SMARTPHONES: Lenovo Founder Liu Losing Confidence in CEO Yang?

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Bottom line: The latest muddled comments from Lenovo founder Liu Chuanzhi could reflect his growing frustration with CEO Yang Yuanqing, who could be forced out in the next year if the company’s performance doesn’t improve.

Lenovo’s Yang looks for new rice bowl

It’s no mystery that PC giant Lenovo (HKEx: 992) has been stumbling in the last 2 years due to bad execution in the smartphone space. But slightly more mystifying are new remarks by company founder Liu Chuanzhi on his views about his self-groomed successor and CEO Yang Yuanqing. Liu is currently chairman of Lenovo parent Legend Holdings (HKEx: 3396) and is 71, which isn’t too old. But his remarks on Yang’s performance on the sidelines of a recent event make him seem a bit muddled and also convey the conflicting feelings of loyalty and frustration that he must be feeling about his appointed successor.

Before I attempt to translate his actual remarks, we should put the Lenovo story into a bit of context to understand what Liu is saying. Yang Yuanqing is famous for building Lenovo into a global PC giant through an aggressive acquisition strategy, which began with the landmark purchase of IBM’s (NYSE: IBM) PC business in 2005 and later included other acquisitions in such diverse markets as Germany, Brazil and Japan.

That strategy got off to a bad start, but later the situation improved and Lenovo roared to pass Hewlett Packard (NYSE: HPQ) to become the world’s largest PC seller. But PCs are now in steady decline, and Yang has performed quite poorly in the area of portable devices like smartphones and tablet PCs that are filling the gap.

Lenovo’s big acquisition in that space was its purchase last year of the faded Motorola smartphone brand, which has seen its own small market share shrivel even further during Lenovo’s brief ownership. Add to that Lenovo’s own miserable performance for its low-cost smartphones, and it’s not difficult to see why the company is struggling these days to chart a course for the future.

With that background in mind, let’s look more closely at Liu’s comments, which he made at a conference of Chinese industry leaders in Beijing over the weekend. Here’s my direct translation: “Yang Yuanqing’s team needs to go forward, it needs to take more risks. If there’s no other rice bowl, then I don’t dare say I’ll resolutely support Yang, because you need to have a rice bowl to eat from in order to live. When there’s a new rice bowl, then there will be strength to support their breakthroughs.”

Anyone scratching their heads after reading that series of thoughts probably isn’t alone. But let’s try to make some sense of what Liu said, which probably reflects how he sees Lenovo’s current situation and perhaps hints at Yang’s future at the company. The rice bowl metaphors seem like a fairly clear reference to product lines, and in this case Liu realizes Lenovo’s old product line of PCs is quickly becoming an empty rice bowl.

Liu’s comments that he won’t necessarily support Yang if there’s no other rice bowl seem to hint at a growing frustration over the company’s inability to make significant headway in the smartphone and tablet PC business. Yang famously named Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930) as his next major rivals a couple of years ago, after taking the PC crown from HP. But he rarely utters that mantra anymore, and instead Lenovo seemed to tacitly admit its smartphone business was stumbling when it replaced the chief of its mobile division over the summer. (previous post)

I’m personally relatively positive on Yang, as I think he’s one of China’s more progressive CEOs who tries to adopt western business practices. But that said, I’ve also often been critical of his overzealous acquisition strategy that chases tired brands in decline rather than up-and-coming technology. Liu may also be starting feel some frustration at that strategy, and if Lenovo’s fortunes don’t improve in the next year it’s quite possible we could ultimately see Yang replaced in 2016 with a younger CEO with some fresher, more forward-looking ideas.

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