Lenovo to grab top PC spot, but at what price?

16 Jul 2012
Lenovo

Lenovo is set to overtake HP as the world's biggest PC maker, but it could come at a high cost

Lenovo is on track to overtake HP as the world's biggest PC maker by sales this year, making it the first Chinese company to grab the top spot globally in a technology sector.

The ThinkPad maker's rise highlights the advance of China's technology firms on the world stage in recent years thanks to a combination of aggressive pricing, overseas acquisitions and their taking advantage of a fast-growing home market.

Analysts, however, also warn that Lenovo's rapid gains in market share have come at the expense of profit margins, while the company faces slowing growth in the market for personal computers and tough rivals in the tablet PC space.

"It's just a matter of time before Lenovo becomes No.1 and it won't be surprising at all if it happens later this year," said Frederick Wong, executive director at Avant Capital Management, which owns shares in Lenovo.

He added, however, that competition in the tablet sector and a weak PC market outlook could put pressure on Lenovo.

Lenovo, which became the world's No. 2 PC vendor in the third quarter of 2011, had a 14.9% global market share in the April-June quarter this year, a mere 0.6 percentage point away from HP's 15.5%, according to research firm IDC's latest data. Figures from industry tracker Gartner show an even narrower gap, with Lenovo only a fifth of a point from HP.

Switching lanes

Lenovo's rise has been helped by its purchase of Germany's Medion and a joint venture with Japan's NEC last year, as well as its acquisition of IBM's PC business in 2005.

But profit margins have suffered. Lenovo had a 1.4% operating margin in the latest quarter, lower than HP's 7.4% and Dell's 6.2%, the data showed.

"HP, Dell and Acer have switched lanes in the PC race and passed the baton to Lenovo in terms of focusing on sales rather than margins," said Dickie Chang, an analyst at IDC in Hong Kong.

Another risk is slowing growth in the PC market as the global economy, including Lenovo's home turf and stronghold China, eases. China accounts for about 42% of Lenovo's total revenue, with the bulk of that coming from PC sales.

Global PC shipment growth was largely flat in the second quarter, marking the seventh straight quarter of slow growth for the industry.

Overall PC demand could pick up this year with the launch of Windows 8, though the catch is that competition in the sector for tablet PCs will likely be the hottest - and it's not Lenovo's strongest area.

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