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Lenovo will double R&D war chest to $9bn for AI push: CEO Yang

Company to grow services into major pillar, shifting away from PC focus

A Lenovo store in Chengdu, China. The pandemic has revived PC sales. (Photo by Shunsuke Tabeta)

CHONGQING, China -- Lenovo Group, the world's biggest personal computer manufacturer, looks to expand artificial-intelligence-based solutions services, deploying a war chest of roughly $9 billion over the next three years, CEO Yang Yuanqing told Nikkei.

The China-based PC maker will step up the development of AI-based systems that will improve efficiency for manufacturers. Shifting away from a business model heavily reliant on hardware sales, the company plans to make the solutions business a second pillar of growth.

"We are committed to doubling investment over the next three years to fuel our 'Smarter Technology for All' vision," Yang said.

Lenovo spent $1.45 billion on R&D in the fiscal year ended March 31. The company "will spend twice as much each year over the next three years," said Yang, meaning that R&D investment will total $8.7 billion during that span.

The telework boom spurred by the pandemic has been a boon to the PC industry. Global shipments topped 300 million for the first time in six years in 2020.

Lenovo is the No. 1 player, with a 24% market share, predicting that shipments will remain above 350 million units for the next two years.

The company will leverage strong earnings to make its next move, pushing the "everything as a service" business model, Yang said.

Much of the money will go toward core AI technologies. Lenovo has developed the AI platform called the Lenovo Brain and uses it in-house to optimize efficiency in manufacturing and sales. Yang plans to refine the platform and provide it to business clients as a service.

Lenovo will also target "the health care, education and retail sectors," Yang said.

Lenovo Brain will analyze the voluminous data from transactions with clients and suppliers to provide services that will optimize the efficiency of client services and supply chains.

The new growth strategy goes beyond enterprise systems. Lenovo plans to provide all products used by company employees, including PCs, tablets and smartphones, in packages bundled with software and platforms. Lenovo envisions a service that will charge fees based on the usage for such package customers.

Net profit jumped 77% to a record $1.17 billion last fiscal year. In the quarter ended this past June, the black ink more than doubled on the year.

Lenovo has maintained its lead in PCs since 2018 and is plotting to break further away from runner-up HP.

Yang had been pushing for a service-based business model before the coronavirus crisis. In 2019, Lenovo started off by introducing the TruScale platform, which lets businesses access Lenovo's servers for a pay-as-you-go fee.

Lenovo Chairman and CEO Yang Yuanqing said at an event Sept. 8 that his company will expand services.

Although services accounted for less than 7% of all revenue during the April-June quarter, the profit margin is roughly triple that of the PC segment. "Services will play a central role in Lenovo's future growth," Yang said.

Some uncertainties stand before Lenovo's growth strategy. Mounting tensions with the U.S. led China to put a data security law into effect this month, to be followed by a personal information privacy law in November. These restrictions will make it difficult for companies to transfer data across borders.

"Chinese regulations are neither an advantage nor a disadvantage for Lenovo's business activities," Yang said. "The company consistently follows all legal requirements around the world," he said, including data privacy rules rolled out in Europe or in the U.S. state of California.

When the U.S. and China enjoyed rosier ties in 2005, Lenovo bought IBM's PC business and instantly rose as a major computer vendor. Some analysts believe that the high ratio of overseas sales will cloud Lenovo's future prospects.

The Americas contributed the most revenue in the April-June quarter, at 33%. Europe, Middle East and Africa together accounted for 25%, while China generated only 27%.

"Because Lenovo predicates its business on global development, intensifying Sino-U.S. tensions are a risk," an analyst well-versed in the tech sector said.

As the longtime leader of Lenovo, Yang has seen a period of lackluster PC demand. Lenovo tried diversifying with smartphones, only to end up downsizing that business.

The company recognizes that the record earnings owe largely to the fallout from the pandemic.

"We aim to double net profit in three years," Yang said. To reach this goal, growing the solutions business is paramount. His business acumen will face a test.

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