Lenovo is slashing back-end payments, spiffs and program discounts in its $30 billion PC business in a series of moves that partners say will dramatically cut profit margins and ultimately result in them shifting business to competitors like HP Inc. and Dell Technologies.
One major change is that Lenovo is eliminating the cost-minus pricing structure that allowed distributors to offer discounts to partners while still maintaining gross margin, sources said. Solution providers expect the changes to cut their profit margins in some cases by as much 30 percent to 50 percent.
Lenovo North America Channel Chief Sammy Kinlaw confirmed that changes to the company's channel program intended to push partners to sell higher-end products and services went into effect Oct. 1 but would not comment on specific details of the new terms and conditions.
The program overhaul comes just months after Lenovo ceded its position atop the global PC market to HP Inc.
Both HP and Dell made gains in the second quarter while Lenovo's market share dipped in a period that saw the market contract more than 4 percent, according to Gartner.
Several of Lenovo's top partners, who did not want to be identified, said the margin cut is going to result in Lenovo notebooks and systems being displaced by HP and Dell because competing products from those vendors will be more profitable for solution providers to sell.
"Lenovo has taken as much as one half to one third of the profits away that we were making on Lenovo with the change in distributor pricing," said a sales executive for a Solution Provider 500 company, who did not want to be identified. "Our sales reps are furious and are ready to move that business to HP or Dell. What Lenovo is saying with this move is they don't care about the channel. They have made a decision that they do not want the channel to make a sustainable profit on Lenovo product – only on services."
Another partner, who did not want to be identified, expects millions of dollars in sales from his Lenovo PC business to move to HP or Dell.
Other changes include the elimination of Lenovo's spiff program, the reduction of back-end funding and alterations to program discounts affecting all distribution and master contract pricing.
The distribution channel program changes decimate profits in an already thin-margin business – making some special bid contract business unprofitable, said several partners.