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Lenovo boosts market share but at what cost?

BusinessBlog
by Rawiya Kameir
, 12 Nov 2012Blog
Lenovo boosts market share but at what cost?

For years, Lenovo was an underdog. The Beijing-founded, North Carolina and Hong Kong-headquartered PC manufacturer was a relative upstart compared to American legacy technology companies like HP, IBM, and even Apple, who’d had decades to secure their places in the US and global markets.

Until its takeover of IBM’s ThinkPad brand in 2005, Lenovo suffered a fate similar to many other Chinese companies - barely acknowledged, perceived as cheap and of poor quality. But over the past few years, the firm began carving out a bigger slice of the market and, accordingly, building its name as a reputable PC manufacturer. Propelled by its competitive pricing, the range of products it had on offer, and a gradual shift of attitude towards Chinese manufacturers, Lenovo shot up the PC shipment rankings.

After recording a greater market share than HP in this year’s third quarter, Lenovo finally became the world’s number one PC manufacturer. Well, sort of.

The feat was reported by research firm Gartner, which posited that Lenovo sold 13.8 million PCs, as compared to HP’s 13.6 million, giving it a 0.2 per cent lead. (Rather predictably, HP contested the report, citing research done by IDC that kept it at number one.)

But quibbling over numbers aside, just how significant is the market share title? Do higher shipments really make Lenovo the king of PCs? After all, though Lenovo may have shipped more computers than its rivals, the title does not reflect profit margins, territorial growth, or even the successful implementation of Lenovo’s own strategy.

In fact, despite its market share ascension, Lenovo’s profit margins lag significantly behind those of competitors; arguably, its rise comes at the expense of that. Based on figures released from the company’s second fiscal quarter this week, Lenovo runs a net profit margin of 1.86 per cent. Dell, on the other hand, brings in a much more impressive 5.05 per cent and HP, though it has faced massive losses in recent quarters, averaged a net profit margin of 5.5 per cent last year. For an even greater comparison, Apple sits in the 25 - 30 per cent range, and that’s why it is the world’s most valuable company.

For a for-profit corporation, there are presumably few things more important than the bottom line, which is irrefutably, inextricably linked to profit margin. The higher your profit, the more efficient, and therefore successful, you are.

But by forgoing profit margin and focusing instead on shipments, Lenovo may be prioritising short-term glory over longevity. And that could prove dangerous. Cases-in-point: Nokia and RIM.

Granted, hardware manufacturers tend to have lower profit margins than software companies. The exorbitant costs often associated with manufacturing complex machines like smartphones and computers coupled with the relatively competitive nature of selling hardware mean that, unless a company can, like Apple, sell products at a premium, profit per unit is considerably slim; sales do not directly translate into take-home earnings.

But the greater its profit margin, the more cash Lenovo will have on hand to invest in the development of its business down the road. In light of a PC market that is shrinking at a rate of eight per cent per year, looking forward is just as important as the present. Nokia, once the world’s number one mobile phone manufacturer, similarly eked out a meagre success on the back of the millions of units it sold. But as new mobile technologies emerged, the company struggled to transition and keep up.

Lenovo’s competitors, meanwhile, are charging into the enterprise sector, where workstations and servers, though sold in far fewer quantities, come with higher profit margins - the Holy Grail for technology companies. While HP and Dell have formally included a shift in focus from consumer to enterprise in their business strategy going forward, Lenovo has been slower to move in that direction. According to the last available figures (from the year’s second quarter), it held just one per cent of the European server market.

To its credit, the company has expanded in a number of regions widely viewed as emerging markets - China, Africa, and South America among them. The takeover of major computer businesses, including electronics manufacturer CCE in Brazil and retailer Medion in Germany, added not only to Lenovo’s global market share, but also grew its territorial reach.

Of course, selling more computers for lower prices and, consequently, at a lesser margin, has clear benefits. From a brand standpoint, market share isn’t a completely negligible indicator; for one, it means consumers are responding positively to your products. It can also be an effective measure of investments in such areas as marketing and advertising. Just ask Samsung.

And as Lenovo prepares to enter the booming mobile market, that big-name brand recognition could be a boon for the company. Earlier this year, it swatted down rumours that it planned to acquire a flagging phone manufacturer like Nokia or RIM, but acknowledged that mobile would play a larger role in its future. As it attempts to transition into new territory already dominated by behemoths such as Samsung and Apple, the tens of millions of PCs it has sold could trickle down to its eventual handset offerings.

Regardless, Lenovo will have to work very hard and very strategically turn its market share crown into a lasting legacy.

Image Credits: Gartner; Lenovo

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