Ezra Gottheil, an analyst with Technology Business Research, praises PC maker Lenovo on several points in a new report.
In particular, Gottheil likes Lenovo’s bid to win consumers on a worldwide basis. He also believes Lenovo’s recent decision to partner with IBM on production of servers will produce dividends.
“At the Consumer Electronics Show in January, Lenovo introduced its first line of consumer notebook PCs designed specifically to be sold outside of Asia, and these have been well-received thus far,” Gottheil wrote. “However, TBR believes the PCs were introduced at relatively high prices. We expect Lenovo to adjust prices and subsequently enjoy success with its consumer products going forward.
“The company then partnered with IBM to manufacture and sell lower-end x86 servers, allowing Lenovo to fill out its business offerings and sell higher-margin products,” he added.
The report was written before Lenovo launched its ultralight X300 laptop, which weighs in at around 3 pounds. The X300 is a competitor for Apple’s recently introduced “Air.” Both machines are similar in size (around 1-inch thick) and weight but differ in features and price.
In terms of internal business, Gottheil believes Lenovo has successfully absorbed the IBM PC division, which it acquired two years ago. Lenovo, which maintains its headquarters in Morrisville, N.C., is the world’s fourth ranked PC maker behind HP, Dell and Acer.
Report: ‘Successful Integration’
The following segment of the TBR report is reprinted with permission:
Lenovo’s improving performance throughout 2007 demonstrates a successful integration of the IBM Personal Computer Division that the company acquired in 2005.
TBR believes Lenovo is well-positioned for the next stages in its transformation into a global PC vendor: entering the global consumer PC market and the global small business server market.
Following the IBM PCD acquisition in May 2005, Lenovo experienced six quarters of uneven growth and profitability, particularly outside its original geographic market of China. Effectively, Lenovo’s strong preexisting business in China supported the unprofitable business acquired from IBM. Then, beginning in 1Q07 and extending throughout 2007, the company grew revenue in every one of its geographic segments, and was profitable in all markets except Asia Pacific outside China, where Lenovo is strategically investing to drive rapid growth. In every quarter of 2007, the company’s operating margin increased sequentially.
Moreover, year-to-year revenue growth for Lenovo exceeded 9% throughout 2007, with the three most recent quarters posting growth of more than 13%.
TBR believes this performance shows that Lenovo has accomplished the tasks necessary for the acquisition to be successful. It has transitioned the IBM customer base to the Lenovo product and brand while driving down costs so that the acquired business is profitable.
Lenovo has also organized itself as a global company, not only in market but also in management and infrastructure. Lenovo believes the task of streamlining the supply chain is not yet complete, that the process can and will be made more efficient. 2007’s performance shows that Lenovo is now functioning effectively after incorporating a business three times its size.
The company is now ready to expand into the global consumer market and the global small business server market. TBR believes the consumer market expansion is critical to Lenovo’s long-term viability as a major PC vendor. To compete effectively against the much larger HP and Dell PC businesses, Lenovo needs the scale and rapid growth the consumer market provides.
Lenovo has two advantages in this initiative:
1) the company has unique expertise in consumer sales in the rapidly growing emerging markets; and
2) the company has the opportunity to define itself and its brand to the market.
Its disadvantages are its smaller size and relatively limited resources, and the fact that its brand is not well-known in the global consumer market. TBR believes Lenovo will gain global consumer market share in 2008, and will establish itself as a viable PC vendor in that market.