Lenovo-NEC Ties Grow With Smartphone Talks

Just a year after re-entering China’s cellphone market, faded Japanese electronics giant NEC (Tokyo: 6701) is in rumored talks to sell its cellphone business to Chinese computing giant Lenovo (HKEx: 992). I previously predicted that such a tie-up could come after NEC’s original announcement last March that it would return to  China, and this latest move could auger an eventual takeover of NEC’s entire struggling consumer electronics business by Lenovo.

In many ways, such a handover would mirror what happened to western electronics makers in the 1970s and ’80s when Japanese and Korean electronics giants like Sony (Tokyo: 6758) and Samsung (Seoul: 005930) began their own spectacular rises. That trend saw many former Western consumer electronics giants like Zenith and RCA either close or get sold to other companies as they couldn’t compete with their lower cost Asian rivals. Now Japan is facing the same kind of pressure as the West once did, with former superstars like NEC, Panasonic and Sony all facing similar challenges from lower cost rivals like Lenovo that come from China and other developing markets.

Let’s take a look at the latest news, which has media reporting that NEC is in talks to sell its money-losing mobile phone business to Lenovo or another domestic Japanese company. (English article; Chinese article) The talks would come as NEC’s mobile business struggles against lower cost up-and-coming Chinese rivals like Lenovo, Huawei and ZTE (HKEx: 763; Shenzhen: 000063). Its slumping prospects forced the company last October to slash its mobile phone sales target for its latest fiscal year to 4.3 million units from a previous 5 million.

NEC and many of its domestic Japanese rivals have been losing share in the cellphone, PC and TV businesses, as they face stiff competition from rival low-cost manufacturers in China and other developing markets. Stiff competition prompted NEC to stop selling cellphones in China in 2006; but in an unusual move, it re-entered the market last year with its announcement of plans to launch of a smartphone and tablet PC model. (previous post)

I commented at that time that NEC’s recently formed PC tie-up with Lenovo was a likely factor behind the decision to re-enter the China smartphone business. The pair’s original tie-up saw NEC put its Japanese-based PC business into a joint venture with Lenovo, with indications that Lenovo would eventually take over the business completely. I speculated that NEC was hoping to use its new Lenovo ties to boost its chances of success upon re-entering the Chinese cellphone market, and that a more formal tie-up could follow.

So, what do I think of this potential new tie-up between Lenovo and NEC, and what might the next step be in the growing romance between these 2 companies? Strategically, a takeover of the NEC cellphone business would give Lenovo an important foothold in the Japanese smartphone market where consumers have a natural bias towards domestic brands. Lenovo could also use the NEC name internationally as a platform to develop its high-end smartphone business, drawing on the association of high quality that comes with many Japanese brand names. For these reasons, a purchase of NEC’s cellphone business  could be a smart move for Lenovo if it can acquire the unit for a good price and move some or all of NEC’s high-cost manufacturing operations to China.

From a longer term perspective, I could also see Lenovo eventually stepping in and buying some of NEC’s other consumer electronics businesses, allowing the Japanese company to focus on its more profitable high-end products like networking equipment and sensors. This kind of trend looks likely to grow in the next few years, as reflected by other recent talks by Taiwan’s Foxconn to buy a big stake in struggling Japanese TV maker Sharp (Tokyo: 6753).

Bottom line: Lenovo’s potential purchase of NEC’s cellphone business looks like a smart move that could quickly propel Lenovo into the high-end smartphone business.