Lenovo's Leadership Eyes More Market Share, Bigger Margins

Lenovo's proposed acquisition of IBM's PC division may be the most closely watched deal in the history of the computer industry, given all of its international implications. With the deal scheduled to close next quarter, the company's overall strategy is beginning to take shape.

Stephen Ward and YUANQING Yuanqing, who will become CEO and chairman of Lenovo, respectively, outlined the company's strategy to reshape the PC market's competitive landscape in an interview with CRN Editor In Chief Michael Vizard and VARBusiness Senior Executive Editor T.C. Doyle.

CHANNELWEB: How broad of a product line will Lenovo have in the PC arena once the acquisition of IBM's PC unit is completed?

WARD: The reason Lenovo acquired the IBM PC business is because of the opportunity to have a business that spans consumer, small-to-medium businesses, very small businesses and medium-to-large businesses. And we absolutely want to do that worldwide. In the U.S., we will have a much broader spectrum of products than we have today.

CHANNELWEB: Does that mean there will be more PCs brands in the U.S.?

WARD: We're test-marketing what the right brand should be. We have not yet finalized the segmentation of ThinkPad/ThinkCenter and Lenovo.

YUANQING: We want the IBM brand to represent high-quality products and services for our customers.

CHANNELWEB: Will the Lenovo brand will be used to undercut Dell pricing?

YUANQING: Low price is not our strategy. We want to deliver value to our customers.

WARD: We already can beat Dell on price. It's a misnomer that Dell has better pricing. And if you look at the Lenovo products for SMB, they are anything but commodity products. Lenovo had a Media Center PC a year before Microsoft came up with the software. They had instant-on capability first. They have a machine that has a simple control on the front that allows you to overclock the processor to create a high-performance gaming machine. They put cool features on their machines at price points similar to our competitors'. And Lenovo quality is as good as we have on average desktops and notebooks.

CHANNELWEB: Why is Dell a tough competitor?

WARD: We're fighting a tough battle because a competitor is screaming that all PCs are total commodities. There's not much margin selling a commodity product. There's money to be made when you bring a solution to a customer.

CHANNELWEB: Will Lenovo compete outside the PC space in the U.S.?

WARD: That's an area we are spending a lot of time on. Lenovo is in the cell phone business and has digital cameras and printers. We have a broad product line. Our next decision is to decide which ones to bring outside China.

CHANNELWEB: Does the fact that your machines will now come from China have customers worried about quality?

WARD: Eight-five percent of all notebooks are made in China. The difference will be that we will own our own plants. Our competitors don't. That's a huge advantage.

CHANNELWEB: Given the history of competition in the PC space, can you compete profitably?

YUANQING: Lenovo is the most profitable PC company after taxes. We have 14 percent gross margins. We also think we can improve the efficiencies of PCD [IBM's Personal Computing Division]. We believe we will produce a lot of synergies by combining our procurement and supply chains.

WARD: And Lenovo's most profitable products are PCs. Lenovo has 5.3 percent after-tax profit selling to SMB and consumers in a way that is 100 percent channel. Eighty-two percent of its PC revenue comes from desktops, and only 18 percent comes from notebooks. That's a very complementary business to PCD. Our model as a merged company is to grow faster than the industry. We think we can also improve our margins faster than our revenue. We can do that because of our focus on the PC space, the scale we get from the merger, consolidation and simplification of procurement, and the fact that we own our own plants. We can also make better use of market development funds that Intel and Microsoft offer, which is a little more complicated when you're part of IBM. Our expense-to-revenue ratio inside PCD is already equal to industry leaders. This is a merger about growth and market expansion.

CHANNELWEB: How critical is the channel to Lenovo's overall strategy?

WARD: We actually moved an additional four points of our business to the channel last year. We still sell direct because that's important to some of our customers. When we do, we do it openly and in an up-front way. We don't do a bait-and-switch with our customers. We think we're the kind of company the channel can trust.

Our new channel executives are going to run both our channel and dot-com business together in a synergistic way. We learned that from Lenovo. They do an excellent job of working tightly with their partners.

YUANQING: For our customers, whether it's a transaction or somebody we have a relationship with, we use the channel to serve those relationships. I think that's a very wise strategy. We don't want to hurt our channel.

CHANNELWEB: Is it Lenovo's goal to be the No. 1 PC supplier in the U.S.?

YUANQING: Yes.