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Lenovo doubles down on PCs as Fujitsu moves away from hardware

BEIJING/TOKYO Japan's Fujitsu plans to sell its struggling personal computer operations to Lenovo Group as part of its efforts to switch focus from hardware to IT services.

Taking over Fujitsu's PC operations would cement Lenovo's dominance in the Japanese market. But whether grabbing a bigger slice of a shrinking pie will be a worthwhile move for the Chinese group is unclear.

With a 26% market share, Lenovo is already the biggest player in Japan, having combined its local PC operations with those of NEC in 2011. Adding Fujitsu's business would push that figure to 40% or more. One upside of the Japanese PC market is that prices tend to be higher and profit margins fatter than in emerging countries. On the other hand, annual sales have slumped from 15 million units to 10 million units over the past several years.

PCs are Lenovo's core business, and the company aims to claim more market share as rivals consider pulling out, CEO Yang Yuanqing said in June at an event in the U.S. "At that point, Lenovo was already in talks with Fujitsu behind the scenes," a person familiar with the deal said.

The Chinese computer manufacturer was founded in 1984 with funding from a government-linked research institution. It made global headlines with its 2005 acquisition of IBM's PC operations.

TIME TO ACT Lenovo leads the global PC market, with a 20.8% share in 2015, according to International Data Corp. The Fujitsu deal is part of efforts to use its strength in this area to bolster recent weakness elsewhere.

The company logged its first net loss in seven years in the 12 months through March, due mainly to tougher competition in the smartphone market and restructuring costs associated with its purchase of Motorola's handset business. Lenovo's mobile business lost $469 million, while its PC operations turned a $1.49 billion profit.

Success in its joint venture with NEC played a part in Lenovo's decision to pursue Fujitsu. Lenovo went all-out on localization -- the joint venture employs almost no Chinese staff, and integration with the Chinese parent is limited largely to parts procurement. Other areas, such 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-brand computers was transferred to this 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 thriving IT infrastructure services, a route shielded from rival manufacturers. "Lenovo likely found this appealing," a source at a Japanese PC maker said.

Going forward, Lenovo faces the challenge of revamping its mobile division, as well as building a framework for making 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 in the mobile division. To help finance such restructuring steps, it sold a building in Beijing for 1.78 billion yuan ($266 million) at the end of September.

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, but one securities analyst said this move was "still not enough."

A NEW FOCUS For Fujitsu, handing over its PC business to the Chinese group will take a major weight off its shoulders as it continues the long shift from hardware to services.

The company did not take the most direct path in getting to this point. Top officials at Toshiba and private equity firm Japan Industrial Partners were left fuming early this year when Fujitsu abruptly balked at a three-way merger proposal. The company had been amenable to the idea until December, only to then refuse to shutter any plants, arguing that the would-be partners were underestimating its assets.

The PC business has been a concern for Fujitsu ever since smartphones began eroding demand for computers. Fujitsu ranked second in the Japanese PC market last year but accounted for less than 1% of the global market. The business lost nearly $100 million in fiscal 2015.

Yet Fujitsu failed to take any decisive steps. On numerous occasions, merger talks with peers went nowhere as the company refused to compromise on one point or another. Recent negotiations with HP Inc. ran aground over HP's plans to downsize the business.

President Tatsuya Tanaka, who took the helm in June 2015, envisioned a new path for Fujitsu, saying it will focus on "high-margin information technology services." Restructuring the PC business had been a top priority in this shift away from hardware, but the company lost time by insisting on finding a domestic partner.

Complacency may have also delayed reforms. Fujitsu's equity ratio of more than 24% likely fostered a feeling that the company was not in any immediate danger. Its fiscal 2015 operating margin, which clocked in at just 2.5%, served as a wake-up call. "You can't compete globally unless you have at least 10% in margin," Tanaka said. Fujitsu's agreement in September to sell its car navigation system unit to Denso reflects this new sense of crisis.

The company's strategic shift is far from complete, however, and many of its businesses are still in need of work.

IBM downsized radically in the 2000s, unloading operations in hard-disk drives, PCs and digital printers while earnings were still solid. Fujitsu waited until it was already feeling the pain of leaner profits. While the talks with Lenovo represent progress, more will be needed before Tanaka's reform drive can be deemed a success.

Nikkei staff writer Tomohisa Takei contributed to this article.

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