1 November, 2007
By Patricia Pickett

Maintaining product quality will be key as Lenovo Group carries out its plans to switch out the IBM branding of its Think products in favour of the Lenovo brand two years earlier than expected.
The vendor announced the move when it reported the results for its second fiscal quarter, which showed a 20-per-cent revenue jump year-over-year to $4.4 billion (US); PC shipment growth of 23 per cent over last year; and gross profit margin of 15.1 per cent, compared to 13 per cent in the prior-year period.

"Our strong performance in the second quarter once again proved that Lenovo has successfully completed the integration phase of our acquisition" of IBM's PC unit, which it bought out in 2005 for $1.25 billion, "and we are now entering a new phase of profitable growth," said Lenovo chairman Yang Yuanqing in a statement. "In this new phase, we will continue to strengthen the competitiveness of our products and improve operational efficiency, so as to further enhance profitability."

William Amelio, Lenovo's president and chief executive officer, also noted in the statement that Lenovo has reached some of its big goals such as gaining market share in both desktop and notebook PCs, boosting market acceptance of its products, and posting double-digit revenue increases in all of its geographies. "By making substantial progress on all of our critical priorities over the past few quarters, we're now a stronger, healthier company," Amelio said. "One important sign of this progress is our decision to completely transition our Think products from the IBM brand to the Lenovo brand two years earlier than planned," despite a previous agreement that allowed Lenovo to use IBM's logo on ThinkPads and certain desktops for several years.

When Lenovo acquired IBM's PC business, "everyone's concern was what sort of brand equity Lenovo would have," said Warren Shiau, senior associate and lead analyst for IT research at The Strategic Counsel in Toronto. "IBM laptops and desktop computers have always had a brand perception of quality products, so the big concern was once they were taken over, would Lenovo be able to maintain that?" This quarter's numbers suggest that so far, Lenovo has been successful in this endeavor, Shiau said.

The only important thing for Lenovo to do now is maintain product quality, said Shiau. "If Lenovo had fallen back on product quality, it would have surfaced in the general IT guy's perception of the brand not being as good, but the fact that IT staff often still refer to IBM (when they mean Lenovo) means that on that front, Lenovo has succeeded. It shouldn't be that much of an issue to switch (the branding) over."

Despite good performance for the quarter, analysts point out that Lenovo does face some challenges. In a research note, Ezra Gottheil, analyst with Technology Business Research Inc. (TBR) in Hampton, N.H., pointed out that Lenovo is not a significant vendor in the consumer market outside of China.

Shiau added that Lenovo's financials are still "relatively dependent upon the enterprise market -- and that could be an issue." The vendor mentioned that it would work on tapping growth in the small and medium business (SMB) and consumer segments in mature countries -- areas that are expecting a huge amount of growth, and within which Hewlett-Packard Co. (HP) has made a lot of headway in the past few years. Dell Inc. also has significant recognition in that space, he said. "(SMB and consumer) are such a growing portion of the market, so that's the place where you've got to be evaluating on future performance."

Lenovo's presence in SMB varies depending on what segment of the market you look at, Shiau continued. "If you're dealing with the higher end of SMB, moving toward the mid-market, for sure they've got a good reputation and perception....But if you go to small office/home office (SOHO) or a person working from home, where there is no link to IT staff, you start to deal with consumer-type buying." This is where Lenovo will face an advertising battle with HP, which is running successful ad campaigns featuring pop culture icons such as Gwen Stefani.

However, Gottheil predicted that since Lenovo has been very successful in the Chinese consumer market, the vendor would also succeed on a global basis, particularly in the more rapidly growing emerging markets.

Reprinted by permission of Integrated mar.com (integratedmar.com), EchannelLine © Copyright 2006 Integratedmar.com Corporation.