What next for Lenovo? Look for focus on efficiency

Editor’s note: Ezra Gottheil is an analyst with Technology Business Research in Hampton, N.H. He follows Lenovo. This article was written before Lenovo’s negotiations to buy Brazil-based PC maker Positivo broke off. Last month, TBR concluded Lenovo was more vulnerable than some of its competitors due to the global economic slowdown.

The global economic slowdown has negatively affected Lenovo for the past two quarters, driving down margins and revenue growth. TBR believes Lenovo will be challenged to maintain profitability for the next three quarters and will probably suffer decreases in revenue. As a result of these challenges, Lenovo will increase its focus on operational efficiency.
##CONTINUE##
For this reason, and because of its strengths in the large enterprise (LE) market and emerging economies, TBR believes Lenovo will recover from the downturn more quickly than its competitors. Lenovo felt the recession's effects earlier than its competitors due to its greater exposure to the LE market. The company reported increases in the number of large enterprise accounts, but saw a pronounced slowdown in purchasing starting in 2Q08, but its rapidly growing SMB and consumer segments offset the downturn.

In 3Q08, however, Lenovo's corporate revenue grew only 0.4 percent year to-year and operating profit decreased 75 percent from 3Q07, to $30 million. Currency effects, price pressures and the company's scale disadvantage all drove its gross margin down to 12.6 percent, the lowest level in at least five years.

TBR believes Lenovo will drive down operating expenses during the next four quarters, and will be ready to run more efficiently when large enterprises resume purchasing and when emerging markets are revived more quickly than mature markets.

The company has had mixed success in reducing operating expenses in the past year, largely because it was growing rapidly prior to the last two quarters and because of marketing expenses related to the 2008 Beijing Olympics - a keystone of its global marketing campaign. The slow market will allow the company to focus on cost reduction.

The hiatus in rapid growth also gives Lenovo the opportunity to solve some of its operational problems. The company has yet to finish its supply chain restructuring and complete its IT infrastructure.

For the second consecutive quarter, Lenovo reported "operational issues" affecting growth in its Asia Pacific geographic segment. The company's inventories are up 89 percent year-to-year. Lenovo has been showing some of the strain of its ambitious program to become a global PC vendor.

TBR believes the company will use the economic slowdown as a time in which it can consolidate the considerable gains it has made. With its largest investor, the Chinese government, likely to be patient, Lenovo can emerge from the recession a stronger company.

-----------------------------
BY Ezra Gottheil
Source：Technology Business Review