The Future of Lenovo

Before we give our recommendations on what the future looks like for Lenovo, we need to understand the industries
Lenovo operates in, its closest competitors as well as the latest trends playing out in each industry.

The following is Lenovos latest Revenue split according to its 2016/2017 Annual Report 1:

Figure 1 Source: Lenovo Annual Report 2016/2017. Revenue breakup according to region and business segment

Owing to the large percentage the PC industry contributes to the firm as well as the mobile industry being an
important upcoming market, we shall focus on those two industries.

Current Situation of the Global PC Market

The global PC market benched in at $148,643m in 2016 with a compounded annual rate of change (CARC) of -
4.5% between FY 2012 - 2016.
In volume terms the CARC was -3.4 % between FY 2012 - 2016 with a total of 264.5 million units in 2016 being
sold in 2016.2

Its important to note that the PC market has been shrinking over the past 5 years. 2Q17 would be its 11th straight
quarter of decline.

This decline can be attributed mainly to the increased PC prices.

1
(Lenovo Group Limited, 2017)
2
(Report Buyer, 2017)
 "Higher PC prices due to the impact of component shortages for DRAM, solid state drives (SSDs) and LCD panels
had a pronounced negative impact on PC demand in the second quarter of 2017," said Mikako Kitagawa, principal
analyst at Gartner.3

Smartphones are to blame for this shortage in components. Over recent years, computing power in phones have
dramatically increased. They are now at a point where they compete with PCs for the same components. The recent
boom in the number of mobile units being sold has resulted in mobile companies like Samsung, LG, Motorola,
Oppo, Xiaomi etc. are buying components in bulk directly from the suppliers. This causes a shortage of components
for the PC markets which have caused component prices to increase.

Component costs are estimated to fall when the component manufacturers increase the production rate however, the
earliest that can happen would be late 2018 or mid-2019.4

To deal with this price hike, PC manufacturers are faced with a choice, either to transfer the cost over to the end
consumer by increasing the price of their PCs or to take a hit to their margin percentages.
In the B2B segment of the industry, prices are usually fixed owing to a large number of firms buying on a
contractual basis. On the flip side, on the B2C segment, customers have been reported to be incredibly price
sensitive. So much so many have deferred their purchases to a date when the prices of PCs have reduced.

The biggest question for all PC makers are: Should we go for market share or margins?

Lenovo vs HP
Preliminary Worldwide PC Vendor Unit Shipment Estimates for 2Q17 (Thousands of Units)
Table 1 Source: https://www.gartner.com/newsroom/id/3759964

2Q17 2Q17 Market 2Q16 2Q16 Market 2Q17-2Q16

Shipments Share (%) Shipments Share (%) Growth (%)
Company

HP Inc. 12,690 20.8 12,285 19.2 3.3

Lenovo 12,188 19.9 13,305 20.8 -8.4

Dell 9,557 15.6 9,421 14.7 1.4

Apple 4,236 6.9 4,252 6.7 -0.4

Asus 4,036 6.6 4,501 7.0 -10.3

Acer Group 3,850 6.3 4,402 6.9 -12.5

Others 14,546 23.8 15,710 24.6 -7.4

3
(Gartner, 2017)
4
(Sharma, 2017)
 -4.3
Total 61,105 100.0 63,876 100.0

On the global stage, as shown in the above table, HP and Lenovo are intense rivals. Each quarter these two firms
compete for the top position in the industry.
For 2Q17 HP reclaimed the top position from Lenovo due to its performance in the US that outstripped the
competition. HPs strong sales and growth of 3.3% contrasts Lenovos growth that fell by 8.4% Y-O-Y.

Trends in the Global PC Market

As we speak, theres a change in the buyers pattern. Gamers and millennials are willing to pay more for a PC.
A very good example of this: Intel. Intel PC chip prices increased by 7% in 2016, however the firm sold more Core
i7 (top of the line chips) as sales of gaming and VR systems increased.

