Lenovo teams up with Best Buy

Posted by: Bruce Einhorn on April 12, 2006

Lenovo’s U.S. push is gathering momentum. Not long ago, the Chinese computer maker launched a new line of desktops and notebooks, part of Lenovo’s effort to build up its U.S. sales following the takeover of IBM’s PC division last year. (See the story that BW ran about that here.) Back in China, Lenovo is strong in sales to consumers and small and midsized businesses, but the company’s U.S. sales have gone mostly to large corporate customers, a legacy of IBM’s focus on big-name clients. The new line of PCs is an attempt to change that and make Lenovo a name that appeals to smaller businesses and consumers in the U.S. In the latest step to get those customers, yesterday the company issued a press release with Best Buy announcing that the giant retailer would start carrying Lenovo’s PCs.

Why does Lenovo need to do this? I talked with Martin Kariithi, an analyst at Technology Business Research, Inc. in New Hampshire for some answers. According to Karithi, the business model that Lenovo inherited from IBM in the U.S. doesn’t work. In order to get big corporate customers, Lenovo needs a big sales force – and that eats into margins at a time when the PC business doesn’t have a lot of margin to start with. According to Kariithi, Lenovo’s operating margin in the U.S. is just 2.1%, compared to 6.5% in China. “Most of that difference is the sales cost,” he says. Traditionally, “they depended on field sales, which really raised the distribution cost structure compared to Chinese operations.” Getting exposure in key retailers is provides Lenovo with a much less expensive way of winning customers. The company reached a deal with Office Depot late last year, and now it has Best Buy too. “They really want to switch to value-added resellers and retailers,” says Kariithi. “That is a more low-cost model.”

Lenovo sure could use some good news. The stock price has tanked this year, down 18%. That’s compared to minus 1% for Dell and an almost 14% increase for HP. Among the big PC names, only Taiwan’s Acer Inc. (down 25%) has done worse

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