Computer maker takes on iconic brand in a battle for style and technology
SHANGHAI - Two years ago, Liu Chuanzhi returned to Lenovo, China's largest personal computer manufacturer by market share, as board chairman to sort out a legacy of losses and confused management.
Having revamped the company he now feels confident enough to throw down the gauntlet to Apple Inc.
By vowing to give Steve Jobs' company a run for his money earlier this year, Liu shocked the IT world.
But analysts of the industry are heavily divided on this heroic attempt.
Liu came to the rescue of Lenovo at its worst time - after the outbreak of the US financial crisis had thrown the global personal computer market into turmoil. That year, 2009, Lenovo posted a loss of $97 million. With sales plummeting 78 percent because of sluggish corporate demand, a major overseas business focus, Lenovo's global share slipped to 7 percent, which further distanced itself from HP, Dell and Acer, the top three global PC vendors.
Taking the helm again, Liu steered Lenovo away from its reliance on overseas markets that remained crippled by the economic downturn. Instead, he refocused Lenovo's core business on China and other emerging economies, which were the only bright spots in the global economic gloom. He also refocused the company on the growing consumer market, an arena previously strategically eclipsed by the business customer market.
Thanks to the strategic shift, Lenovo has just witnessed its best year. According to the company's fiscal year 2010 report, Lenovo's global market share reached a record 10.2 percent, closing the ground on third place Acer's 11 percent. The company's year-on-year growth in sales exceeded that of all the four major vendors.
The upward momentum has continued. Lenovo's fourth quarter report for the year ending March 31, 2011, showed a net profit of $42.13 million, up from $12.8 million a year earlier. China remained the star performer, accounting for 46.4 percent of the company's sales. Moreover, sales in emerging markets such as Russia, India, East Europe and Latin America also increased sharply.
Determined to fend off competitors in the domestic market, Lenovo has been beefing up its expansion in small cities and rural areas. It has strengthened its distribution network in the countryside. The company has made it a commitment to ensuring that a potential buyer can find an outlet selling Lenovo computers within 50 kilometers of where he or she lives.
After putting its own house in order, Liu is casting his gaze on bigger things. In the PC business, nothing can seem more ambitious than taking on the undisputed leader in verve and style: Apple Inc, which has the biggest market capitalization among all competitors. To that end, Liu is leading his company into the realm of design excellence and popular appeal.
For years, the company's line of high-profit margin PC laptops was based mainly on the trusted design it inherited from the purchase of IBM's PC business in 2005. In recent months, Lenovo has broken the mold with some creations that are widely considered to be worthy of consideration by devoted Apple fans.
It is considered wise of Lenovo to stay with its ThinkPad and seek to accrue a greater share in the high-end domestic PC market, because "the market is narrowed down from a handful of players (including Sony, Samsung, Toshiba, HP and Dell) to the only pair left: Lenovo and Apple", said Wang Jiping, research manager at IT research company International Data Corporation China.
Wang said Lenovo has made a series of cutting-edge breakthroughs with the ThinkPad, including the introduction of a wide screen and a wider range of colors.
Among the company's landmark products is the ultra-thin laptop U-260 ThinkPad, which has won acclaim from international PC journals for its multifaceted factors, including a satin finish and svelte frame, a first for Lenovo. It is not a Macbook Air killer yet, but it's close, critics said.
"It skillfully merged all features of its major competitors. It is designed for more rational users who crave fashion. To that extent, it is no exaggeration to say it makes a worthy rival to Macbook Air," Wang said.
Weighing 1.3 kilograms, the U260 is less than an inch in thickness and is carved out of a one-piece magnesium-aluminum alloy frame, very much like the Macbook Air, Wang said.
With a splendid keyboard that resembles that of Sony's Vaio series, he added, the U260 has become the world's first 12.5-inch "envelope-friendly" consumer laptop giving users a 16:9 wide screen dimension.
Other sophisticated features include a glass multi-gesture track pad and a leather-textured palm-rest. It is available in mocha brown and Clementine orange colors with a matte finish. "You would never have imagined ThinkPad being this colorful, and it is Lenovo that brought about this change," Wang added.
