Business Management

Will US Let Chinese Dragon Lenovo Eat Its Tech Economy?

It’s been a spectacular start to the year for Chinese hardware giant Lenovo. First the firm announced its intention to purchase IBM’s volume server business; then it launched a radical internal restructure, adding an “ecosystem and cloud group”; and finally, the icing on the cake – a $2.9bn deal to buy Motorola from Google as well as a reported bid for Sony’s Vaio PC group. The question everyone seems to be asking is whether Lenovo can reinvigorate Moto phones and IBM’s x86 server business as it managed to with Big Blue’s ailing PC business. The general feeling from Asian analysts I’ve been chatting to is ‘yes’, but with some caveats and a few major barriers still to vault.

First up, the good news for Lenovo. If it goes through, the deal will, theoretically, give it a ready-made, iconic brand with which to access the US, as well as European and Latin American markets. It also gets a highly skilled manufacturing and sales team, relationships with US and other operators and, as primary manufacturer of Google’s Nexus devices, a sizeable new chunk of smartphone and tablet shipments, according to Rachel Lashford, APAC managing director of analyst Canalys.


However, there are concerns. Motorola hardly set the world on fire with innovative designs – even with Google at the helm. Also, while it may have strong brand recognition in the US that has not been translating into sales. Moto was ranked 18th in IDC’s global smartphone rankings for the first nine months of 2013 with around 1% of the market, senior research manager Melissa Chau told me. What’s more, CEO Yang Yuanqing has admitted to the Wall Street Journal that he doesn’t have “an effective plan yet” for turning the business around. Is this another case of a big-bucks tech vendor splashing the cash first and asking questions later?

One of the biggest points in favour of the Moto deal is that Lenovo managed to turn around IBM’s PC business, which it bought in 2005, to such effect that it’s now the world’s number-one PC vendor. However, it’s worth remembering that the going was far from smooth for Lenovo early on after that landmark deal.

“The first two years after that acquisition were painful, and it took five years for the company to be operating at its full potential again,” Lashford says. “This acquisition too will undoubtedly bring cultural, operational and cost challenges.”

She was optimistic, however, that the tough experience post-2005 and Lenovo’s trumpeted restructure would stand the firm in good stead this time around. But is it a wise move for Lenovo to make such a bold play in a market which, even in China, has begun to slow?  When global smartphone leader Samsung is warning of leaking profits — down 18% in its mobile division from Q3 to Q4 2013 — it’s obvious that intense competition in the market is squeezing margins.

Well, not necessarily.

“What will happen is greater consolidation where we’ll see a few big players who have scale working on lower margins and pushing out the smaller guys,” says IDC’s Chau. “This acquisition puts Lenovo in a better position to be one of the big players.”

In the x86 server space too there are question marks over whether Lenovo’s acquisition will bring long-term rewards. Alexandre Mesguiche, an analyst with market watcher Context, told me recently that server trends focusing on greener datacentres and low power consumption will cause inevitable disruption in the market in the next five to ten years. Vendors need to adapt to these new requirements, as HP is with its hyperscale Moonshot platform, or there may be trouble ahead, he warned.

Poster child to take a fall?

Perhaps the biggest unknown in this debate, and the thing that’ll likely be keeping Lenovo CEO Yang awake at night, is how US politicians react. It’s a delicate time for Sino-US relations, exacerbated by Snowden’s NSA revelations, and lawmakers can be an unpredictable bunch. Canalys MD Lashford believes we should be prepared for “US protectionism dressed up as national security concerns” and it certainly wouldn’t be a shock to see some Congressional roadblocks put on Lenovo’s takeover of the American phone biz. After all, Huawei and ZTE have both effectively been barred from competing in the country’s telecoms infrastructure market due to “national security” concerns.

As what Lashford describes as “China’s multinational poster child”, Lenovo has managed to largely avoid negative attention from US lawmakers, but with two major deals now in the offing that could be about to change. It remains a fact that Lenovo’s biggest shareholder is part-owned by Beijing and that, like all Chinese companies, there remains a shadowy Communist Party presence within its corporate structure. The firm, which started out life as “Legend” (Lenovo combines the “Le” from that moniker with the Latin word for “new”), was even founded by a small group of boffins from the state-run Chinese Academy of Sciences. It doesn’t get more establishment than that.

A controversial report in the Australian Financial Review last summer claimed that Lenovo products have actually been banned by intelligence agencies for highly secure networks in “Five Eyes” Anglophone nations (US, UK, Australia, Canada, New Zealand) since the mid-2000s after backdoor security vulnerabilities were found in testing. The firm will be hoping no more similarly damaging stories surface before its deals are finally approved by US regulators. It’s no coincidence that, according to Bloomberg, Lenovo has already hired several high-powered lawyers from noted Washington lobby firms who have previously held positions with the CIA and Homeland Security.

Still, analysts are pretty confident about its prospects. Chau points out that despite concerns, Lenovo is fairly well trusted on Capitol Hill, where ThinkPad mobile computers are still used in some departments. “A lot of the US scepticism with Huawei was to do with its back-end infrastructure; there was never any mention about its handset business,” she says. “This [Lenovo-Motorola] is a handset deal.” 

Lashford, meanwhile, predicts that Lenovo will double its global smartphone share in two years and hit double-digit market share by 2015 at the latest.

“The smart phone industry will have three leaders soon: Lenovo, Apple and Samsung,” she adds.



John Anderson has been writing about technology and all things Asia for over a decade. From his perch in the Far East he keeps a keen eye on the global significance of emerging trends in the region.


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John Anderson

John Anderson has been writing about technology and all things Asia for over a decade, having started out on some of the UK's best known best-known IT trade titles. From his perch in the Far East he keeps a keen eye on the global significance of emerging trends in the region. 

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