King of PCs, Lenovo Sets Smartphone Ambitions

December 26, 2013

King of PCs, Lenovo Sets Smartphone Ambitions

By ERIC PFANNER

In the United States, Lenovo is still best known as the Chinese company that bought IBM’s PC business in 2005. In China, it is better known as the world’s new No. 1 PC maker, a force to be reckoned with in smartphones and a bellwether for the nation’s economic and technological might.The laptop maker is already the second-largest smartphone brand in China, after Samsung Electronics. Lenovo, which has never had modest plans, wants to build on that success and begin pushing into the United States and other wealthy markets in 2014.

“I’ll be very clear: Our aspiration is someday to be No. 1 in the mobile space,” said J. D. Howard, a Lenovo vice president who is in charge of developing the company’s smartphone business outside China. “I know it sounds crazy, but even five years ago, if I had said we’d be No. 1 in PCs, people would have said we were crazy.”

The company must balance — some would say blend — American and Chinese cultures. It has dual headquarters, in Beijing and Morrisville, N.C. Eighteen nationalities are represented among the top 100 managers. While it has had success worldwide in PCs and with its new smartphones in China, its good fortune in developed markets, dominated by entrenched Apple and Samsung, is anything but assured.

But the company constantly surprises. Lenovo was founded in 1984 by Liu Chuanzhi, a computer scientist, and a group of other engineers with financing from the Chinese Academy of Sciences, a government-linked research institute that still holds an indirect stake in Lenovo.

Mr. Liu, who had been sent to a rice farm to work as a laborer during the Cultural Revolution, startled the world when it bought IBM’s PC business. The IBM deal gave the upstart instant credibility and cachet because he secured the right to use the ThinkPad name, a popular brand among companies around the world. Lenovo then made other deals that gave it a presence in major markets like Germany, Brazil and Japan.

By September of this year, Lenovo had cemented its position atop the PC industry. It sold more PCs than two major American companies, Hewlett-Packard and Dell, as well as the fading Taiwan-based rivals Acer and Asus. Lenovo had secured a 16.7 percent share of global PC shipments, according to the two market research firms that track them, Gartner and IDC.

The company’s strength has always been in building very durable laptops, but recently it has expanded into tablets. In January 2012 it introduced a new device under the Yoga brand that blends the features of a laptop and a tablet, including a flippable touch screen. It sells for less than $300 in the United States.

Moreover, the tablet runs on Android, the Google-made operating system that has been so important to the success of Samsung’s smartphones and tablets. It showed the kind of flexibility that most PC makers, wedded to Microsoft’s operating system software, lack.

“The PC is not going to go away tomorrow,” Peter Hortensius, president of the company’s Think Business Group, which serves corporate customers. “Two hundred billion dollars is a big pie, and we think we can get a bigger piece of it,” he said, referring to the approximate annual sales in the global PC market.

IDC forecasts that sales of PCs will decline almost 14 percent to 314 million units this year from 364 million two years ago. Some analysts say there is pent-up demand among corporate customers who have held off buying new desktops because of a weak economy. But the longer-term trend seems clear: PCs are a mature business.

“Lenovo is feeling the pressure, but it may be better prepared to weather the storm,” said Jeff Orr, an analyst at ABI Research.

One reason is smartphones. In 2008, its chief executive at the time, William J. Amelio, sold the company’s fledgling mobile business to an investor group for about $100 million. He was seeking to focus the company’s efforts on PCs as it wrestled with the effects of the global financial crisis. The decision proved to be shortsighted. A year earlier, Apple had introduced the iPhone, setting the stage for the mobile Internet revolution.

In 2009, Lenovo corrected the error by ousting Mr. Amelio. The new chief executive, Yang Yuanqing, bought back the mobile unit — at twice the price — and went to work regaining ground.

By the third quarter of this year, the company secured 13 percent of the Chinese smartphone market. Samsung Electronics, which had been at it longer, is doing better with 21 percent, according to Canalys, a research firm. But it is enough that worldwide, Lenovo is in third place after Samsung and Apple. By this summer, Lenovo was selling more smartphones and tablets, combined, than its PCs, even though PCs still account for 85 percent of its revenue.

Lenovo has been helped by its leading position in PCs and its close relationships with retailers and mobile operators in China, the world’s largest smartphone market.

“They know the China market better than any of the foreign brands, and they have the distribution network,” said Jenny Lai, an analyst at HSBC.

While more than 90 percent of the company’s mobile phone sales are still in China, there are signs of promise elsewhere. In Indonesia, another enormous market, Lenovo’s market share is already in double digits. Last year, Lenovo began its smartphone export push by moving into India, Vietnam, the Philippines and Russia.

Analysts say much of the growth in smartphone sales will occur in developing countries, but Lenovo does not plan to stop there. But given the strength of Samsung and Apple in the United States and Europe, a newcomer may find it difficult. “I just can’t imagine that Lenovo could come into the U.S. smartphone market and build market share quickly,” said Mikako Kitagawa, an analyst at Gartner.

While Apple and Samsung are ranked among the world’s 10 most valuable brands by Interbrand, a marketing firm, Lenovo is not among the top 100. Lenovo has a high profile among corporate purchasing managers, who are responsible for many PC buying decisions, but its brand name is less widely known among consumers. Even Lenovo executives acknowledge that to challenge Apple or Samsung in smartphones, Lenovo will have to burnish its image. To do so, the company has enlisted Ashton Kutcher and Kobe Bryant as pitchmen.

Mr. Bryant appeared in ads for Lenovo’s K900 smartphone in China and other Asian countries this year. The idea, executives say, is to make Lenovo look like an American or global company; many consumers are suspicious of domestic brands, considering their quality to be inferior.

Lenovo recently hired Mr. Kutcher, who portrayed the Apple founder Steven P. Jobs in the movie “Jobs.” Mr. Kutcher’s title is “product engineer.” He will do more than just serve as a celebrity endorser, the company says.

“He’s not going to be writing code or designing chipsets,” said David Roman, Lenovo’s chief marketing officer and the former H.P. executive who managed the company’s effective “The Computer is Personal Again” campaign. “But he’s very into design and software, integrating social media. The guy is a genuine technologist.”

Some of Lenovo’s early smartphones were quirky, with unusual clamshell designs that recalled earlier generations of mobile technology. While many of the smartphones sold in China and other developing countries are budget models, Lenovo has been adding higher-end handsets to its range as it prepares for an expansion into wealthier markets.

Last month in Beijing, it showed off a new device called the Vibe Z. It is a cross between a phone and a tablet, what the consumer electronics industry has started calling a phablet. With a 5.5-inch screen housed in a largely plastic body, the Vibe Z lists at 3,399 renminbi, or about $560 in China, where some smartphones can be had for less than $100.

Lenovo is not the only Chinese smartphone maker itching to expand internationally. Others, like Huawei, Xiaomi and ZTE, have also begun pushing outside the domestic market. Lenovo executives say they are in a better position than Chinese rivals because of the company’s strength in PCs. By adding tablets and smartphones, they say, Lenovo will be able to integrate devices and cloud computing services into the devices.

They say consumers are looking for alternatives to Apple or Samsung. “I’ve talked to a lot of people in the industry, and there is a hunger for alternatives to the big two,” Lenovo’s Mr. Howard said. “It’s just the nature of things that power corrupts.”