Posted by: Bruce Einhorn on May 21, 2009
More bad news for Lenovo. China’s top PC company today announced it lost $264 million in the quarter ended March 31. The loss was no surprise, given the awful state of the computer industry, although it was worse than many had expected. Eric Savitz, blogging at Barron’s Online, says analysts were looking at a Lenovo loss of $186 million. According to Bloomberg, the median estimate expected by five analysts was a loss of $211 million.
So what’s Lenovo supposed to do next? It already has laid off thousands of workers in a big restructuring effort. After announcing a quarterly loss for the last three months of 2008, the company also pushed through a management shakeup, with Bill Amelio, the Dell exec brought in a few years ago to help the Chinese company go global, leaving. (We wrote about Amelio’s departure in this BW story.) Now the old team is in charge, with founder Liu Chuanzhi back at the helm and trying to boost Lenovo’s fortunes by focusing on the Chinese market. Problem is, that strategy might make sense from a business point of view, but politically it’s a bit of a disaster. One of the most important points of government-backed Lenovo buying the old PC division of IBM back in 2005 was to help promote Beijing’s goal of turning Chinese companies into global champions that could uphold the honor of the motherland against the Americans and the Japanese. “You carry the hopes of China on your shoulders,” Premier Wen Jiabao said once to Yang, as my colleague Steve Hamm wrote in this BW story from 2006. With declining sales in the Americas (minus 24.6%), declining sales in Europe, Middle East and Africa (minus 13%) and declining sales in ex-China Asia (minus 32%), those hopes seem to be fading.
If Liu and Yang want to find a way to get back in the good graces of China’s Communists rulers, they should consider something bold. A few weeks ago, Bernstein Research analyst Toni Sacconaghi Jr. came out with a report suggesting Dell solve some of its problems by merging with Acer. The idea, according to Sacconaghi, makes sense because the industry needs consolidation and Dell and Acer’s businesses are complementary. The same holds true for Lenovo and Acer: The two have been bitter rivals for years, but there’s some logic to the two teaming up. Lenovo is strong in China and weak most everywhere else; Acer is weak in China and strong most everywhere else. While HP and Dell have made some headway in the Chinese market, Acer is still very much an also-ran despite years of effort. In other markets, Lenovo is strong in business sectors where Acer is relatively weak. The Chinese company, thanks to the IBM legacy, is strong in sales to enterprises but is weak with consumers; Acer is weak in enterprise and strong with consumers.
And of course there’s the political symbolism of a Lenovo-Acer partnership. When Chen Shui-bian, an advocate of Taiwan formally declaring itself independent of China, was president of Taiwan, relations between Beijing and Taipei were in the deep freeze and such a deal would have been impossible. Now, though, Taiwan’s president is Ma Ying-jeou, whom Beijing likes much better and whose government is working to improve ties between the two sides. Taiwanese and mainlanders can now fly back and forth across the Taiwan Strait without having to go via Hong Kong, for instance, and the Taiwanese stock market has been soaring amid optimism about Chinese investment in local companies. In this climate, why not consider a Lenovo-Acer deal? If Lenovo were in the driver’s seat, Beijing would probably be thrilled. On the other hand, that’s a big if. The way the two companies are heading now, Acer is the stronger company. A mainland company getting swallowed by a Taiwanese company might be too much for China’s leaders to handle.