PCs: All Signals Point Down for Wearying Lenovo

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Bottom line: Lenovo chief Yang Yuanqing is likely to resign or get replaced as company head by the end of this year as sales continue to stumble, possibly by recently named President Gianfranco Lanci from its European operations.

Lenovo looks at tough year ahead

If there’s a single word to summarize the latest quarterly results from struggling PC giant Lenovo (HKEx: 992), it’s “down”. Just about every major metric in its just-released results was down, though the company did manage to boost its net profit for the quarter thanks to recent aggressive cost cutting. But lowering costs isn’t a long-term formula for success, and investors are clearly worried about the prospects for Lenovo’s shriveling core PC business and a sputtering mobile device unit that is supposed to be its new growth driver.

Investors were clearly most spooked by Lenovo’s top line revenue, which shrank 8 percent to $12.9 billion in its latest quarter. That was the first time Lenovo has posted such a revenue decline in more than 6 years, and nicely summarizes the company’s struggles in just about all of its major product areas. Lenovo did achieve one notable milestone as its mobile device unit finally climbed from the loss column to break even. But even that is hardly an accomplishment since cost cutting was most likely the main driver behind that movement. 

Lenovo chief Yang Yuanqing tried to put a positive spin on the results, focusing on the company’s net profit growth and realignment. But growing signs are emerging that his boss Liu Chuanzhi, head of Lenovo parent Legend Holdings (HKEx: 3396), is growing impatient with the company’s struggles. (previous post) If things don’t start showing signs of a turnaround by mid-year, I do expect we could see Yang leave the company, or perhaps be marginalized with the installation of a new chairman above him.

Lenovo’s shares tumbled 10 percent after the company announced its latest results, shedding nearly $1 billion in market value as the stock neared lows not seen for more than 3 years. Shares of Legend Holdings also sank 6 percent to approach an all-time low following their Hong Kong IPO last year, which can’t be making Liu Chuanzhi too happy.

The drop in top line revenue was underpinned by declines for both PCs and mobile devices, Lenovo’s 2 major product lines. (company announcement; English article; Chinese article) Unit PC sales fell by 4 percent, though Lenovo rightly pointed out that was better than the broader market’s 11 percent decline. Accordingly Lenovo managed to boost its global share of the dying market for traditional PCs — not really something to brag about.

Plunging Smartphone Sales

More worrisome was an 18 percent plunge in Lenovo’s smartphone business, which was supposed to be the main driver of its future growth. Yang Yuanqing was widely quoted as recently as 2 years ago saying Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL) were his new rivals, replacing traditional rivals HP (NYSE: HPQ) and Dell. But you don’t hear him saying that anymore, as Lenovo’s smartphones have emerged as a favorite among bargain hunters with little or no brand loyalty.

Lenovo points out that it has shifted its smartphone focus away from the fiercely competitive China market. It said non-China smartphone sales now account for 83 percent of its total, up sharply from 59 percent a year earlier. While I partly commend the company for pulling back in China, I also find the move slightly disappointing because Lenovo already has such huge advantages due to its years of operating experience in the market.

So the big questions now become: Will Yang Yuanqing be able to turn around the company, and if not then who might we see as its next chief? I have a lot of respect for Yang, as he is one of China’s earliest high-tech leaders. But that said, I also do think Lenovo may be ready for some new leadership.

The company previously tried a foreign chief a decade ago, but  that experiment didn’t work very well. Still, I do think it’s quite possible that Yang will be gone by the end of this year, and Lenovo may try again by seeking a foreigner at its US- or European-based operations. One strong candidate could be European executive Gianfranco Lanci, who previously helped Taiwan’s Acer (Taipei: 2353) become a major global player and joined Lenovo last year as company president.

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