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Faltering Lenovo doubles down on PCs

Lenovo is in talks to take over Fujitsu's PC operations.

BEIJING -- Taking over Fujitsu's personal computer operations would cement Lenovo Group's dominance in the Japanese market. But whether grabbing a bigger slice of a shrinking pie would be good for the Chinese company is less than clear.

PCs are Lenovo's core business, and the company aims to claim more market share as rivals consider bowing out, Chairman and CEO Yang Yuanqing said at a U.S. event this June. Lenovo was already in talks with Fujitsu behind the scenes at that point, according to an insider.

The Chinese computer manufacturer was founded in 1984 with funding from a government-affiliated research institution. It burst onto the global scene with its 2005 acquisition of IBM's PC operations.

Lenovo leads the global PC market, with a 20.8% share in 2015, according to International Data Corp. It aims to use its strength in this area to bolster recent weakness elsewhere.

The company logged its first net loss in seven years for the fiscal year ended March 31, owing mainly to an increasingly competitive smartphone market and restructuring costs related to the acquisition of Motorola Mobility. Lenovo's mobile business lost $469 million, while the PC operations turned a $1.49 billion profit.

Lenovo's success in a joint venture with NEC played a role in the decision to pursue Fujitsu. The venture, formed in 2011, controls 26% of the Japanese PC market. Lenovo went all-out on localization -- the venture employs almost no Chinese staffers, and integration with the Chinese parent is limited to parts procurement and personnel. Such other areas as product lineups and marketing are based on local needs.

Lenovo also retained around 1,000 employees at a PC factory in Yonezawa, Yamagata Prefecture. Production of some Lenovo computers was transferred to the plant from China in 2015. The facility began handling final assembly of servers for the Japanese market in June.

Fujitsu sells PCs as part of its information technology infrastructure services, a route shielded from competing manufacturers. Lenovo likely found this appealing, a source at a Japanese PC maker said.

Gaining Fujitsu's operations would also give Lenovo a 40%-plus share of the Japanese market, where prices tend to be higher and profit margins wider than in emerging countries. But annual PC sales in Japan have slumped from 15 million to 10 million over the past several years.

Going forward, Lenovo faces the challenge of revamping its mobile division, as well as building a framework to make money from augmented reality and gaming, cloud services, artificial intelligence and the "internet of things." The company has announced the layoff of up to 1,100 employees -- equivalent to about 2% of its workforce -- mainly from the mobile division. It has also announced the sale of a building in Beijing for 1.78 billion yuan ($266 million).

Whether Lenovo can plot a new course for growth before the PC business drops off remains to be seen. The company launched a $500 million venture capital fund earlier this year, a move that one securities analyst says is still not enough.

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