Global Economics

Lenovo CEO Is Out; Chinese Execs Return


Amid falling sales and PC industry turmoil, Amelio exits as CEO. Lenovo vets Liu and Yang, back in the top jobs, will focus more on China

They were the Dream Team of China's drive to build its first truly global brand: Yang Yuanqing, the computer scientist from the Chinese countryside who at age 40 became chairman of Lenovo, and William Amelio, the American chief executive lured from Dell (DELL) to become CEO. The two joined forces in 2005 after Lenovo, the country's largest PC company, acquired the PC division of IBM (IBM). With Yang focusing on strategy and Amelio zeroing in on production, the pair had an ambitious goal of building on Lenovo's success in China to take on heavyweights Hewlett-Packard (HPQ) and Dell in markets worldwide.

On Feb. 5, the dream ended. With the PC industry in turmoil and Lenovo losing ground to rivals, the company announced a $97 million loss for the quarter ended December, compared with a $172 million profit for the same period in 2007. Sales for the quarter dropped 20%, to $3.6 billion from $4.5 billion. And, the company announced, Yang is replacing Amelio as CEO, with the American staying on "in an advisory capacity" until September. Despite the setbacks Lenovo has faced, "I'm pleased with what we have accomplished as a team," said Amelio in a statement.

Lenovo announced another big management change. Liu Chuanzhi, the company founder who stepped aside after the IBM deal, will return as chairman. The move to reinstate Liu and Yang, who held the CEO job from 2001 to 2004, is a clear signal that Lenovo sees China as its biggest hope. "Lenovo has grown successfully on the international stage," Liu said in a press release. "But at this important time we want to pay particular attention to our China business as it represents the foundation of our global business and growth strategy."

Losing Market Share

Back when Lenovo announced the IBM deal, the idea was to leverage Big Blue's worldwide distribution and senior executives to help the Chinese brand go global. But that strategy has met with limited success: Lenovo, which was the world's third-largest PC maker after the acquisition, has slipped to No. 4 globally, behind HP, Dell, and Acer, the Taiwanese rival that had been neck and neck with Lenovo. While Acer, with 11.8% market share in the fourth quarter according to rankings from IDC, is closing in on Dell for the No. 2 spot, Lenovo is a distant fourth at 7.3%. "They are not on a good trajectory," says Charles Guo, an analyst with JPMorgan (JPM) in Hong Kong.

The global recession has hurt PC companies, but Lenovo has been especially vulnerable outside its home market because of its reliance on sales to corporate customers. With companies cutting back on IT spending, Lenovo on Feb. 5 announced that total shipments to the Americas fell 6% in the quarter, twice the industry average. Lenovo was also nearly one year behind rivals when it came out last fall with its netbooks, the mini-laptops that have helped drive sales for Acer. "Netbooks are about consumers, and consumers were not the key focus," says Patrick Yau, an analyst in Singapore with Macquarie.

Yang, Amelio, and their executives also may have underestimated the amount of time and effort that any merger requires, especially one dealing with such divergent corporate cultures. "While HP and Acer had been pushing ahead, they spent all this time integrating their operations and developing their brand name," says Bryan Ma, a PC analyst at IDC in Singapore, "The competition was out there grabbing opportunities in the market, but they still had internal challenges distracting them."

Meanwhile, attempts to diversify beyond PCs went nowhere. Giving up on an effort to capitalize on China's fast growing mobile-phone market, the world's largest, Lenovo last year unloaded its struggling cellular-phone division to the private equity arm of its parent, Legend Holdings, for $100 million. Although Apple (AAPL) has shown it's possible for a computer company to branch out into telecom, Lenovo's strategy for mobile phones "was really just hoping that the Lenovo name would carry over into handsets," says Dave Carini, an analyst with Maverick China Research in Beijing. "I never saw any innovation."

Global Outlook

The big question now is whether Lenovo's redoubled efforts on its home market will be enough to offset plunging overseas sales. Third-fiscal-quarter sales of $1.6 billion in China, where Lenovo is the largest PC maker, accounted for 45% of Lenovo's earnings, compared with 38% in the fiscal third quarter of 2007. Shipments fell 1% year-on-year compared with an industry decline of 7%, allowing Lenovo to increase its market share from 28.7% to 30.5%, widening its lead over No. 2 HP.

During a conference call with reporters, Lenovo executives took pains to explain that the company wasn't reversing course. "The objective of Lenovo has never changed since the acquisition of IBM, and we want to build a global company and global strategy," said Liu. Those sentiments were echoed by Yang, who admits the challenges he faces are very different from those when he was last in the corner office. "Today's CEO [position] is a global CEO. Yesterday's CEO was just a Chinese local-company CEO, and the scope is very different. I can feel that the burden on my shoulder has become that much heavier."

With good reason. Shareholders clearly share Yang's concern about the company. The stock in Hong Kong dropped 2.7% on the news on Thursday, taking its year-to-date fall to 31% and 12-month drop to 72%. That's worse than any of Lenovo's rivals. Dell is down just 4% this year and 49% over the past 12 months. HP is off less than 1% for the year and off 15% over the past year. Acer is up 1% for the year so far and down only 7% over the same periods.


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