Lenovo: Down So Long, It Looks Like Up

Integrating IBM's PC division continues to tax China's No. 1 computer maker, but growth is up, and more job cuts are cheering investors

The cost cutting continues at Lenovo (LNVGY), China's top PC company. As part of its effort to integrate the money-losing PC division of IBM ( IBM) that it acquired two years ago, Lenovo President and Chief Executive Officer William J. Amelio said yesterday that the company is cutting 5% of its work force. This follows a round of layoffs last year.

The cuts are just the latest in a long list of changes that Lenovo has gone through since it took over the old IBM division in 2005. There's been a major overhaul of management, with the departure of old IBMers like then-President Stephen Ward in late 2005 and the arrival of a team of former Dell (DELL) executives like Amelio. The company has also launched a new line of PCs in the U.S. in an attempt to win over consumers and small-business customers and promote awareness of the Lenovo brand name.

So far, Lenovo has not enjoyed much success from its global push. The stock price dropped 25% last year, and in September, Lenovo's falling market capitalization cost the company its place on the elite Hang Seng Index. The stock price is down about 12% so far this year. The company has not seen significant improvement in U.S. market share and has also struggled in Japan.

Promising a Payoff

Although the IBM deal catapulted Lenovo into the top tier of PC makers globally, the company has been losing market share. On Friday, market research firm International Data Corp. announced its numbers for the first quarter, showing that Taiwanese rival Acer had climbed into a tie with Lenovo at 6.7%.

The Taiwanese have the wind at their backs: While Lenovo's sales climbed 17.4%, Acer's jumped 41.4% (see BusinessWeek.com, 1/07, "Acer Closes in on Lenovo").

Still, Amelio promises the payoff is coming. Lenovo's first-quarter sales growth wasn't as sizzling as Acer's, but it still topped the 10.9% growth of the overall market and certainly outshone the 6.9% slide that Dell suffered. Moreover, the newest cutbacks will cost the company between $50 million and $60 million (to be charged this quarter), but management believes Lenovo will see $100 million in savings for the year.

Are there more cuts to come? Maybe, but Amelio says the shrinking at Lenovo might be over.

"We believe the 'tipping point' is within reach," the executive said in a statement released by the company as it announced the layoffs. "If we can combine optimal cost competitiveness and efficient delivery capabilities with innovative, best-engineered products, we can generate more profitable growth, gain market share, and make further reinvestments into the business, fueling more growth."

Moving Up in the World

Investors were cheered by the news of the layoffs. Lenovo's stock price rose 2.1% in Hong Kong trading on Friday. Some other good news for Lenovo came on Friday with the announcement by IDC that the company had expanded its lead in Asia Pacific (excluding Japan) in the first quarter.

While the market as a whole grew 17.6% year-on-year in the first three months of 2007, Lenovo enjoyed 24.3% growth. Lenovo is tops in the region, with 17.8% of the market, compared to No. 2 Hewlett Packard's (HPQ) 15.4%. And this progress came at a time when sales in China slumped because of the weeklong Chinese New Year holiday; that's a sign Lenovo is becoming more of a player in other countries around the region.

Talks to Follow

Kathy Sin, an analyst in Hong Kong with IDC, attributes the strong Asia-Pacific growth to Lenovo's push to build awareness of its brand among consumers. "They are targeting the retail market," she says. "In the past, the IBM ThinkPad was targeted at the commercial market only; they had limited presence [among consumers]."

Lenovo has not said where the cuts will fall, but positions in Europe are likely to be on the chopping block. The company's statement yesterday said: "In Europe, Lenovo will immediately launch the process of consultation with workforce representatives, as appropriate, regarding the plan's intended efficiency gains and cost structure reductions."

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau .