CELLPHONES: Lenovo Needs to Admit Motorola Flop and Move On

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Bottom line: Lenovo should write-off its Motorola investment as a failure, and focus its smartphone efforts on building up its own brand rather than relying on more acquired foreign names.

Lenovo in need of Motorola write-off

PC giant Lenovo (HKEx: 992) repeated a frequent pattern last year when it purchased a former global leader, Motorola, with plans to resuscitate the struggling brand to boost its own smartphone business. It repeated yet another pattern last week when it said that early efforts to revive Motorola were failing, undermining its own profits and sparking one of the worst sell-offs for its shares in recent memory.

Having learned once more the difficulties of reviving broken western brands, Lenovo should now take the bold step of considering a complete write-off of its $2.9 billion Motorola purchase, or at least relegating the brand to niche status. The setback also shows more broadly why Lenovo and other globally-minded Chinese companies need to abandon the strategy of buying struggling global brands at bargain prices, and instead should focus on developing their own names.
Lenovo is one of China’s first truly global high-tech brands, and is a veteran at the business of buying struggling western companies as a key part of its expansion strategy. Its earliest and highest profile purchase came in 2005, when it burst onto the global stage with its acquisition of IBM’s PC business for $1.25 billion.

That deal immediately gave Lenovo the global footprint it had been craving. But the IBM unit’s low margins due to stiff competition also sharply undermined Lenovo. As a result, Lenovo sank into the red 4 years later and ultimately announced a major structuring that included 2,500 layoffs as it struggled to turn around that acquired business.

The latest story looks remarkably similar, this time beginning with Lenovo’s mega-purchase last year of Motorola, whose name was once synonymous with cutting-edge cellphones but which later fell on hard times and was rapidly becoming a non-player. In its latest quarterly report released last week, Lenovo said Motorola-brand smartphone sales slid 31 percent during the 3 month period, contributing to a 51 percent decline in overall company profits. (previous post)

The poor performance led Lenovo to announce another restructuring that included 3,200 non-manufacturing job cuts, or about 5 percent of its total workforce, resulting in a one-time loss of $600 million. The grim outlook sparked a sell-off that saw Lenovo’s shares tumble 9 percent to levels not seen for 2 years.

Lenovo is hardly the only Chinese company to purchase a struggling foreign brand, only to end up with major headaches after failing to resuscitate the business. TV giant TCL (Shenzhen: 000100) experienced major setbacks with 2 similar purchases about a decade ago, one for French electronics maker Thomson and another for the cellphone business of Alcatel (Paris: ALU).

Taiwan’s BenQ also suffered after buying the cellphone business of Siemens (Frankfurt: SIEGd), and never fully recovered from the blow. More recently, automaker Geely (HKEx: 175) has been having difficulties reviving Volvo after its landmark purchase of the struggling Swedish carmaker for $1.5 billion in 2010.

Homegrown Brands

While Lenovo and others have failed to revive their faltering western acquisitions, a more recent group of high-flyers like Huawei, ZTE (HKEx: 763; Shenzhen: 000063) and Xiaomi have tried a different approach of organically building their own brands through savvy marketing and strong product development. That strategy helped Xiaomi to land the spot as the world’s third largest smartphone maker last year, and has led to a recent surge for Huawei and ZTE and their niche brands Honor and Nubia, respectively.

Lenovo’s own Lenovo-brand phones have failed to find much customer loyalty due to their relatively low quality and lack of distinguishing designs and features. But the company may also be trying out the newer approach, following its launch last week of its own new brand of higher-quality smartphones called ZUK selling for about 1,800 yuan ($280) each. (previous post)

This newer approach looks more prudent and could have better chances for success, even though developing such brands is expensive and often takes years. The old formula might bring quicker name recognition, but it’s also fraught with numerous problems. Those include fading consumer appeal for such brands, and numerous problems within their operations.

Lenovo’s latest experience with Motorola serves as the latest reminder of the difficulties of this model, and the company could take a bold and definitive step by writing off the big investment. Such a move would be costly and painful in the short run. But it would also send an important signal that Lenovo and other Chinese firms intend to try to develop their own brands in the future, and finally abandon an acquisition strategy that is fraught with difficulties and often ends in failure.

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