This change has led to a change in the mix of laptops, desktops and 2-in1. Most vendors have started to focus on
selling high priced products that are able to give better margins. (Shah, 2017)

It doesnt mean that affordable PCs would go away. There will always be cheap laptops available, though those
markets aren't growing and not attractive to PC makers. said Kitagawa, principal analyst at Gartner

The change in overall PC buyer profile as well as the increased costs of components have made the PC Industry
volatile. 5

Other trends that is likely to play out over a longer period is that between the booming mobile market and the
declining PC market.
While PCs tend to offer better performance as opposed to mobiles, a majority of customers do not need intensive
tasks such as 3D rendering and image processing that PCs are known to handle. Mobiles have evolved to a point
where using Facebook and YouTube are very easy for an ARM CPU (CPU that mobiles use) to do. Thus, most
mobiles are suitable for a vast majority of everyday use.
The demand for PCs have slowed as consumers know turn to large screened mobiles or tablets to complete many
tasks they once needed laptops to do.

There are specialized niche players in the PC industry who value the form factor of a PC over a laptop. Segments
like gaming laptops and ruggedized laptops are segments that are growing. 6

PC Competitor Analysis (HP)

As HP is Lenovos closest competitor we shall evaluate it to come to a strategic marketing decision.
HP currently focuses on tapping the emerging markets where theres some growth in the PC industry as opposed to
the declining developed markets.
Their core competency is R&D. This benefits them as the product life cycles are short and thus perpetually need
upgrading. Thus, they are aiming to make devices that are tailored to emerging markets.

5
(Wagner, 2017)
6
(Williams, 2017)
However, this is also their biggest weakness. HP has R&D-ed so much that their product lines are massive. As a
result, in a highly competitive market such as the PC market, there are areas which they cannot allocate funds
because they have to priorities other areas.

As a large amount of their expenses are on R&D it enables them to churn out high quality and innovative products.
In addition to their R&D costs being high, the increased component costs have rendered their low budget PCs
uncompetitive as the costs are too high to profitably cater to this segment.

HP furthermore battles lower margins as they are currently facing intense price competition in all their markets
which have caused them to lower their prices to stay competitive. 7

Current Situation of the Global Mobile Market

Samsung is the leading smartphone maker with 859 million units being sold globally. Apple ranks second with 704
million units. Together they account for 56% of the total number of smartphones worldwide.
In the tablet segment, Samsung and Apple accounted for 89% of the total 260 million active tablets. Apple leads this
industry with 166 million followed by Samsungs 65 million units. 8

A large amount of the developed markets have reached saturation. Europe is estimated to have mobile user
penetration rate of 81.4% by 2020. Demand continues to fall in these regions. However, with the rapid expansion of
infrastructure in developing nations, a large amount of revenue is expected from these areas.
While the problem of Latin American income inequality continues to persist in 2017, the region has seen a
significant increase in Android smartphone adoption due the generally lower price points. Below are a few
infographics from a global market research report on the mobile industry conducted by We Are Social that
enumerate the current position of the industry. 9

Figure 2 Source: GSMA Intelligence, Mobile Economy Report 2017. Share of the Web Traffic by Device

7
(Packard, 2017)
8
(NewZoo, 2017)
9
(GSMA Intelligence, 2017)
Figure 3 Source: GSMA Intelligence, Mobile Economy Report 2017. Unique Mobile User Penetration by Country

Figure 4 Source: GSMA Intelligence, Mobile Economy Report 2017. Share of Mobile Web by Mobile OS

As of now there are 10 global players.

Figure 5 Source: Newzoos 2017 Global Mobile Market Report. Based on the top 100 countries in terms of smartphone users, representing more
than 98% of the worlds smartphone population.

Note: Lenovo owns Motorola.

Trends in the Global Mobile Market

Data mining, 5G capabilities, and emerging consumer markets for smart devices are combining forces in 2017 to
create new opportunities for consumers and businesses alike.

Unique mobile subscribers are expected to increase from 4.8 billion in 2016 to 5.7 billion which would essentially
be a 4.2% CAGR with global penetration levels moving from 65% to 73%. A large amount of these global numbers
is contributed by APAC, Latin America, MENA and Sub Saharan African regions.

