Korean company is number one in the PC market and wants to be number one in the mobile sector. Analysts say the aim is achievable only if operator, retailer and distribution partnerships are leveraged
It’s fair to say, Google’s decision to sell Motorola to Chinese manufacturer Lenovo for £1.8 (billion £1.1 billion) back in January – pending US regulatory approval – came as a shock to most.
After all, it was only in 2012 that the search engine giant spent close to £8 billion acquiring the business – with its chief executive Larry Page stating “it was a great time to be in mobile”.
The size of the task proved, however, far too great. Its first quarterly losses totalled $38 million in Q2 2012, steadily increasing to a staggering $384m in Q4 2013 (ending December 31).
So the question remains, what did Lenovo see in Motorola? Did it really need to buy it to fulfil its ambitions in the smartphone space? And is there room for a new entrant?
“We are number one in the PC market, so now we want to be number one in the mobile market,” Lenovo consumer product launch director Andrew Barrow told Mobile News earlier this year.
Given Lenovo only entered the mobile market in 2010 (with LePhone), and the dominance of Samsung and Apple, it would have been easy to dismiss this comment as wishful but unrealistic thinking.
However, a quick glance at market share figures from leading analyst houses shows Lenovo is already a serious contender for, at the very least, a top three position.
In the last quarter of 2013 it became the fourth-largest smartphone manufacturer with 13.9 million shipments and 4.9 per cent market share compared to fifth-placed LG, which had 4.6 per cent market share with 13.2 million shipments.
For 2013 as a whole, Lenovo took fifth place as shipments grew 92 per cent year-on-year from 23.7 million to 45.5 million, and market share grew from 3.3 per cent to 4.5 per cent. In comparison, LG grew 81.1 per cent, Huawei 67.5 per cent, Apple 12.9 per cent and Samsung 42.9 per cent.
In terms of market share and shipments, it is very close behind fourth-placed LG (47.7 million shipments, 4.8 per cent) and third-placed Huawei (48.8 million shipments, 4.9 per cent).
This is according to research firm IDC, which pointed out that Lenovo achieved a top-five spot “despite having no presence in North America nor Western Europe”. In its home market China, for example, Lenovo is second only to Samsung, with 13 per cent market share compared to the Korean manufacturer’s 18 per cent.
Analyst firm IHS predicts Lenovo shipments will grow to 61 million by the end of the year, to 70 million in 2015, 78 million in 2016, 84 million in 2017 and 89 million in 2018. Huawei chairman and rotating chief executive Eric Xu expects to do better and ship between 80 and 100 million smartphones this year. Lenovo’s other close competitor, LG, is predicted by Strategy Analytics to sell 69 million smartphones by the end of the year to take a six per cent market share.
In the UK specifically, Lenovo also faces competition from several companies that have made it their mission to take third place in the market – all but accepting the heights of second and third occupied by Samsung and Apple will take time to achieve.
For example, LG told this magazine in December it plans to spend tens of millions of pounds repairing its poor standing in the UK with the aim of achieving 10 per cent market share by the end of 2014.
An almost identical pledge has been made by HTC, which currently has 5.8 per cent market share but wants at least 10 per cent by the end of the year.
Sony Mobile told Mobile News earlier this year that it is now the third largest smartphone manufacturer in the UK, and is aiming for second place. Nokia is competition too, already having 10 per cent market share. Chinese rival Huawei has said the UK is a “key European market”, and that it tripled market share here last year to two per cent.
Which begs the question: is there room for Motorola, under Lenovo’s leadership, to rise through the ranks?
The answer according to analysts is a resounding yes, but only if Lenovo manages to leverage Motorola’s operator, retailer and distribution partnerships.
Ovum principal analyst for telecoms, devices and platforms Tony Cripps argues the smartphone market has the flexibility to make room for a new entrant – and for that company to do well.
He points out how much the global smartphone market has changed over the past five years – and said the same could happen again. For example, in 2008, Nokia was the world’s largest smartphone manufacturer with 42.4 per cent of the market, while BlackBerry was in second place with almost 16 per cent market share.
“There has been an enormous amount of movement in the smartphone market, and it doesn’t look much like it did five or six years ago. We are in a hiatus period now where there doesn’t seem to be a lot of movement, but in the UK market the success of a new entrant will depend on whether they can convince carriers to range their devices and sell them to customers.
“If it really wants to establish itself in markets like the UK, getting to grips with the channel is vital,” Cripps said.
This isn’t lost on Lenovo, which has said it bought Motorola because it has long-standing relationships with network operators in the UK and US, something Lenovo lacks.
Speaking to Mobile News, Lenovo’s Barrow said that while Lenovo is the second-largest manufacturer in its home market, China, it is finding it difficult to break into the UK market because of the high proportion (over 50 per cent according to Ofcom) of contract customers.