But a senior PC industry researcher who would only give his surname Jiang, and who works for a leading securities firm in China, was less complimentary.
Jiang argued that the U260 is placed at a disadvantage, because, for example, it operates using the old-fashioned hard disk drive, rather than the flash storage that gives the MacBook Air instant appeal.
Jiang insisted this was because Lenovo still relies on the Yamato Lab in Japan, ThinkPad's major research center, which was in existence before Lenovo inked the acquisition deal.
"These so-called indigenous innovations are, in essence, tweaked foreign technologies. But as far as critical indicators go, Lenovo always fails to stand out," Jiang said.
Huang Shaoqi, an engineer at China Telecom Shanghai branch, touted Lenovo's marketing strategy. Unlike Apple betting solely on one product in the hottest contested marketplace, Lenovo is configured to provide a diversified portfolio to meet the varying demands posed by students, game players, white-collar workers and government officials.
For instance, Huang pointed out, Lenovo launched the Zhaoyang series, which is tailor-made for corporate clients but at a price that is on average only 70 percent of the ThinkPad.
A Lenovo user himself, Huang believes the high cost-efficiency of the Zhaoyang series has helped it win a competitive edge. "Many public procurement projects would favor such products," he said.
Lenovo's latest effort to take on Apple was the launch of the PC tablet LePad in March in China.
"LePad, closer to the heart of Chinese consumers" was the advertising slogan. Yang Yuanqing, chief executive officer of Lenovo, said he was confident LePad would have grasped 20 percent of the domestic tablet market by 2012 because Lenovo knew the China market better.
Likewise, after years of producing various mediocre phones, Lenovo last year launched its first smartphone in China, LePhone with the aim of seizing back market share eroded by competitors, notably Apple's iPhone.
Running on the Android system, Lenovo adopted elements it considered would be popular in the Chinese market, such as a camera, a USB interface and applications that support multimedia.
According to Rory Read, chief operations officer with Lenovo, the company has designed a range of software for the LePad in cooperation with Chinese portals and social networking sites such as qq.com, sina.com and renren.com, to better cater to the needs of domestic users.
Wang made an upbeat assessment of LePad, given its proximity to the Chinese market.
"Based on our own internal survey, Apple's iPads only took up some 50 percent of tablet market share in the fourth quarter of 2010 in China, owing to its limited sales channels. This has left a vast space for other brands to grow in. Lenovo, as the biggest domestic vendor, has an edge straightaway."
LePad can make forays into different industries, such as the catering business where tablets are replacing traditional paper menus, Wang said.
Just before LePad's entry into the tablet fray, its main rival Apple introduced iPad2. At 3,688 yuan ($570) in China, it was a price hard to match.
"Chinese PC makers are used to counting on a low-price strategy to compete with foreign brands, but Apple has turned the tables around this time, putting Lenovo in an awkward position," Huang said.
Apple has always been savvy in creating brand loyalty, targeting middle-class and fashion-minded consumers rather than the mass market, which gives the company the leeway to charge more.
The branding strategy of LePad, however, was flawed from the very beginning, said product positioning and marketing guru Al Ries, who is the co-founder of Ries & Ries consulting firm in the US.
In an interview with Economic Observer, Ries said by naming the products LePhone and LePad, Lenovo had locked them into well-known brand names, and that could create a wrong impression on consumers, who may regard them as bootleg and inferior versions of Apple's products.
While the global version of LePad was expected to hit the overseas market this month, Lenovo may find it hard to prove itself as desirable to Chinese consumers as their international peers, Jiang said, "because they have nothing unique to offer".
On June 2, Lenovo announced it was buying a major stake of Medion, a German consumer electronics maker, for up to 456 million ($645 million), the biggest acquisition since it bought IBM's PC business in 2005. This deal would boost Lenovo's PC market share in Germany to 14 percent and in western Europe to 7.5 percent, taking Apple's fourth place in the market share of the region.
