SMARTPHONES: As Smartphones Stall, Lenovo Falls Back on Tablets

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Bottom line: Lenovo’s focus on PCs for its latest product launch is designed to divert attention from its struggling smartphones, which are likely to show more losses and weak performance in the company’s upcoming quarterly results.

Lenovo targets bargain hunters

It was just 2 years ago that Chinese tech titan Lenovo (HKEx: 992) was on top of the world, having just gained the title as the world’s biggest PC brand from Hewlett-Packard (NYSE: HPQ) and declaring that Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930) were its next targets. But you don’t hear the company’s chatty chief Yang Yuanqing talking about Apple, Samsung or even smartphones that much these days, most likely because all of its efforts in that space have struggled to find an audience.

Instead, Yang was falling back on his company’s older PC business in the latest headlines, showing off a few new models from its Yoga line that can function as both laptop and tablet PCs. The only problem is that both of these types of computer are in rapid decline, as consumers increasingly flock to large-screen smartphones for simple functions like reading news and e-commerce shopping that they used to do on their PCs.

All that leads me to my broader analysis that Lenovo is standing on the brink of an identity crisis, even though no one seems to have noticed that just yet, including Yang himself. I was drawn to the latest Lenovo headlines by a photo of a smiling Yang holding up 2 of his company’s latest Yoga models, which have generally received strong reviews even as the global tablet PC market starts to contract.

My earlier description that Lenovo was in the headlines is probably a bit of an exaggeration, since few foreign media seem to have covered the company’s latest product launch and the photo I saw was in a local Chinese publication. (English article; Chinese article) What’s more all the coverage seemed to be focused on the low prices for the latest Yoga models, which start at a very affordable 1,999  yuan, or just over $300.

Moving Downmarket

Company watchers will know that this kind of move toward the low end has been a major factor behind Lenovo’s struggles in the smartphone business. Such a strategy can often gain some quick market share from consumers whose first priority is price. But the gains are often only brief, since such customers have almost zero loyalty to the brand and instead will just make their next purchase based on whoever offers the new lowest price.

The lack of loyalty is quite apparent in the global market share for Lenovo’s own line of cheap smartphones, which is showing signs of topping out at around the 5 percent level, mostly based on sales in its home China market. Lenovo was hoping to move upscale with its purchase of the faded Motorola brand last year, but even that effort has sputtered.

If you add in Motorola brand phones to its total, Lenovo’s share of the global smartphone market actually tumbled to 5.3 percent in this year’s third quarter from 7.7 percent a year earlier, according to data tracking firm IDC. I’ve previously written that Lenovo should simply write off the Motorola brand at this point and look for a new smartphone strategy (previous post). The company doesn’t seem to be writing off Motorola yet, though it is experimenting with a new smartphone brand named Zuk. (previous post)

Investors have become increasingly impatient with Lenovo’s growing identity crisis, with the stock losing more than half of its value between a peak in May this year and a low in late September. The company is set to report its latest quarterly results on Thursday (earnings calendar), and I expect we’ll see more bad news on its smartphone business. That’s likely to put more downward pressure on the stock, which could be set for a long-term decline if the company doesn’t start showing some improvement soon in the important smartphone area.

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