Raising Its Profile

By Chris Preimesberger  |  Posted 2006-05-25

Lenovos Lack of Brand Heft Dings Q4, Analysts Say

Thirteen months after acquiring IBMs personal computer division for $1.25 billion, Chinas Lenovo Group revealed a fourth-quarter loss May 25 that doubled analysts forecasts.

Analysts said the shortfall reflects Lenovos struggles to build itself as a brand.

Lenovo, the worlds third-largest PC maker behind Dell and Hewlett-Packard, reported earnings of 32 cents per share on May 24.

The net loss it posted of $116 million for the quarter ended March 31 compared with a $21.4 million profit a year earlier.

The earnings fell well short of a forecast by Thomson Financial, based on a survey of 21 analysts.

The companys net profit for the year was reported as $22.33 million, down from $154 million a year earlier.

Chinas No. 1 maker of personal computers has been losing market share to Dell and HP for the past 12 months.

Although its Asian operations are profitable overall, the company posted an operating loss in Asia in the fiscal third quarter, which was a clear indication to several analysts of the unsettled business situation it inherited from IBM.

Big Blue was losing about $200 million per year in its PC division before unloading it last May 1.

Lenovo told Reuters it is spending about $100 million to overhaul its PC-making operations, but it also said it expects to record savings up of $100 million this year and $250 million annually over the next few years.

Several PC industry analysts agreed that despite owning the ThinkPad brand, Lenovos own lack of name recognition in the United States has hurt sales.

"To most of the world, its been Lenovo who?" said Leslie Fiering, a PC industry analyst with Gartner Group in San Jose, Calif.

"Lenovo spent a lot of money advertising [$16 million] during the [Turin] Winter Olympics, but the Olympics are over. They also spent a lot sponsoring a name soccer player ... and now they have cash-flow problems. Those arent the kind of [marketing] methods that will build a brand over time."

Fiering also said that the Lenovo channel sales strategy also has serious issues.

Click here to read more about Lenovo putting dual-core processors in its notebooks.

"They have had phenomenal success in China for years, but they have been unable to crack the international markets," Fiering said.

"When IBM was the sole distributor at the beginning [in mid-2005], the arrangement worked pretty well. Since then, however, the IBM sales force has been getting heavier incentives to sell IBMs own products and services, so that has left Lenovo on its own."

Next Page: Raising its profile.

Raising Its Profile

Roger Kay, president of Endpoint Technologies Associates in Wayland, Mass., said that Lenovo definitely needs to raise its profile if it is to compete with Dell, HP and myriad other PC makers and succeed.

"Lenovo needs to become more aggressive in its sales strategy, and they need more time to develop their markets," Kay said.

Kay said that Lenovo lost some credibility—deserved or undeserved—within the U.S. government sector May 23 when a group of Congress members publicly denigrated Lenovos laptop computers as possibly being "spy machines" simply because they were manufactured in China.

The State Department, responding to fears that its security might be compromised by secretly placed devices or hidden software, agreed under pressure from the legislators to keep 16,000 personal computers made by Lenovo off networks that handle its classified government messages and documents.

"That did not help Lenovo in the government sales channels," Kay said.

Kay said he wasnt overly surprised to see the negative quarterly report.

"More than anything, this shows that integrating a company isnt the easiest thing to do," Kay said.

"You talk about merging HP and Compaq a few years ago? Texas and California ... thats not nearly as big a cultural divide as integrating Raleigh [N.C.] and Shanghai."

IT industry analyst Charles King, of Pund-IT in Hayward, Calif., said that Lenovos main problem is that it is "attempting to digest a $1.25B Thinkpad Happy Meal. Lenovo does have brand-recognition issues to deal with in the U.S. market, but its position in Asia is solid. It will take time, but I believe the company should eventually do well in the U.S."

King said that Lenovo can overcome its current problems if it keeps doing what it knows best.

"They didnt stumble into market leadership in Asia. They cant let analyst skittishness deter them from their plan.

"They should keep driving into retail locations to improve product visibility. The real challenge is building a retail strategy to support them, but Lenovo needs to do that anyway to better establish its brand in the U.S."

Fiering said that to extricate itself from its current red ink, Lenovo needs to hold on to its existing business in China, developer a more aggressive sales program ("they need to learn to get out there and knock on doors"), and develop new products.

"Ive seen the factory over in Shanghai," Fiering said, "and its amazing what they can build there. But so far, their products have been underwhelming, to say the least.

"They are very good at pricing, but the features arent there to distinguish it as being markedly better than the competition."

King said he believes that the future still looks bright.

"In Thinkpad, Lenovo purchased one of the best quality laptop product lines in the market, but its up to Lenovo to get that story out to a larger market," he said.

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