The acquisition was in line with Lenovo's global expansion ambition in developed overseas markets. Just five months ago, Lenovo announced it was forming a joint venture with NEC, with Lenovo taking a 51 percent ownership in the new venture, a move that enabled it to establish a firm foothold in the Japanese market.
The deal was an apparent challenge to Acer, which currently accounts for the lion's share of the European PC market. But other than a trophy to stroke the corporate ego, Jiang did not foresee much benefits.
"Lenovo is likely to witness a rise in revenue and market share in the short term, but it does not necessarily lead to a high profit margin and may even face deficits. While the previous bid for ThinkPad was about access to the US market, ample evidence shows the Asia-Pacific region remains the ultimate driving force," Jiang said.
The flurry of overseas acquisitions and joint ventures has brought back memories of the company's earlier problems of integration after its purchase of IBM's PC business.
After Lenovo took over IBM, Yang Yuanqing was appointed chairman of the board and William Amelio, who previously worked for Dell, was invited to be Lenovo's CEO. The move aimed to combine Yang's expertise in the domestic market with Amelio's overseas experience.
However, a corporate cultural conflict brought about by a foreign management style and local staff distracted Lenovo from making bold innovations and strategic shifts in the fast changing global economy.
The management reshuffle that followed Lenovo's worst performance in 2009 not only welcomed Liu back to the top job, but also led to the replacement of Amelio with Yang. The dream team of Liu and Yang brought an end to Lenovo's falling sales and boosted corporate morale that had suffered under the previous regime.
Lenovo also restored company confidence by developing a consistent corporate strategy.
"The company is now configured to be internationalized, from its employees, to its management style," Wang said.
Lenovo has overcome the traditional dichotomy of domestic and overseas markets, and is eyeing a new form of divide: developed markets and emerging markets.
"As for advanced economies, Lenovo has and will continue to proceed with mergers and acquisitions, especially in areas where market share remains limited. For emerging economies, all that matters is to tap into the market and make a strong presence," Wang said.
Experts agree a lack of technological breakthroughs is Lenovo's Achilles' heel.
For Lenovo, software development has lagged behind rivals. Wang predicts a merger or acquisition to address this is on its way.
Apple has dwarfed Lenovo with its intangible, yet crucial, customer experience, both before and after the purchase. Jiang said Apple's applications are markedly more user-friendly than most of its competitors, including that of Lenovo.
"LeOS, Lenovo's operating system, lacks genuine innovation, and has yet to achieve software compatibility. Compared with iOS, its business-oriented applications are still in their infancy," said Jiang.
In addition, "many consumers simply don't really care whether they are iPhones or LePhones, iPads or LePads. What they care about are Internet surfing, music, e-mail and the associated services that go with them. Therefore, what matters is the experience they go through in buying these products and the service they receive after the purchase."
Along with an attractive style, an appealing global branding image is also a must for Lenovo, which, unlike Apple, is not yet a household name.
The New York Times reported that Lenovo partnered with Saatchi & Saatchi, part of the French multinational advertising and communications Publicis Groupe, in January, to spend $100 million on a new advertising campaign that began in May.
Wang said Lenovo has veered away from a product-driven strategy to pursue an ideal-oriented notion in order to make Lenovo a household name.
But according to Jiang, Lenovo appears hesitant on the trade-off between business expansion and technology breakthrough, and this has been a consistent strategic divergence that has long crippled its development.
"Lenovo started from trade and assembling, and excelled at them. It is no easy task to throw off this sheer inertia," Jiang said.
The critic added: "Despite churning out a full range of products within a limited time frame, Lenovo has been emulating Apple's approach all the time."
Lenovo could also be in trouble on its home turf. Analyst Brian White of Ticonderoga believes China is in the early stages of catching "Apple fever".
"What we need is Apple's global brand loyalty and the strong team of applications suppliers behind it," Liu Jun, the company's mobile Internet and digital group president, once said.
But Rome was not built in a day. "To win the hearts of Apple evangelists, who do not bother to haggle over prices and who worship Steve Jobs, is not within Lenovo's reach right now," Jiang said.