Why I’m bullish on Lenovo

I’m at CES this week and its given me an opportunity to check in with many of the key players in the technology industry and hear their latest news. One of the companies I’ve found most intriguing to catch up with is Lenovo, which I continue to believe is the company to watch in the smartphone space and beyond.

Motorola acquisition is a great fit and solves key problems

One of the keys to my bullishness on Lenovo is the acquisition of Motorola. I’ve been talking about why I think it was such a good idea since the acquisition was announced. In January 2014, I wrote this:

As for Lenovo, they’re now in a very strong position to become the third major company in the consumer hardware business after Samsung and Apple. Last quarter they were number four in smartphones, number four in tablets and number one in PCs. It’s one of the few companies in the hardware business that’s grown profits over the last couple of years and the only one to have grown shipments across all three categories. The biggest challenge for Chinese vendors in the smartphone business has been moving beyond the white label business as HTC did a number of years ago. Both Huawei and ZTE have struggled to establish their own brands in the major carriers’ postpaid channels. But Lenovo will be buying both carrier distribution and a known brand, which should dramatically simplify the process. Moving manufacturing to its facilities in China and taking advantage of domestic scale will also be hugely beneficial. Assuming regulatory approvals come quickly and Lenovo is able to make a quick start, it could quickly leapfrog much more established brands like Sony and LG and take a prominent position in the market.

The way Lenovo has executed on the acquisition and the things it’s talking about now that the acquisition has closed, lead me to believe all this and more will pan out as I predicted. One of the best things about the acquisition is how complementary the two businesses are geographically. The way Lenovo talks about the split is Motorola has been strong in carrier-controlled device markets such as North America and Western Europe. Meanwhile, Lenovo has been stronger in markets which are more retail oriented, including China, many emerging markets and Eastern Europe. While there’s some overlap in India and Latin America, for the most part the companies have focused on and found success in different markets. The biggest problem Motorola solves for Lenovo is how to break into more Western markets, especially the US. This is something both Huawei and ZTE have struggled to do and something Xiaomi will likely fail at too, if it even tries. But with the Motorola brand, carrier relationships and past success in the US, Lenovo now has a clear strategy for the key US market as well as Europe. The two companies taken together are now third or fourth in the global smartphone market share rankings, depending on who you believe and how you measure these things, putting Lenovo in the top four across smartphones, tablets and PCs.

One thing that’s worth mentioning is, although Lenovo and Motorola are working on combining some of their engineering and R&D resources, they haven’t yet shifted Motorola device production to the facilities Lenovo is using in China. That could still change over time, but it doesn’t appear to be on the short term roadmap.

ThinkPad business provides a route into the enterprise for smartphones too

Another interesting aspect to the acquisition is Lenovo has a strong enterprise sales force selling ThinkPads into businesses around the world. As the number one PC maker, Lenovo is already selling lots of PCs into businesses and, while Lenovo’s own smartphones haven’t necessarily been an obvious fit for most of those enterprises, Motorola’s could well be. The big piece that’s missing though is a strong MDM solution for managing those devices in the enterprise. Samsung developed Knox in-house and has now partnered with BlackBerry to create an end-to-end management solution and Motorola needs something similar. I understand they’re working on this at the moment but it can’t just be more of the same superficial stuff other device vendors have done in the past – Motorola needs a really strong, world class MDM solution tightly integrated with its devices if it’s to pull off an enterprise invasion.

Motorola’s software innovations and China

One of the things Motorola has done best over the past couple of years is focus on software innovations that matter. It’s eschewed the ubiquitous Android UI customizations in favor of a very clean approach to the core Android experience with real added-value software improvements. Moto Voice, Moto Actions and other enhancements really set Motorola’s devices apart from other Android devices. I’ve written in the past about the fact I think Samsung would have done well to innovate in similar ways to set its hardware apart instead of the gimmicky stuff it’s focused on to date. But Lenovo has a relatively weak software and services ecosystem, with only some basic device-to-device sharing technology setting its version of Android apart. It could use some of Motorola’s innovations as a way of differentiating its hardware and preserving its margins in the face of the onslaught of cheaper Android competitors also coming out of China. But one of the challenges is the stock Android experience doesn’t work well in China because the Google Mobile Services can’t run there. As Motorola re-enters China over the coming months, it’s going to have to build a set of replacement services for the traditional Google ones and it’s not yet clear how it will do that, though here it’s likely to borrow from Lenovo.

Brand positioning needs to be worked out in more detail

Despite the fact many of Motorola and Lenovo’s key markets are mutually exclusive, there is some overlap in markets where the two both compete. So far, Lenovo seems to focus on channel distribution and price bands as ways to set the two brands apart where they’re present in the same market, but I feel like the company needs to go further in establishing clearer values and positioning for both brands. Motorola’s positioning is relatively clear, with its emphasis on software innovation, premium and customizable materials, a stock Android experience, and so on. But, by contrast, I’m not sure Lenovo’s positioning is as clear. Where it wants to have both brands in a market together, it needs to find ways to set the two apart better: with the Moto G and Moto E at the low end of the market, it’s not clear that price band delineation will work all that effectively, for example.

A clear number three player in devices, with potential to move up

Lenovo is arguably already the clear number three player in devices given its rankings across three major categories, but with Samsung’s recent stumbles (including this week’s preview of Q4 results) it seems possible Lenovo could move into the top two in the not too distant future. Interestingly, Lenovo has built up its business in a very different way from Samsung, which used massive marketing spending and premium devices to establish a very large and high margin business, at least for a time. Lenovo’s business is more like the rest of the consumer electronics market, operating on relatively modest (but consistently positive) margins, and it seems to be OK with that. That may just make for a more sustainable route to success than Samsung’s.