Lenovo Financial Results Point to Changes on the Horizon


Archived Published: 02 February 2006 ID: G00137684

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Summary

Lenovo's recent successes cannot make up for uninspiring performance in North America and Europe. Expect changes as Lenovo re-evaluates its sales channels and especially its relationship with primary reseller IBM.

News Analysis

Event

On 26 January 2006, the China-based PC manufacturer Lenovo released financial results for the third quarter of its 2005/2006 fiscal year (the fourth quarter of calendar year 2005). Lenovo's revenue, profit and cash all grew substantially, and its sales in the Chinese market grew 39 percent year-over-year. However, the company's worldwide shipments grew only 14.8 percent year-over-year, compared with 16.4 percent worldwide growth for the industry as a whole, for an overall loss of Lenovo market share.

Analysis

Lenovo's most recent quarterly financial results show strong profit, growth and cash management, with both operations and products performing well. However, the company's success in China cannot adequately compensate for below-market growth in the critical North American and European markets. Lenovo's stated mission is to become a global brand, and to achieve this goal the company must take decisive action to maintain and grow share in these markets.

Gartner believes that Lenovo's problems in North America and Europe stem largely from its relationship with IBM. Lenovo acquired IBM's PC business in May 2005, and IBM provides Lenovo's primary sales channels for large and midsize enterprises. IBM has businesses that are far more lucrative than PC sales, and is now marketing PCs less actively. These issues are especially pronounced in the midmarket, where IBM has clearly reduced its focus on PCs and Lenovo has yet to launch alternative market initiatives. Until this apparent gap in Lenovo's go-to-market activities is filled, the company seems likely to lose market share in this segment. Transactional sales to small-business customers — which are managed directly by Lenovo — continue to do well.

Gartner expects Lenovo to make further management changes — following the December 2005 resignation of CEO Steven Ward — to address its immediate problems in North America and Europe. These changes will likely most affect the sales and marketing organizations in North America and EMEA (Europe, the Middle East and Africa). The company can also be expected to re-evaluate its relationship with IBM as it works to address its reseller/channel problems. Gartner does not anticipate any immediate impact on current IBM/Lenovo customers. However, management and marketing changes always have the potential to cause customer supply and service problems.

Recommendations for Lenovo customers

  • Do not change suppliers at this stage, but monitor Lenovo's performance against contracted delivery and service levels for signs of problems.

  • Ensure that all Lenovo contracts allow a straightforward switch to alternative suppliers.

Analytical Sources: Martin Reynolds, Leslie Fiering and Brian Gammage, Gartner Research

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