lenovo-mast-logo.jpgA
year on, its still not clear why Lenovo bought IBM's loss-making PC
division. The cost and distraction of turning the business round
continue to weigh heavily on Lenovo just at a time when competition in
the Chinese market is growing.

China fans will say the
acquisition helped rapidly establish Lenovo as a global rather than
Chinese brand. It also enabled China to add another multinational to
its tally sheet and in a hi-tech industry as well. But at what cost?

China,
where Lenovo is the leading PC maker, continues to contribute most of
its growth and two fifths of its revenues. Ominously, however, Lenovo
now faces stiffer competition in China from the likes of Dell and HP.

Outside its home market, Lenovo is growing at less than the regional averages in EMEA, Japan and the US, according to Gartner Dataquest. What's worse, it continues to lose money in EMEA and the Americas.

Chairman Yang Yuanqing last week told Reuters that it would take at least three years for Lenovo to return to strong profitability. Currently, its margins are just 1% to 2%, a level he believes insufficient:

That's definitely not a healthy business. Our goal is to return to the old-Lenovo P&L statement.”

Before
it bought IBM's PC business, Lenovo — previously called Legend — had
margins of 4.5% to 5%, healthy by the shrunken standards of the PC
business. Getting back to those sort of levels is going to take time,
Yang admits:

Nobody should think it will happen anytime soon. It won't happen in a year or two, perhaps we need a three- or five-year plan.”

It
would be foolish to expect Lenovo to be able to turn around the former
IBM business overnight, particularly as it faces fierce competition in
the US from the likes of Dell and HP.

Gartner Dataquest says
Lenovo is starting to get its act together in the US, its Achilles
Heel. It has a new channel strategy targeting SMEs through well-known
outlets like Best Buy and Office Depot.

It also has a new
product line, the Lenovo 3000, which is cheaper than the Think line of
desktops and notebooks inherited from IBM and, hopefully, sufficiently
differentiated that it will not cannibalise sales. For example, Lenovo
3000 notebooks are aimed at “individual achievers” rather than the
businesspeople targeted by ThinkPads.

So far, however, there are
still few signs that the economies of scale, supply chain efficiencies
and other operational improvements promised at the time of the IBM
acquisition have worked their way to Lenovo's bottom line.

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