Mobile Adoption according to Region:

1. Asia Pacific: 51% to 63%
2. CIS: 48% to 66%
3. Europe: 65% to 75%
4. Latin America: 55% to 70%
5. MENA: 46% to 64%
6. Sub - Saharan Africa: 28% to 55%
7. North America: 77% to 79%
VR
Its the buzzword in the mobile market. Consumer interests for VR capable devices are strong however the price tag
associated with such devices arent likely to make these devices mainstream. VR technology still has a few kinks
EG: many users still experience motion sickness and setting up a VR environment needs a lot of free space. 10

Closest Competitor Analysis (LG)

As LG is Lenovos closest competitor we shall evaluate it to come to a strategic marketing decision.
LG has endured multiple quarters of falling revenue and profitability over the past two years. It currently mostly
operates in the US and South Korea however it must expand beyond to new and potential growth markets like India,
Latin America, Indonesia etc. Playing in its favor is its strong mid-tier smartphone portfolio in K and the just
launched Q series which are more likely to be adopted in these emerging markets.
As for its flagship devices, it needs to revamp its value proposition as its latest flagship was not successful. If it does
venture past its current markets, its expected that it would look to build better brand awareness with aggressive
marketing for its mid-tier to bring in requisite volumes and get back to growth. 11 12

Current situation of Lenovo13

Summary
Lenovos competitive edge and pride has always its ability to understand the consumer and give them exactly what
they want. This ability has been attributed to the brand and the firm leverages this brand to make sales.
This is the exact reason why they acquired Motorola. In addition to giving Lenovo a foot into the mobile market,
The Moto G series is known to giving customers exactly what they want (mid tier specifications at affordable/low
tier prices)

Figure 6 Source: Lenovo Annual Report 2016/2017. Revenue breakup according to region and business segment

10
(GSMA Intelligence, 2017)
11
(Nair, 2017)
12
(Nair R. , 2017)
13
(Lenovo Group Limited, 2017)
They are aware that they have diversified into other businesses that arent core to the firm. (Mobile with Motorola
and Cloud with IBM System X). This broadens their product lines and complicates their portfolios. Each business is
at a different stage of maturity and therefore has different priorities. As a result, they have make an effort to
establish a system to manage each business differently (by implementing a multi-business operating system)

As off 2017 their CEO has proposed a 3 Wave Strategy:

1. Maintain PC Leadership and Profitability: By better understanding customer needs and innovating
accordingly
2. Build Mobile and Cloud computing into Profit centers: They got into this business through acquisitions.
Through post-merger activities such as optimizing cost structures and unifying all mobile activities under
the Moto brand along with investing into carrier relationships across the world.
3. Invest into New IoT Devices and Cloud.

Like all firms in the PC market, Lenovo has been affected by the cost increases due to the shortage of components.
The firm has reacted to this cost increase with a combination of increasing the price on certain models and absorbing
the cost increase on other models.
Owing to the price increase their revenue dropped by 4% Y-O-Y. Gross profit also took a hit with it decreasing by
8% Y-O-Y with Gross margins decreasing by 0.6%

The Way Forward

PC Market
The increasing costs of components puts pressure on the firms margins that have seen a fall of 0.6% Y-O-Y.
Developing niche segments such as Gaming PC could help reduce the margin decreases in the coming years.
The firm shouldnt expect the cost of components to decrease anytime soon because of the explosion in the mobile
industry.

The major segments in this market are B2B and the price sensitive B2C. Owing to the trend of the costs increasing
in the near future, catering to the price sensitive B2C segment would be difficult unless the firm absorbs the cost

Instead, it would make sense to increasingly focus their resources on developing the B2B market.

Additionally, they could look at buying out smaller firms to keep market share as the industry continues to shrink.

Mobile Market
India and Brazil. Both nations favor Android phones owing to the lower price points. Motos G product line cater
very well to these markets. In addition, their E series also do so.

It wont be easy for Lenovo to go forward. There are challenges. As mobiles arent their core business they are
facing integration issues with their newly acquired Motorola Mobility from Google. Integration is going to be the
key to their success.

The rage over VR shouldnt be on their minds because its not what the mid and low tier (core customers) wants at
this point.
Bibliography
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