Upward mobility

LePhone: the future of Lenovo

At the end of January, Apple founder Steve Jobs unveiled the iPad, a tablet computer that was perhaps the worst kept secret in gadget history. Although it didn’t come as much of a surprise it still got the Apple diehards salivating.

But Apple does not have a monopoly on touch screen technology. Chinese computer maker Lenovo is already pushing its forthcoming IdeaPad U1, a laptop that has a detachable monitor which can be used as a tablet PC. The device is already receiving praise from industry observers.

It is this kind of innovation that will help lay the future for Lenovo’s business as technology companies start to recover from the financial crisis. Lenovo’s latest quarterly earnings report shows that the company is firmly back on track. In the quarter ending December 31, the company posted a net profit of $80 million, a significant turnaround from the $97 million loss it suffered in the same period last year.

And with a 33% year-on-year sales increase, the company’s share of the global PC market crept up to 9%. The lion’s share of growth came from China, which accounted for nearly half the company’s revenue in the quarter. Not only is Lenovo a well-established brand in its home country, it is also a beneficiary of the Chinese stimulus package, as the government is offering subsidies to help consumers purchase electronics. Sales were up in other emerging markets such as Brazil and India.

Lenovo’s little black boxes might be a hit in emerging markets, but in developed markets things are tougher, especially in the US where revenues were down year-on-year. Sales are currently being driven by individual consumers, rather than by corporate clients, where Lenovo derives most of its US income.

“For the consumer market, their brand is still not very well recognised,” Tracy Tsai, analyst at Gartner told BusinessWeek. And she says this is the reason that the company is losing share in this key market. In 2006, a year after it bought IBM’s PC business, it had the third largest share of US computer sales, 7%. Now it has 4% and it is not even in the top five.

Lenovo is already developing products for the consumer market. The main line of attack will be the smartphone: “The convergence of PC and mobile device is a major trend, and Lenovo Group cannot miss it,” said Lenovo’s CEO, Yang Yuanqing, in November. Yang expects its handset business will grow faster than its core PC business.

The company is therefore putting high hopes on a device known as ‘LePhone’, a 3G smartphone that will be available in China from May. Some might point to the poor sales of Apple’s iPhone since it was released last year as evidence that China is not ready for such a high-end product. But the number of iPhone’s officially sold (i.e. with a China Unicom contract) disregards the huge grey market for iPhones that has existed in China since the phone was first released in the US in 2007.

It will be harder for LePhone to succeed in America, where the smartphone market is more mature, but the phone already has some State-side admirers. “Looking at the shiny marketing shots, I want to lick it… and rub it all day,” is how gadget website Gizmodo declared its affections.

But great looks and high-end specifications don’t mean much if you don’t have the brand to back it up. “The company’s new mobile internet devices are well designed, but they are nowhere close to matching Apple’s brand power or innovation,” one telecoms analyst told the South China Morning Post. That’s the main problem for Lenovo, the company doesn’t carry the cool cachet needed for the consumer market. Lenovo might have its own version of Steve Jobs – comeback king Liu Chuanzhi (see WiC24) – but it’ll take more than Liu donning trainers, jeans and a mock turtleneck to acquire some of Apple’s cool.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.