By Eva Dou
BEIJING--After the buying spree, now comes the hard work for
Lenovo Group Ltd.
Lenovo Chairman and Chief Executive Yang Yuanqing warned of
challenges ahead, after the Chinese computer maker posted a 37%
profit slump, missing analyst expectations, in its first full
quarter after acquiring unprofitable smartphone maker Motorola
Mobility and International Business Machines Corp.'s low-end server
business.
Mr. Yang faces slowing demand, fierce competition and U.S.
security concerns as he integrates the two U.S. businesses. But if
he succeeds, he will create the first Chinese brand with such broad
and deep roots in the U.S.
"We will see some bottlenecks to further growth in the Motorola
business, " said Mr. Yang in a telephone interview on Thursday,
adding the company still planned to make Motorola profitable within
six quarters by cutting costs and selling more phones in emerging
markets.
Lenovo faces a slowing China smartphone market, lower operator
subsidies and fierce competition from upstart rivals, such as
Xiaomi Corp., who are willing to sell phones near cost on the bet
they can make more money off services.
"The market has become more saturated," said Mr. Yang, referring
to China's smartphone market. "And the competition is unreasonable
sometimes." He added that some players "don't want to make
money."
IBM's System X server line has lost sales during the
integration, Mr. Yang told investors at a Hong Kong conference, but
Lenovo says it expects growth in sales in China to offset losses in
the U.S.
T he U.S. Navy is looking at dropping IBM servers from some
weapons systems after the Lenovo acquisition because of concerns
over the security of Chinese gear, a Navy spokesman told The Wall
Street Journal this week.
Mr. Yang said at the conference that there were no security
issues with Lenovo products and the company continues to sell to
the U.S. government. "We have never received complaints," he said.
"If there are such rumors, we are willing to communicate with the
U.S. government, but it would not affect Lenovo's business in the
U.S., nor would it affect our reputation around the world."
Some analysts weren't convinced by the prospects for Lenovo's
new businesses. "System X is losing market share both in China and
globally, " said Yuanta Securities analyst Vincent Chen. Referring
to Motorola and the server business, he said, "the outlook of
Lenovo really hinges on the outlook of the two merged
businesses."
Lenovo in October closed its $2.91 billion acquisition of
Motorola from Google Inc. and the $2.1 billion purchase of IBM's
System X server line.
Founded in Beijing, Lenovo acquired IBM's PC business in 2005.
The company now has headquarters in both the U.S. and China and
surpassed Hewlett-Packard Co. to become the world's No. 1 PC maker
by shipments last year.
Lenovo was the world's third-largest smartphone maker by
shipments in the first quarter, with 5.6% market share, boosted by
the acquisition of Motorola, according to market research firm
IDC.
Lenovo's net profit in the quarter ended in March fell to $100
million from $158 million a year earlier, while revenue rose 20.7%
to $11.3 billion.
Mr. Yang said cost savings from integrating new units will help
the company's profit grow this year from last year. He said Lenovo
would meet its previous forecasts to build a profitable $5 billion
enterprise business within a year and turn around Motorola in six
quarters.
"No integration is without obstacles," said Mr. Yang. "We are
definitely ready to meet the challenges."
Write to Eva Dou at eva.dou@wsj.com
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