Internet & Tech

A fading legend

Why Lenovo has embarked on its eighth restructuring

Chairman and CEO of Lenovo Yang participates in a panel at the 2015 Fortune Global Forum in San Francisco

Lenovo’s boss: Yang Yuanqing

When Lenovo acquired IBM’s PC division in early 2005, it became the first Chinese tech firm to successfully ‘go global’. It was a highly symbolic moment for Lenovo’s founder, Liu Chuanzhi.

He had come a long way from selling pants outside the gates of the Chinese Academy of Social Sciences. However, ‘pants’ is how views the current state of affairs at Lenovo. In a coruscating feature, the state-backed news website analyses why Lenovo has turned into a “living fossil”.

Its analysis follows a miserable year for the world’s largest PC manufacturer and fifth largest mobile phone vendor.

Lenovo reported a net loss of $714 million for the quarter ended September last year. Its Hong Kong-listed shares have fallen almost 50% over the past 12 months. Forward-looking valuations are also at a substantial discount to the ‘BAT’ usurpers of its tech crown. Whereas Lenovo is currently valued at roughly 8.7 times projected 2017 earnings, Baidu, Alibaba and Tencent are trading at respectively 48.5 times, 19.2 times and 24.2 times.

According to, Lenovo has made four major mistakes. The first has been a failure to transition from PC to mobile. The group dropped from first to third in the domestic handset rankings during 2014 as low cost vendors like Xiaomi started to make their mark.

As we reported in WiC308, Huawei’s rise has also hurt Lenovo and in June 2015 led to the departure of Liu Jun, who ran the mobile division. Yet says Lenovo’s loss of competitiveness was hardly his fault. “His flawed thinking was simply a continuation of Lenovo’s flawed thinking, which is stuck in the PC era,” it argues. says Lenovo’s second big issue concerns its dominance of a sunset industry: PC manufacturing. It says Lenovo has failed to transition to a software-and-services based model along the lines of the BAT troika, Apple, Google, Microsoft or Facebook. In particular it cites Lenovo’s failure to develop its portal FM365 and keep up with Sohu, Netease and Sina in the past decade.

This plays into its third failing: the inability to move beyond its industrial beginnings to create a world-class consumer brand. For example, says consumers get confused between the group’s multiple mobile brands (LePhone, Lenovo, LeMeng, Zuk and Vibe to name a few).

Underpinning it all is Lenovo’s fourth failing: R&D. Lenovo spent only 1.9% of revenues on R&D from 2006 to 2015 compared to roughly 13% at Google and Microsoft. Over the past decade it has spent $4.4 billion in total, less than Huawei’s R&D expenditure in 2015 alone.

Although Lenovo has been actively buying patents through its various acquisitions (in 2014 it spent $2.91 billion buying Motorola Mobility and $2.1 billion on IBM’s X86 server group), says Lenovo lacks the R&D gene to develop them further.

Can it turn this state of affairs around? Last month, the group announced a sweeping transformation into four new groupings – PC, data, mobile and financial (termed ‘capital and incubator’).

While reorganising is one thing, developing a long-term strategy is another. China Entrepreneur magazine notes that this is Lenovo’s eighth restructuring since 2000 (and the third in as many years).

With Xiaomi and Huawei both about to launch PC products, Lenovo is set to face stiff competition in its core business, although at the end of 2015 it managed to increase its global PC market share to 20.6%, up from 19.5% in 2014. Lenovo’s goal is to grow that share to 30%.

China Entrepreneur suggests Lenovo has been relying on its PC business too heavily and that the formation of a venture capital division may signal a departure from its more conservative strategy. “Lenovo’s breathing space will diminish if it keeps doing risk-free businesses only,” is the magazine’s assessment.

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