Lenovo Has Less to Lose in the U.S.

Ironically, what may be shielding the computer maker from recession fallout is its continued inability to crack the U.S. market

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by Bruce Einhorn

Hong Kong investors this month have frantically dumped stocks with too much U.S. exposure, and computer maker Lenovo has been one of the biggest targets. The stock of the world's No. 4 PC maker has plunged 35% in January alone, far worse than the 13.5% drop for Hong Kong's Hang Seng Index. Lenovo had further to fall, since the shares had jumped 52% in the second half of last year, but with some investors taking profits, and others worried about PC sales during a U.S.-led global slowdown, Lenovo has suffered much more than its main rivals. Hewlett Packard (HPQ) is down 13%, Dell (DELL) is off 18%, and Acer is down 21%.

On Jan. 25, though, harried shareholders of Lenovo, which reports its quarterly earnings this Thursday, received some rare good news with the publication of an analyst's research report saying worries about the company were excessive. That helped send Lenovo shares up 15%, although today they gave up some of those gains, falling 4%, to close at 4.55 Hong Kong dollars.

Joseph Ho, the analyst from Daiwa Institute of Research in Hong Kong who wrote the upbeat report, explains Lenovo actually is better-positioned than its rivals to do well during a U.S. slowdown. Sure, the U.S. might be heading into a recession, but compared with HP, Dell, and Acer, "Lenovo's U.S. exposure is the smallest," he tells BusinessWeek. "That definitely works in favor of Lenovo in a scenario of a U.S. recession."

Virtually No Market Presence

Ironically, the reason for this optimism is the inability of Lenovo to record much success in achieving one of its main goals: Selling itself to U.S. consumers skeptical about a PC brand from China. Since the Chinese-government-backed computer company acquired the PC division of IBM (IBM) in 2005, Lenovo has struggled to boost its presence in the U.S. consumer market, where IBM had not been strong.

Two years ago, for instance, the company launched a series of consumer-targeted PCs (BusinessWeek.com, 2/3/06). That didn't make much of an impact on U.S. consumers, says Ho. "They have had virtually no market presence."

Lenovo hasn't given up trying. On Jan. 3 the company unveiled a new line of computers (BusinessWeek.com, 1/3/08), under the Idea brand, for consumers in markets including the U.S. For now, though, Lenovo sends just 14% of its total PC shipments to the U.S., a much smaller percentage than Asian rivals Acer, 28%, and Toshiba, 32%. That means Lenovo has far less to lose from a fall in U.S. demand.

Developing a Global Footprint

Other analysts agree Lenovo might be better positioned to ride out hard times than the bears believe. Some of this month's sell-off has been driven by worries about China's new labor law, which went into effect on Jan. 1, increasing costs for companies like Lenovo with a lot of Chinese employees. About 77% of the company's 25,100 workers are based in China, according to brokerage firm CLSA. However, Venugopal Garre of Credit Suisse (CS) wrote in a Jan. 11 report that labor costs represent just a tiny percentage of the company's overall costs. Moreover, Lenovo has been expanding beyond China.

"Lenovo now has a global footprint," Garre wrote. Last July, the company announced plans to open its second factory in India (BusinessWeek.com, 10/1/07) and this year it will open plants in Mexico and Poland to make desktop PCs. That should make it easier for Lenovo to sell desktops, which can't easily be sent via air cargo.

Plenty to Worry About

Still, the Chinese company has plenty of exposure to the business cycle in Western countries. While Lenovo has not yet succeeded in making a big splash in the U.S. (where according to IDC's most recent rankings, it doesn't crack the top five), the company does get almost half of its revenue from sales in the U.S. and Europe combined, according to CLSA analyst Jenny Lai. Nearly 45% of those sales are to large corporate customers, many of whom are likely to cut their purchases during a recession. "The risk is on the downside with slower corporate spending," she wrote in a Jan. 8 report.

CLSA lowered its Lenovo earnings forecast 31% for the year ending March, 2009, to $363 million, compared with an estimated $324 million for March, 2008. Daiwa's Joseph Ho is more optimistic, predicting $353 million in profit for the company this year and $424 million in 2009.

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau .