Lenovo Took Its PC Playbook Into Mobile. Now It Wants a New Brand for the Shift

Lenovo is following the path that made it successful in PCs as it competes in mobile. It has done some things right, but to build a reputation for product innovation, it must stop being a follower.

Lenovo is trying to establish a significant place in the mobile market.

Lenovo Group announced yesterday that it will establish a new subsidiary run entirely on an internet-based model and focused on smartphone products and services. It has not yet announced the company’s name. The subsidiary will formally begin operations on April 1, 2015, with its own corporate name and a new sub-brand.

Chen Xudong, currently a Lenovo Group senior vice president and president of its China and Asia-Pacific emerging markets regions, will be the new company’s CEO. Liu Jun, Lenovo Group executive vice president and president of its Mobile Business Group, and He Zhiqiang, a senior vice president and president of its Cloud Services Group, will serve as co-chairmen.

Just a week earlier, Lenovo had unveiled two new YOGA products—a tablet and a laptop—at high-profile events in Beijing and London. Leaving aside ThinkPad, which Lenovo acquired from IBM, YOGA is its most recognizable product line yet. Since the first model appeared in 2012, the line has contributed 20% of Lenovo’s sales revenue.

Revenue from Lenovo’s mobile products, including tablets and smartphones, has grown from US$804 million to US$14.725 billion over the past four years. But Lenovo first entered the mobile market in 2003. Like HTC and HP, it began by following Microsoft into Windows Mobile smartphones. After sustained losses, Lenovo spun off its phone business in 2008 and sold it to Hony Capital for US$100 million. In the second half of 2009, with the market’s direction becoming clear, Lenovo bought it back for twice that price.

Lenovo brought its successful PC playbook to mobile: a multitude of product lines from low-end to high-end, large numbers of carrier-customized phones, an emphasis on sales channels that may have outweighed consumer needs, and low prices.

Over the past two years, though, Lenovo has become dissatisfied with the margins on its many product lines. It has begun to change its mobile strategy, putting more weight on branding and differentiation in search of higher prices.

The YOGA line of multimode PCs and tablets is meant to play that role. Its two latest products have given Lenovo reason to be proud—and more confidence in its ability to innovate. At the launch event, Lenovo Group CEO Yang Yuanqing told representatives of more than 40 media outlets: “Apple is a company worthy of respect, not only for its brand but, more importantly, for its ability to keep innovating. But no company can monopolize innovation. Sooner or later, you will see Lenovo as a company with the same spirit and capacity for innovation as Apple.”

Lenovo is not yet driven by product innovation. Still, it has done some things right in mobile.

What has Lenovo done in the mobile market?

As the timeline shows, Lenovo’s early progress was uneven, even though it entered mobile back in 2003. In 2008, after heavy losses competing with foreign brands including Nokia, Samsung and Motorola, it sold its phone business—which was losing 300 million yuan—to Hony Capital, part of Legend Holdings, for US$100 million. It bought the business back for US$200 million in November 2009.

From 2010 to 2012, Lenovo tried a range of mobile products. Its Android-based LePhone was its first true smartphone, but first-year sales missed the target of 1 million units. Lenovo then developed four phone lines, A, S, P and K, spanning the lower and upper ends of the market. Few became widely known. At the time, it was Lenovo’s vast sales network, rather than consumers themselves, that drove what the company designed and made.

In the past two years, Lenovo has gradually found its footing as it pursues stronger brands and more distinctive products. Consider YOGA: a tablet with a stand that sets it apart from most others on the market, and multimode laptops that blur the boundary between tablet and PC.

Both lines have sold well, helped by Lenovo’s strong existing PC channels and their distinctive designs. YOGA tablet sales reached 10 million units within a year of launch. In Lenovo’s 2013 annual report, revenue from its Mobile, Internet and Digital Home division, or MIDH, had risen to 15% of group revenue.

What has Lenovo gotten right in mobile?

Buying back its phone business

Few companies sell off part of their business and then quickly change their minds. Lenovo did. The decision paid off: it put the company in position for the rapid growth in smartphones that began in 2009 and continued through the time of writing.

After buying back the business, Lenovo launched its first heavily customized Android phone in April 2010. Its name, LePhone, was an unmistakable nod to Apple, but sales were poor: just 850,000 units in the first year. Lenovo then took its PC approach, rolling out multiple lines for different channels and price points. By the end of 2013, quarterly Lenovo smartphone sales had risen by 200% from the fourth quarter of 2011, reaching 13.55 million units. MIDH, which includes smartphones, began making a profit in 2012. As the chart below shows, its share of total revenue rose from 3.8% in 2010 to 15%.

Expanding overseas

Lenovo’s established overseas PC business gave its mobile products a solid foothold abroad. In November 2013, Lenovo smartphones entered at least 20 new markets across the Middle East, Africa and Latin America at once—a measure of how aggressively the company was expanding.

Building its own brands

This may be Lenovo’s biggest change in recent years, best illustrated by YOGA and VIBE. Launched in 2012, YOGA began with an ultrabook whose screen could rotate through 360 degrees. It worked as a laptop or, folded back on itself, as a touchscreen tablet. It was Lenovo’s first attempt at a multimode PC and genuinely blurred the line between computer and tablet. For several consecutive months, the convertible ultrabook was the top-selling premium laptop in North America.

In October 2013, Lenovo launched the YOGA tablet, a three-mode tablet with a built-in stand. Yang Yuanqing said Lenovo needed a breakthrough in tablets and that YOGA was the best product to deliver it.

The VIBE smartphone line, launched in September 2013, was another Lenovo brand. Aimed mainly at the mid-to-high-end market, it sold 150,000 units in its first two weeks.

Acquiring Motorola to strengthen technology and R&D

Technology has long been a weak spot for Lenovo. Much as its purchase of IBM’s ThinkPad laptop business did a decade ago, the Motorola acquisition could raise Lenovo’s profile abroad. It would also give Lenovo Motorola’s design team, some patents and overseas sales channels. Motorola’s relationships with carriers in North America and Latin America, as well as Europe and India, are seen as vital to Lenovo’s international expansion. The deal could also improve its chances of competing in premium smartphones.

According to figures Yang Yuanqing gave at Lenovo’s first-quarter earnings presentation, Motorola’s performance was improving. Quarterly revenue reached US$1.7 billion and phone sales reached 8 million units, while its loss narrowed from between US$100 million and US$200 million to a little over US$60 million. Yang’s goal is to make Motorola profitable within four to six quarters of completing the deal.

Why isn’t Lenovo Apple?

In both Yang Yuanqing’s remarks and the “Pierce the Air” slogan at Lenovo’s launch event, the comparison with Apple was plain. Lenovo does not shy away from it. The recently unveiled YOGA 3 Pro multimode laptop was pitched against the MacBook Air on thinness and weight. Even the leaked Lenovo Sisley phone looked strikingly like the iPhone 6.

Zhao Hong, the Lenovo vice president responsible for tablets, told QDaily that the “Air” in “Pierce the Air” could also be read as a reference to the MacBook Air. But Lenovo is still driven by its sales channels and innovation in its own manufacturing, even as it changes its approach to branding. Apple, by contrast, is driven by product innovation.

We compared the companies’ figures to show why Lenovo is not Apple.

Product replacement cycles

Apple has the iPhone and the iPad, each generally updated once a year. Lenovo tries to cover the market with multiple product lines. In recent years, it has offered dozens of phone models alone, not counting the vast number customized for carriers. Lenovo updates its products annually too, but beside Apple’s focus on two products, its advantage shows up chiefly in shipment volume. Few Lenovo models are truly recognizable. That is directly tied to its decision to put market-share growth first.

The share of revenue from overseas markets

Putting the regional revenue shares of Lenovo and Apple side by side makes for an interesting comparison. As the chart below shows, each draws about 40% of revenue from its home market. China’s contribution to Lenovo’s revenue is shrinking, though, while the US share of Apple’s has remained fairly steady. Both draw roughly 22% from Europe, but Lenovo’s figure also includes the Middle East and Africa. Apple is growing faster than Lenovo in Asia-Pacific.

Another important difference is that low prices give Lenovo an edge in emerging markets, while Apple has considerable brand appeal in mature ones.

A wide gap in profit margins

According to their financial reports, Lenovo’s product profit margin in fiscal 2014, which ended March 31, 2014, was just 2.1%. Apple’s profit margin in its fiscal 2013, which ended September 28, 2013, was 21.7%. Lenovo said in 2012 that it planned to raise its pretax margin by one percentage point, to between 3% and 4%, within three years. So far, the plan does not appear to have borne fruit. Take PC sales in 2013: shipments of 17 million Macs brought in nearly US$35 billion, while Lenovo shipped 52.4 million PCs for about US$29.8 billion in revenue.

The same pattern holds in mobile. Lenovo ships a great many phones, but they have little brand recognition. To carriers, Lenovo is a replaceable supplier, which keeps margins low. This is not Lenovo’s problem alone: ZTE and Coolpad face it too.

So what kind of company is Lenovo, really?

Lenovo still depends on PCs, despite its growing push into mobile

Lenovo’s financial reports show that from 2010 to 2014, laptops and desktops accounted for a declining share of revenue while mobile products gained ground. Even so, PCs still bring in about 79% of revenue. MIDH, which includes mobile, internet and digital-home products, accounts for 15%.

Lenovo’s product innovation remains rooted in the PC. Compared with Samsung’s and Apple’s tablets, Lenovo’s designs do more to blur the boundary between tablet and laptop, emphasizing PC-like functions:

multiple ways to use the device, charging a phone, use on a desk, an integrated keyboard, and so on.

Lenovo still provides solutions for business users, despite announcing a shift toward individual consumers

Much of Lenovo’s revenue still comes through channel partners rather than directly from consumers. According to Lenovo vice president Zhao Hong, YOGA sales revenue already accounts for 20% of the company’s total. Lenovo’s 2013 annual report also says the YOGA tablet sold 10 million units in its first year. Lenovo employees say a large share of the tablets sold in China went to government agencies, including the National Bureau of Statistics.

Lenovo’s strength lies in its channels. In Europe, the YOGA tablet reportedly still sells mainly through channels established in the PC era. According to figures Lenovo CMO Wei Jianglei previously gave the media, carriers still account for 60% of Lenovo’s sales channels, with open-market channels making up just 40%. Xiaomi’s split is 30% to 70%.

Lenovo clearly sees the issue. The subsidiary announced yesterday will focus on selling and marketing through online channels. It will also develop products specifically for those channels, aiming to interact more closely with ordinary consumers. That is why Lenovo wants to rely less on carriers.

Lenovo’s mobile future lies overseas, even though it is a Chinese company

China’s share of Lenovo’s revenue has fallen from 46% in 2011 to 38%; overseas markets now provide 62% of sales. Yang Yuanqing said at the first-quarter earnings presentation that Lenovo’s greater smartphone opportunity lay abroad and that the company would pay close attention to emerging markets. According to his figures, sales that quarter grew by nearly 300% in Southeast Asia, more than 500% in Eastern Europe and over 50% in Latin America. Profitability was better abroad too: operating margins were 3% in Southeast Asia and 4% in Eastern Europe, compared with roughly break-even results in China.

Neither YOGA product sells best in China. The tablet sells best in Europe; the laptop, in the United States.

Following the Motorola acquisition, Yang said Lenovo would use its scale to buy components more cheaply and operate at lower cost as it entered more overseas markets.

For now, Lenovo remains a PC company and a provider of solutions for business users. That sets it apart from a mobile market moving toward personal use and entertainment. Its way of winning a share of that market may yet work—if it can win one. The figures suggest early progress. But if Lenovo wants consumers to see it as a company with Apple’s capacity and appetite for innovation, it will have to move beyond following others in technology and product design.