SMARTPHONES: Lenovo Starts Rebuilding Year with Samsung Poach

Bottom line: Lenovo could reverse its smartphone decline this year under a new leadership team anchored by a respected company veteran, though chances of success are relatively low due to stiff competition and magnitude of the task.

My first post in the new lunar Year of the Rooster seems like a good time to look at the ultra-competitive smartphone market, and what may lie ahead for the embattled Lenovo (HKEx: 992) as it seeks to regain its footing in the space. CEO Yang Yuanqing has made repeated overhauls of his mobile devices division, including the naming of longtime executive Gina Qiao to try and turn the division around late last yaer. Now the latest reports are saying that Qiao has made one of her first big moves in that post by hiring an executive from rival producer Samsung (Seoul: 005930).

China’s crowded smartphone sector is in dire need of a retrenchment, and it’s quite possible we could see one or two major closures in the Year of the Rooster. One of the most likely among the majors could be Coolpad (HKEx: 2369), whose controlling stakeholder LeEco (Shenzhen: 300104) is fighting for its life right now. Other contenders could include mid-tier names like OnePlus and Smartisan, which are also facing their own challenges.

All that said, it does seem unlikely that Lenovo will end up on the 2017 casualty list, since the company has quite deep resources in its profitable and globally-leading PC business. Let’s kick off this look at the year ahead by reviewing the latest year-end market share figures from IDC, which came out late last week and don’t even include Lenovo’s name in the top 5. (press release)

Those figures show that Samsung and Apple (Nasdaq: AAPL) led the global market for all of 2016 at first and second place, followed by Chinese names Huawei, Oppo and Vivo in the third, fourth and fifth positions, respectively. By comparison, Lenovo was the fourth biggest global brand a year earlier in 2015, finishing with 5.2 percent of the market behind the same Samsung, Apple and Huawei.

There’s not too much to say about these latest numbers, since Lenovo’s rapid decline in the smartphone space was well documented during the year. The company’s big bet on the Motorola brand didn’t do too well, nor did its decision to focus on the low-end of the market with its own Lenovo brand. The company has more recently put its bets on a newer, unknown in-house brand called Zuk, though we’ve yet to see any big traction for that name yet.

All that leads us in to the latest headlines, which say that Qiao has hired away a former mid-level Samsung executive named Jiang Zhen as her vice president in charge of smartphone sales for China. (Chinese article) Jiang’s LinkedIn profile shows that he comes from an electronics engineering background, and was at Samsung for more than 12 years, including his initial stint as an engineer. He appears to have moved into a more business-oriented role in his last 7 years, though the profile isn’t too explicit.

New Team Takes Shape

Jiang joins another vice president appointed by Qiao, Chang Cheng, who is being charged with leading development of smartphone software with an eye to creating an ecosystem around Lenovo’s products. This pair of appointments certainly has all the right buzzwords, since China is the world’s largest market and one Lenovo really needs to win back for its smartphone business to succeed. Likewise, the ecosystem concept is important for the success of any smartphone brand, as evidenced by Apple.

I don’t really know too much about Qiao, though she appears to have a good reputation in the company, which is why she was hand-picked to lead the smartphone division as part of a major management overhaul in November. What’s more, the Chinese and global smartphone markets have shown themselves to be hugely volatile places in the last 5 years, with names like HTC (Taipei: 2498), Xiaomi and Coolpad rising to prominence one year, only to rapidly fade into obscurity the next.

That volatility factor could work to Lenovo’s advantage, especially since the company is still quite popular in India, which shares many similarities with China. But Qiao’s main goal, at least in my view, will be to dump Lenovo’s attraction based purely on its low prices and try to develop some brand loyalty with more distinctive, higher quality products. If she can start to do that, then the company could finally reverse its downward slide and regain some momentum later this year. But the stiff competition in the market and difficulty of the challenge would still make me peg her chances of success at perhaps just 30 percent.