“There are lots of reasons why we bought Motorola but primarily because it has a history of distribution in the UK. Motorola has long and established relationships with routes to market in North America and the UK, where people are tied to their network operator,” Barrow said. Indeed, Motorola’s mobile manufacturing history dates back to 1984, and it released four phones in the UK in the 1980s.
Motorola brand “still strong”
Barrow dismissed analyst concerns over the weakness of the Motorola brand – saying it still has traction in the US and the UK, where the Moto G has “sold well”.
However, Ovum’s Cripps said Motorola should be “concerned” about how strong Motorola’s relationships with operators and retailers really are – given its poor performance recently.
“It is reasonable to suggest a potential obstacle for Lenovo is the fact that the relationships Motorola has with operators can’t be that strong given its current market position – this is a very real concern,” Cripps said.
At the time of writing, O2 was the only operator offering both the mid to low-end Moto G and high-end Moto X through its website. EE was not offering the Moto X online, although the older Moto G was still available through T-Mobile and Orange in-store, the company said. Vodafone was only offering the Moto G online, while Carphone Warehouse’s website only listed the Moto X. Phones 4u was stocking both.
Motorola announced in February that the Moto G is its highest selling smartphone to date, although it did not provide sales figures to back up its claim. According to analysts, around one million Moto G handsets were sold between its release on November 13 and the end of last year.
Speaking at MWC 2014, the company added that despite the Moto G’s low price, £129 SIM free, it is still making a profit on every unit sold.
According to research firm Strategy Analytics, the Moto X sold just 500,000 in its first three months on sale in the US. For comparison, Samsung sold 10 million Galaxy S4 handsets in its first month on sale. Despite this, Motorola EMEA marketing director James Soames is quoted as saying Motorola is “very pleased” with Moto X sales in the US.
Lenovo’s history as a PC manufacturer means it has the advantage over other manufacturers looking to grow market share in the UK, IHS senior analyst Dan Gleeson argues.
Lenovo’s parent company Legend launched its first PC 24 years ago in 1990. It became the market leader in China by 1996, then the world’s fastest-growing major PC manufacturer in 2010. Last year, it was the only PC manufacturer to grow, and overtook HP to become the world’s largest PC maker.
In the second quarter, Lenovo’s shipments totalled 12.6 million and it had 16.7 per cent market share, compared to HP, which sold 12.4 million for 16.4 per cent of the market.
“Out of all the Chinese brands, Lenovo is the one that is most well known in Europe. Lenovo’s legacy in the PC market will be the most important factor in the short term – as it is a consumer-focused business.
“Huawei’s main business is in selling telecoms equipment – so it has always been very focused on selling to the operator. The result of that is they have not been effective in building a consumer brand – it is not in its DNA. Lenovo are much more comfortable with building relationships with customers,” Gleeson said.
Its success in the PC market means it has relationships with three large distributors in the UK: Exertis Micro-P, Ingram Micro and Tech Data. Barrow said: “I am sure these companies will be happy to distribute our smartphones,” but he declined to give details on how far discussions in this area had progressed.
At the same time, Motorola is reviewing its distribution partnerships, as revealed to Mobile News in January. The manufacturer currently only has a relationship with Tech Data Mobile in the UK, but said that it is considering adding more as its device portfolio improves.
Lenovo’s success in the PC market has also given it the ability to invest in research and development in the tablet and smartphone space. In December, the manufacturer opened an R&D centre in China to focus on mobile devices – a move which cost it £494 million.
It is also growing its patent portfolio inorganically, most recently through the acquisition of 3,800 3G and LTE patent families from Japanese IT services provider NEC.
In late March it paid $100 million for 21 patent families belonging to ‘Unwired Planet’, a company which specialises in the creation of new mobile technologies. Speaking on the deal, Lenovo general counsel Jay Clemens said: “It will serve the company well as we grow and develop our worldwide smartphone and mobile PC Plus business in new markets”.
In addition, Lenovo has managed to secure a 10-year deal with Google to use its technology. The above means it can avoid patent infringement cases such as those brought against HTC, Samsung, Apple and LG.
In summary, should Lenovo’s acquisition of Motorola go through (the company is confident it will), the Chinese manufacturer will at last have a “way in” to the UK market – long-standing relationships with the UK’s major operators and retailers.
Lenovo’s strong position in the PC market (it is currently number one) also means it has relationships with major distributors, with the implication being that these will be extended to cover smartphones.
From a device perspective, Lenovo is investing in research and development as well as expanding its patent portfolio to ensure it has the ability to create market-leading handsets.
Analysts agree that despite the saturation of the UK market, there is room for a new entrant. Indeed, as Gleeson said: “Every operator wants to have a strong competitor against Apple and Samsung – because they don’t want to be hostage to those companies and have to pay them large sums of money for handsets.”