Hard-Charging Lenovo Challenging in Smartphones

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It has been an impressive run for Lenovo and its Android-based LePhone. Lenovo's market share shot up from 1.7% in the third quarter of 2011 to 14.8% in the third quarter of 2012, making it the second largest smartphone brand ahead of Apple (NASDAQ: AAPL) (6.9%) and behind only Samsung (16.7%).

Already the top PC seller in the world, having taken the units shipped title from inept Hewlett-Packard, Lenovo is poised to become the biggest seller of smartphones in China by 2013. Less than two years after entering the smartphone market to benefit from growing demand, Lenovo has leveraged its strong presence in the PC market and its vast retail distribution network, household brand recognition, and strong image to grab acres of market share in the biggest market in the world.

"We know that Lenovo is one of the strongest local companies in China," said Gartner analyst Sandy Shen. "But we just didn't expect the change to come so fast... We thought it would take them several years to grow their business in mobile devices."  What Gartner’s analysis failed to take into consideration was the strong Chinese national pride in buying locally grown items, especially ones built and marketed to the average Chinese consumer, many of whom simply cannot afford an iPhone.  And, for those that can, companies like Xiaomi are eating at Apple’s premium portion of the market by selling cutting edge devices at two-thirds of the cost. 

And this is exactly where Lenovo figured their opportunity was. The LePhones are priced for the mid to lower end of the market. The devices from Lenovo can be purchased for 400 yuan (US $63) when bought without a contract. On the other side Apple’s iPhone 4s starts at 4,488 yuan ($720) in China.  Now, Apple likes it this way, selling fewer units at higher margins.  It is players like Nokia (NYSE: NOK) who are finding it difficult to regain lost market share, though their Lumia 610 did respectable business and Nokia is looking to compete directly with Xiaomi, Samsung and even Apple at the top of the market with the Lumia 920T and aggressively pricing it on China Mobile.

Lenovo, unlike the rest of the computing industry, has not only been unfazed by the weak global economy but has actually thrived and has plans for further expansion by replicating its China success in India. In India, Lenovo faces a huge task to uproot Samsung, which leads the smartphone market with a near 40% share. India’s smartphone subscribers are growing exponentially and are estimated  to almost quadruple by the end of this year to 20 million (from 5.5 million units in the first six months of 2012).  Just last month, Lenovo launched five models at a price ranging from Rs 6,499 ($130) up to Rs 28,499 ($600). Along with India, it sells smartphones in Indonesia, Vietnam, the Philippines and Russia and plans to enter other emerging markets.

Despite its huge success in the smartphone business, the PC maker faces an uphill task of squeezing profit in an industry where even Apple is now having to sacrifice margin to sell units, having dropped the price of the iPhone 5 by 30% less than two months after its release.  Per the company’s statements, its smartphones business is unprofitable as of now, but it expects to become profitable in China in two to three quarters. Currently, Lenovo’s PC earnings are supporting the company to focus its smartphone business on growth over profit for now.  It is something they have to do, as mobile devices are the future of computing and the industry becomes even more commoditized.  Lenovo’s growth now needs to be reinvested in continuing to build its brand image.  At this point the company looks up to the challenge


PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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