's mobile business posted a $469 million loss. That weighed on overall performance, which saw a first loss in seven years.

Lenovo's struggles with Motorola have tested the faith of investors who believed the company could do no wrong when it came to takeovers. But according to a former Lenovo manager, the company made a key mistake when it acquired Motorola by "not sticking to the success model that it had learned with PC business takeovers -- understanding local demand and keeping its hands off."

Lenovo's openness and willingness to understand and learn from different cultures has long been a corporate habit. That tradition was established in the early days under Liu Chuanzhi, who helped establish New Technology Developer, a predecessor of Lenovo's parent company Lenovo Holdings, in 1984.

Lenovo struggled in its early years. With Liu and his colleagues all having science and engineering backgrounds but no company management experience, the venture ran out of money within a year.

It was not until 1986 that the company got its first taste of success with a circuit board that could process Chinese characters. At the same time, Lenovo developed a corporate culture that emphasized client demands. "Do not let technologies make you overconfident, give a high priority to clients and local demands," Liu said.

That attitude has remained the bedrock of the company. When it acquired IBM, Lenovo preserved the U.S. company's reputation for brand quality and sales networks serving corporate clients. Most IBM executives were retained and Lenovo did not try to impose its own technology or practices.

Yang also tried to integrate corporate cultures. He encouraged employees to use his first name in an effort to break down the business hierarchy.

The company followed a similar strategy in its partnership with NEC, which began in 2011. Once again, local demand influenced the core strategy and Lenovo relied on Japanese workers instead of sending people over from headquarters. This helped Lenovo become the largest PC maker in Japan.

But the Motorola takeover has been a different story. Lenovo brought in a former executive from its PC arm to manage the company, despite having little experience in mobile phones.

Bernstein Research senior analyst Alberto Moel said that "the acquisition was not terribly well thought out, and Lenovo basically overestimated the growth potential of the acquired business and underestimated the intensity of the competition." Unlike its previous acquisitions, the Motorola deal showed "that the capability and strength of the acquisition alone was not enough."

The change in management led to a strategic shift. The new executive leadership wanted to focus on the introduction of Motorola products in the Chinese market, which required changes in both hardware and software, but key international markets received little attention. Motorola also saw long-time managers jumping ship, while others were transfered.

After more than a year of stuttering, Lenovo sought a clear strategy. Yang said the company would focus on the Lenovo Moto brand as the flagship product. "Singular branding will benefit the business," he said.

But the damage to the reputation has been done. Steven Tseng, an analyst at Daiwa Capital Markets, said, "Customers are also really confused by the company's strategy."

This was reflected in the markets. As of March 24, Lenovo's closing share price had fallen below 5.00 Hong Kong dollars, 20% lower than the share price of a year ago and a decline of more than 60% from a peak in March 2015. Despite its top position in the PC market, the company's market capitalization has fallen to around $7 billion, lower than Taiwanese peer Asustek Computer. In contrast, Apple's market cap stands at around $740 billion.

Lenovo has also faced increased competition in the notoriously fickle Chinese mobile market. "The competition will become even more intense and Lenovo will face another tough battle this year as its smartphone unit continues to lose money," said Joey Yen, a Taipei-based analyst at IDC.

To improve profits, Lenovo has cut the Motorola workforce and discontinued production of most of its cheaper smartphones. It has also brought in new management, including Ma Daojie, a former China Telecom executive who spearheaded the state-owned company's smartphone business; former Samsung Electronics executive Jiang Zhen; Zhu Han from China's consumer electronics maker TCL; and Yu Gao from China Mobile.

Yet analysts remain concerned. "Reshuffling the management team is not going to make it easier for Lenovo to survive in the fast-changing smartphone market," said a Beijing-based IT analyst. "They are better off turning back to focus on PCs, like completing the purchase of [Japan's] Fujitsu's PC unit."

Lenovo may indeed be following this strategy. It posted a 7% year-on-year increase in pretax profit from PCs at $431 million during the three months ended December 2016.

It is reportedly close to reaching a final agreement on the acquisition of Fujitsu's PC unit, while it has also been reported that it is negotiating with Samsung Electronics to buy its PC business.

"Many players are considering pulling out from the PC market and we want to absorb their share," said Yang. By taking over other companies, Lenovo aims to increase its global PC market share to 30%. "PC is our core business," Yang said in Barcelona.

The back-to-basics tactic is likely to pay dividends. Eileen He, a Shanghai-based analyst for market research company Gartner, said that, even if smartphones and tablets reduce consumer demand for PCs, business demand is still strong. "Demand for PCs that offer professional features including a good [central processing unit], display and security features will remain solid or even grow as offices and educational institutions will still need PCs as their main device."

In that sense, prospects remain bright. "Lenovo has always been the leader in providing new PC features by leveraging the resources of the companies it has acquired. The company has strong advantages compared to any other players in the PC market," noted He.

But it is unclear whether refocusing on PCs will prove successful. Lenovo may thrive in this market, but the company "will immediately feel a decline in PC demand especially in China," said Anita Wang, an analyst at research company TrendForce based in Taipei. After all, there is no question among analysts that the PC market is on the decline.

It is up to Lenovo whether it can venture out of its comfort zone once again and find a new growth path.

Nikkei staff writer Cheng Ting-fang in Taipei contributed to this story.

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