Lenovo needs to get a grip in mobile. The tech giant is a trailblazer for Chinese firms going global - but the ill-judged takeover of Motorola’s old handset business is testing that reputation.
The $7 billion hardware group on May 26 reported its first full-year loss in six years. Dismal smartphone sales are largely to blame: handset shipments in China plunged 85 percent as local competitors from Huawei to OPPO expanded in the world’s largest smartphone market. Lenovo Chairman and Chief Executive Yang Yuanqing made a rare admission that integrating Motorola Mobility – bought from Google in 2014 – “did not meet expectations”.
Since buying IBM’s personal computer division a decade ago, Lenovo has built a global brand – a feat Chinese peers, from Haier to Alibaba, want to repeat. Lenovo’s international credentials are further boosted by Western-style corporate governance, with a board that includes former McKinsey executive Gordon Orr and Yahoo co-founder Jerry Yang.
Yet the Motorola acquisition has been a disaster from the start. Lenovo splashed out $2.9 billion for a mobile phone maker that was already loss-making. Since then, smartphone demand has slowed drastically and losses at the division have widened.
To be fair, Lenovo has form in fixing up businesses, and has made some changes. Earlier this year, Motorola’s president left and the role of heading Lenovo’s mobile group was split in two, with one boss just handling China. The group is also sharpening focus. But that will probably not be enough: HSBC analysts reckon Lenovo smartphone sales will grow just 4.3 percent this year and the unit will keep making losses.
A U.S. or European group in a similar position might face calls from directors and shareholders to sell off or shut down such a poorly-performing unit, especially since second acts rarely succeed in handset manufacturing. Indeed, Microsoft has now largely exited the mobile business it foolishly bought from Nokia. Management might come under pressure too. But the presence of Chinese state-backed Legend Holdings, Lenovo’s biggest shareholder, makes both seem less likely here.
Shares in Lenovo have fallen 39 percent this year. Absent a quick turnaround in mobile – or more radical action – Lenovo’s credibility will take a further dent.