It has been more than six months since Lenovo (LNVGF), China's leading computer maker, acquired IBM's (IBM) PC division. Since then, Lenovo has shifted its headquarters to Westchester County, N.Y. -- not far from IBM's HQ -- retained key IBM executives, and launched some new PCs in the U.S. using the IBM ThinkPad brand. Lenovo's biggest shareholder may be the Chinese Academy of Science, but so far the name of the game has been continuity with the old IBM division.
Now it's time for Lenovo to be Lenovo. The company on Feb 23 launched a new line of low-cost PCs targeted at consumers and small to medium-sized businesses (SMB). Although Lenovo dominates these markets at home, in the U.S. its sales to consumers and SMBs have been weak -- a legacy of IBM's concentration on big corporate clients.
POOR POSITION. "IBM's traditional focus was on the large enterprise market, and [it] ignored the SMB and consumer segments," says Viktor Ma, an analyst who follows Lenovo for Morgan Stanley in Hong Kong. As a result, "Lenovo has had nothing to offer that market."
That has left Lenovo in the lurch, since much of the growth in the computer business is now in areas that IBM neglected. In late January, Lenovo announced quarterly earnings of $47 million, significantly lower than the $84 million that most analysts were expecting. One reason for the disappointing results: Lenovo's poor position in the U.S., where it has been losing market share since the IBM deal (see BW, 12/12/05, "A Tough Sell for Lenovo").
Lenovo has just 4.2% share, compared with 30.5% for Dell (DELL) and 19% for Hewlett-Packard (HPQ). And Lenovo's already-small share shrank in the fourth quarter. So, although it has solidified its dominance in China, the setbacks in the U.S. and other overseas markets "wiped out all the earnings upside that we had been expecting," Johnny Chan, a JPMorgan analyst in Hong Kong, wrote in a report released last month.
A SMART GAMBLE. In an effort to change that, Lenovo, which has been a leader in sales of low-cost notebook PCs in China, plans to do what it does best: sell newly designed, low-cost notebook and desktop PCs to consumers and businesses. To prove it, the new notebook PCs will sell for as little as $600. The desktops will sport processors from longtime partner Advanced Micro Devices (AMD), instead of costlier chips from Intel (INTC).
They'll also be significant for what they don't have: IBM's Think brand. The Chinese outfit is creating a new brand for the machines, which will be called Lenovo 3000s. Furthermore, these notebooks won't feature ThinkPad's trademark, the red tracking button in the middle of the keyboard that functions as a mouse. It's a sign that Lenovo management is confident that American buyers no longer need the reassurance of the Think brand to choose computers from China's top PC company (which happens to be making a splash as a sponsor and provider of IT services at the Winter Olympics now under way in Italy).
It's a smart gamble for Lenovo, some analysts say. Using IBM's well-known Think brand has been helpful, but it won't do in the long run. "The Band-Aid has to come off at some time," says Samir Bhavnani, principal analyst at San Diego-based PC consultancy Current Analysis. "They need to establish the Lenovo brand and start thinking about their computer company as Lenovo, not as IBM." According to Bhavnani, this is the only way that Lenovo will be able to break into the big leagues. "If they want to compete as a global brand with Samsung, Dell, and HP, they need to get people to start thinking of Lenovo as Lenovo."
TWO-TIER STRATEGY. Morgan Stanley's Ma is bullish too. The new Lenovo 3000 line of machines "should be great," he says.
Lenovo won't be getting rid of its Think brand. Instead, the company will be pushing a strategy similar to that of its rivals. Just as Hewlett-Packard and Gateway (GTW) respectively carry HP Pavilion and Gateway brands at the high end and Compaq and eMachines brands at the low end, Lenovo will have two tiers of American offerings.
The ThinkPad may be what's famous in the U.S., but in order to reverse its slide in the States, China's most important computer maker needs America's consumers and business buyers to start thinking about Lenovo as a name of its own.
Einhorn is a correspondent in BusinessWeek's Hong Kong bureau
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