Editor’s note: , which is based in New Hampshire, closely follows Lenovo and numerous other high-tech firms.

HAMPTON, N.H. — Technology Business Research (TBR) believes is more vulnerable than its competitors to the global economic slowdown and it will continue to be challenged to grow and maintain profitability; however, the company has strengths that will help it emerge from the recession as a strong competitor.

(Lenovo, which is based in Morrisville, N.C., is the world’s No. 4 PC maker behind HP, Dell and Acer. Lenovo recently announced it would lay off 50 people in the Triangle area as part of a global cost-trimming.)

Lenovo’s year-to-year revenue growth slowed to 0.4 percent in 3Q08, and its operating margin was only 0.7 percent. Lenovo’s position in the market negatively affected its growth and profitability, and TBR believes the company’s performance will be affected by the economic downturn going forward more than its competitors.

Lenovo’s two larger competitors enjoy a significant advantage in scale. HP ships more than twice the number of PCs as Lenovo, and Dell ships only slightly less than twice Lenovo’s units. This puts Lenovo at a disadvantage in gross margin and per-unit R&D and administrative costs.

The company relies more than its competitors on the large enterprises (LE). TBR estimates Lenovo derived 53 percent of its revenue from LE in 3Q08; more than Dell, HP and Acer. Lenovo is weaker than its competitors in the consumer market outside China, and in 3Q08 global consumer PC sales were strong. The company’s products are, on average, higher priced than competitors, and price pressures were strong in 3Q08; TBR expects continued price sensitivity going forward.

Unusually, Lenovo’s strength in China hurt it in 3Q08. The company reports that unit growth in China declined below that of the rest of the world in 3Q08, as a result of natural disasters, the Olympics and the global economic downturn. Lenovo derived 44 percent of its revenue from China in the quarter. Lenovo suffered from the strengthening dollar in 3Q08. Because China’s currency is tied to the U.S. dollar, and because Lenovo has significant U.S. operations, the company estimates 60 percent to 70 percent of its cost of goods sold is tied to the dollar. As a result, in 3Q08, Lenovo’s gross margin fell to 12.6 percent, the lowest in at least five years.

The company believes gross margins will continue at these low levels going forward because of currency exchange rates and price pressures. Changes in exchange rates benefited the company as well, as a large proportion of its sales are in China and the United States. On a constant currency basis, sales were down 5 percent year-to-year.

Because the full effect of the downturn was not apparent until the end of 3Q08, the company is preparing for what Chairman Yang Yuanqing called a harsh winter in the earnings call. He also said, referring to 3Q08, that the downturn is "probably just the beginning."

Yang Yuanqing said the company has committed itself to "extensive changes to the operating structure."

CEO William Amelio said that this would include identifying and eliminating any redundancies and cutting any expenses that will not affect products or operations. The example he gave was the closing of Lenovo’s offices in Italy. The company is focusing on reducing operating expenses, which it says are higher than "industry benchmarks".

TBR believes Lenovo can benefit from an effective reform of its operations. For the second consecutive quarter, the company reported "execution issues" that negatively affected performance in Asia Pacific, a key geographic segment. This time, the problem was in Japan. As a result, APAC revenues were down 13 percent year-to-year and unit shipments were down 10 percent. In 2Q08, Lenovo had "execution issues" in India that resulted in a flat quarter in APAC. Lenovo reports recovery in India in 3Q08, with 42 percent sequential growth in unit sales, and 5 percent year-to-year growth where the PC market declined 1 percent.

TBR believes the company faces challenges in maintaining control over a rapidly evolving, geographically distributed enterprise. While it is still completing the integration of IBM’s Personal Computer Division (PCD), Lenovo is expanding into the global consumer market, rolling out its transaction sales model worldwide, and introducing new product lines like workstations, servers and netbooks. The global economic slowdown has forced the company to reexamine its operational structure. TBR believes Lenovo will be able to strengthen itself, minimize losses and make preparations to compete more effectively when the global economy recovers.