Lenovo has been making a lot of interesting decisions recently. Its first big splash was its poorly managed acquisition of IBM’s personal computer unit in 2005. The decision was originally hailed as the model for future Chinese M&A abroad: It was knowledge-based, integrative and produced none of the popular and regulatory resistance that other Chinese natural-resource forays in the US (and elsewhere) frequently engendered. They even hired an American CEO, Bill Amelio, to internationalize the company. Lenovo was so confident of its strategic position in the US PC market (it held a 7% share, right behind Dell and HP) that it decided it didn’t need the IBM brand after all. Since the brand itself was one of the most valuable assets in the acquisition, this bothered investors. They were right to be bothered: Amelio’s justification for the decision seemed to come right out of a Chinese corporate propaganda book. Ditching the IBM brand would "rally" Lenovo employees around a single brand, Amelio said in a speech. The decision’s timing, several months before the Beijing Olympics, was suspicious.
Whether abandoning the IBM brand was good for morale is unclear, but it singularly failed to rally US private PC consumers to Lenovo, and they were becoming an increasingly important part of the US market. Lenovo’s confidence was based on the strength of the corporate accounts it inherited from IBM, but most US consumers had still never heard of Lenovo when it scrubbed IBM off of its computers’ carapaces. As consumer buying growth outpaced corporate purchases, the company’s share of the US market declined to 3%. Then came a fourth quarter loss of US$97 million, and Amelio’s contract was allowed to lapse. Former chairman Yang Yuanqing stepped in, and steered the company back towards its home market, where it had been doing quite well; as Lenovo lost share in the US, its percentage of revenue from sales in China increased from 37% to 47%. Combined with improved performance in developing countries, Russia and Brazil in particular, the return to its roots has finally put Lenovo back into profitability this quarter.
Good for Lenovo. Now the company is free to turn back to the attack. It bought back its mobile phone unit for US$200 million (twice the price it sold it for back when it was trying to "concentrate on PCs"). It’s also going up against the Apple iPad with a hybrid laptop/tablet PC with a detachable screen – the IdeaPad UI. And it’s moving away from the staid IBM black color uniform for its PCs to come up with more consumer-friendly colors and designs. What will the harvest be? In China, Lenovo’s brand advantage may be temporary, and low-priced competitors are already chewing at the margins. Thus innovation is key. Hopefully it will not get distracted by the stimulus package, which is subsidizing PC prices in rural areas. Low-tech, low-cost computing is great CSR, but while innovation does trickle downwards, it rarely trickles upwards. At the same time, innovation needs to be smart, and going up against the iPad without better support from Microsoft has analysts quite worried – the hybrid IdeaPad UI has to run two different operating systems; one Microsoft, one custom Lenovo OS called Skylight. Nor is the smartphone market a sure thing. Suffice it to say, Lenovo will have its hands full holding on to its advantage in Asia for a while, and managers would be wise to delay their next attempt to crack Western markets until they manage to make their current new projects pay off.