Two Years After IBM PCD Deal, Lenovo Still Faces Challenges


Archived Published: 04 May 2007 ID: G00148617

Analyst(s):

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Summary

Two years after its historic acquisition of the IBM PC Division, Lenovo remains a strong global PC supplier but still must address its slide in market position.

News Analysis

Event

30 April 2007 marked the second anniversary of Lenovo Group’s purchase of IBM’s PC Division (PCD). As part of the deal’s terms, Lenovo relies on IBM Global Services (IGS) and IBM Global Finance (IGF) to fulfill commitments to enterprise customers. The IBM sales account teams remain a key distribution channel for Lenovo outside of China.

Analysis

At the end of its first two years, Lenovo Group has met many of its original challenges, including integrating two disparate cultures in the newly formed company, maintaining the Think brand image for quality and innovation, and improving supply chain and manufacturing efficiencies. Recently, these efficiencies have enabled more competitive pricing. However, Lenovo has failed to meet a key objective of the merger: leveraging the combined strength of the two companies to grow volume and market share.

Instead, Lenovo has stagnated, with little growth. While 1Q07 — the strongest quarter outside of China in the past two years — saw year-on-year unit shipment and share gains, Lenovo still dropped to fourth place in the PC market as Acer rose to third. The main challenge for Lenovo remains generating demand through more aggressive sales teams, improved channel strategy, increased market spending and better execution outside of China.

The IBM sales account teams are writing orders for new Lenovo products but do not appear to be actively seeking new business. The Lenovo sales team has to improve its prospecting skills to gain new business. Also, the marketing team must solidify its message regarding Lenovo's identity so that prospective customers know "who the company is."

Two years ago, Lenovo failed to take advantage of the channel opportunities provided by HP’s disarray. Since then, HP has completely reinvigorated its worldwide channel strategy at the same time that Acer is becoming a strong channel player in the U.S. (Acer was already strong in EMEA.) In both regions, Lenovo is still trying to create the channel partnerships and programs to expand growth. Since channel programs take 12 to 18 months to begin producing results, this highlights a serious problem.

At the time of the IBM PCD acquisition, Lenovo targeted Brazil, Eastern Europe and India as key growth markets. However, execution has been poor due to weak local channel partnerships. Marketing has been imaginative but underfunded and therefore, less effective than it might have been. Recently, Lenovo announced a reorganization to move nearly 750 jobs out to emerging markets to improve local operations and reduce costs.

Despite all of these challenges, Lenovo remains a strong global supplier, able to provide quality products and services at competitive prices worldwide. But causes for concern remain. If current trends continue through the next two years, there would be good reason for us to revise our assessment of Lenovo.

Recommendations

Prospective customers:

  • Consider Lenovo for PC acquisitions where a strong relationship, life cycle services and/or global presence are key decision criteria.

  • Expect more competitive pricing than in past years.

Current Lenovo customers:

  • Examine your contract and pricing to ensure that your current prices reflect the recent savings from improved supply chain and manufacturing efficiencies.

Recommended Reading

  • "Lenovo Financial Results Point to Changes on the Horizon” — In early 2006, we discussed how Lenovo's recent successes could not make up for its uninspiring performance in North America and Europe, and that as a result, it would likely re-evaluate its sales channels and relationship with IBM. By Martin Reynolds, Leslie Fiering Brian Gammage

  • "Lenovo Pursues New Markets, Channels via Its 3000 PC Line” — The success of Lenovo's new line of desktop and notebook PCs targeted at small businesses and consumers in the U.S. and Europe depends on how well Lenovo can exploit existing distribution channels. By Brian Gammage and Leslie Fiering

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