PCs: Dell’s China Cloud Dream, Lenovo’s Smartphone Shift

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Bottom line: Dell’s massive new China commitment could foreshadow a major new tie-up that could see it sell a big stake of itself to a local partner, while Lenovo could be eyeing a major shift to OEM production for its floundering smartphone unit.

Dell bets big on China

Two of the world’s top PC makers are in the China headlines today, with homegrown leader Lenovo (HKEx: 992) and US giant Dell both making major strategic moves. But in a sign of the times, neither item is related to either companies’ core PC business, showing just how quickly personal computers are losing their relevance in the fast-changing gadget world.

Dell’s announcement contains the biggest headline figure, with the company announcing a new commitment to spend a whopping $125 billion in China over the next 5 years. But the Lenovo news is equally intriguing if it’s true, and hints the company could be preparing a major shift for its floundering move into smartphones. That shift would see Lenovo’s smartphone unit build up its business of taking manufacturing orders from third-party brands, a model known contract manufacturing or OEM production.

The bigger story behind these 2 news bits is the rapidly shrinking market for PCs, with global sales now contracting at a rate of about 10 percent each quarter. The contraction is likely to accelerate in the years ahead as consumers trade in their traditional computers for a newer generation of smaller, more mobile devices like smartphones, tablet PCs and wearable devices.

Dell responded to the shift by privatizing several years ago and trying to rebuild itself in behind the scenes. Lenovo is trying to chart a similar transformation, most notably through its purchase of the faded Motorola brand name last year. But that push has been disappointing so far, leading to lackluster financial results that have pushed Lenovo’s stock to lows not seen for nearly 3 years. (previous post)

Let’s begin with the Dell news, which came as a refreshing surprise since I haven’t seen this company in the China headlines for quite a while. Dell used to be a staple in the China tech news during the PC heydays, as it battled with Lenovo and US rival Hewlett-Packard (NYSE: HPQ) for share in the world’s largest computer market. Dell invested heavily in China back then, and founder Michael Dell made regular trips to the country.

Betting on Kingsoft, the Cloud

Now Michael Dell appears to be placing a big bet on China again, with this latest announcement of a plan to invest $125 billion in the country over the next 5 years, averaging a hefty $25 billion per year. (company announcement; English article; Chinese article) The announcement is quite vague in terms of where all that money will go. But the most interesting part focused on a tie-up in cloud computing with Kingsoft (HKEx: 3888), one of China’s leading private software makers.

It’s no secret that China wants to build up its cloud computing and other IT-related capabilities, and it’s also no secret that Beijing wants that effort to be led by domestic companies. Accordingly, this new initiative appears to show that Dell will focus on building up partnerships with local Chinese companies, as it seeks to tap the huge domestic market for IT services.

Since Dell is now privately held, I could even envision the company ultimately selling a strategic stake in itself to a Chinese partner. That would be similar to a deal that saw HP sell half of its China-based networking equipment unit to local partner Tsinghua Unigrioup earlier this year. (previous post)

We’ll close out this post with a quick look at the Lenovo development, which I’m treating with a healthy degree of skepticism due to the source of the news. The report comes from the Taiwan-based DigiTimes, which sometimes breaks big stories but often is incorrect, and says that Lenovo plans to build up its business of OEM production for other smartphone brands. (English article; Chinese article)

There’s no additional detail, though such a move would certainly be logical. Lenovo’s own smartphone business is currently going nowhere, meaning the company may have growing idle manufacturing capacity that it wants to put to work. I doubt such a move would foreshadow a complete withdrawal from smartphones for Lenovo. But it would certainly mark a major shift toward a business model that is far less profitable but also more stable than the difficult and expensive process of developing a new brand.

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