Can Lenovo Find the Answer Google Couldn't for Motorola?

Alamy Late last month, Chinese hardware giant Lenovo (LNVGY) was the subject of many headlines -- not all of them complimentary -- when it signed a high-profile deal to buy the Motorola Mobility smartphone unit from Google (GOOG). The Asian firm is ponying up a cool $2.9 billion to acquire the business, which is monstrously unprofitable to the tune of a $645 million operating loss in the first nine months of 2013. The market didn't appreciate this. Disturbed by the idea of gallons of red ink spilling from Motorola Mobility onto Lenovo's results, investors traded down the firm's stock by as much as 14 percent after the deal was made public. This might have been compounded by the firm's previous announcement, made only days earlier, that it was spending $2.3 billion to purchase IBM's (IBM) x86 -- read: lower-end -- line of servers. Was such a sell-off, in reaction to either or both, justified? At Home Abroad Lenovo is one of those companies that likes to expand by acquisition. Few Westerners had ever heard of the IT manufacturer in 2005 when it closed its first big buy -- the personal computing division of IBM, for total consideration of around $1.75 billion. The purchase seemed a counterintuitive move when everyone knew that a future stuffed with wireless Internet and portable computing was just around the corner. But guess what? Lenovo not only sold plenty of notebooks and desktops, it managed to grow into the top PC manufacturer in the world. According to figures from Gartner (IT), in Q4 2013 the company was the clear market leader in terms of PC vendor unit shipments. It moved nearly 15 million PCs during the quarter, a figure 6.6 percent higher than in the same period the previous year. This was particularly impressive considering that total shipments for the industry dropped by almost 7 percent over that time frame. Lenovo was able to do this because, for most of its life, it's made big strides in less affluent markets and is continuing to do so. In its most recent quarter, for example, it hit the double digits in Latin America PC market share for the first time in its history. In another first, it climbed to the No. 1 position in big, populous Brazil. Meanwhile, in the Europe/Middle East/Africa region, much of which is populated by emerging economies, Lenovo notched its highest-ever market share. This came in at just under 15 percent, with the company's PC volume up 17 percent on a year-over-year basis. Considering those results, it was a natural next step for the company to advance up the PC food chain to cheap servers. After all, if various up-and-coming markets are still hungry for computers, it follows that they'll also eventually need the servers delivering local websites. But sooner or later, the computer market is inevitably going to dry up in those parts of the world too. And the company is very well aware of this. Hence its new push into the smartphone space. Calling on New Markets As with computers, which Lenovo was selling (largely to the Chinese market) long before the IBM buy, the company has been an active cellphone manufacturer for years. And, as with everything it does, it's put a lot of effort and capital into clawing out market share. In 2012, the company broke ground on a nearly $800 million research/production factory in the Chinese city of Wuhan that can produce 30 million to 40 million smartphones a year. The timing wasn't accidental: 2012 was the year the company began selling handsets outside of China. Size is power, and over the next year Lenovo vaulted into the top three in terms of global vendor sales, climbing over Asian rivals Huawei and LG Electronics to get there. No. 3 ain't a bad place to be, and it's an accomplishment to advance that far. However, given the dominance of the two leads -- Samsung (SSNLF) and Apple (AAPL) -- it was a distant third; Lenovo had a market share of just over 5 percent, less than half of Apple's 12 percent and nowhere in sight of Samsung's commanding 32 percent. Lenovo is determined, and it wants to win. Absorbing Motorola Mobility buys it not only precious percentage points of market share, it also brings it a host of patents along with the fresh technology it'll need to make handsets that can compete with iPhones and Galaxys. Product Shift Shelling out a few billion dollars for its shiny new asset is only the beginning for Lenovo. It's going to have to fight hard to increase that market share, and even harder to break through the Samsung/Apple duopoly. There's a sense of urgency here; its shipments of computers will eventually fall, as they have for the company's main competitors. And they're still too heavy an ingredient in the Lenovo product mix, being responsible for nearly 80 percent of revenue in the most recent quarter (breaking it down, the split was roughly two-thirds notebooks to one-third desktop PCs). But if an investor were to gamble today on Lenovo's chances, the bet would be a rather good one. The company is scrappy, determined, and has proven that it can gain market share in crowded segments and maintain its position. We shouldn't be surprised if it repeats this feat with smartphones.