Lenovo shake-up is no cause for panic

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Industry analysts respond as Lenovo prepares to lay off 3,200 staff and restructure business

Lenovo’s plans to restructure its business and lay off 3,200 staff should not cause widespread panic, but it still has much work to do if Motorola is to ever return to  profitability.

That is the view of several industry analysts Mobile News spoke to after the technology giant announced mass change to its future strategy following the publication of disappointing Q1 financial results.

In an email to employees, Lenovo chairman and CEO Yuanqing Yang said it will cut 10 per cent of non-manufacturing headcount and five per cent of its total global headcount of 60,000 as part of an effort to reduce costs by $650 million in the second half of this year and $1.35 billion annually.

Yang said a number of steps will take place, including restructuring its mobile arm to form a much simpler, more streamlined, product portfolio.

Last month, HTC announced it was cutting 2,500 global jobs and planning to reduce costs by 35 per cent as part of a “business alignment”. Just days earlier it revealed Q2 revenues had halved to £672 million from a year earlier and reported a loss of £163 million.

However, analysts insisted the same level of concern should not be shown towards Motorola as mass strategic changes were always going to be inevitable following Lenovo’s purchase of it from Google for $2.9 billion last November. They have backed the planned restructure and jobs cull, adding it will help maximise the potential of both brands.

IDC research director for European Mobile devices for EMEA Francisco Jeronimo said: “This was something we were expecting because there is no point keeping two separate teams working in the same business.

Clean up
“They will save a lot of money by cutting 3,200 jobs, so this will give them more flexibility and added efficiency to address those channels.”

Kantar Worldpanel ComTech chief of research and head of US business Carolina Milanesi echoed those thoughts.

“This is the start of the clean up. The first thing you do, given the pressures that exist in the market from a margins perspective, is look at how many people are doing the same job across the two companies. It is something they need to do, maximise their opportunities by minimising the costs.”

IHS senior analyst Daniel Gleeson was a little less relaxed about Lenovo’s position, claiming the recent troubles experienced by HTC and BlackBerry shows Lenovo needs to act immediately to avoid following in their footsteps.

“One thing we have learnt about the competitive nature of the mobile industry is when you make a loss, it is very difficult to turn it around. Margins are tightening up, as shown by the huge amount of problems encountered by HTC and BlackBerry. There is a lot of pressure on handset makers to be able to turn in a profit, so Lenovo needs to act quickly.”

At Mobile World Congress in March, Motorola told Mobile News it was ahead of schedule with its growth expectations after seeing handset shipments soar by 400 per cent in the UK and 450 per cent in Europe last year.

The manufacturer shipped 1.1 million handsets in the UK last year, up from around 250,000 in 2013, and also saw the same level of growth in Europe, although these figures were not specified. Over the past year, its EMEA presence had grown from three countries in Europe (UK, Germany and France) to 15 by the end of 2014, with more than 10 in Europe.

Global relationships
At the start of 2014, Lenovo consumer product launch director Andrew Barrow told Mobile News: “We are number one in the PC market, so now we want to be number one in the mobile market.”

When the acquisition was announced in November of that year, Yang said he wanted to build a “strong number three and a credible challenger to the top two in smartphones”.

However, analysts dampened that excitement, claiming Lenovo and Motorola need to form relationships with retailers and operators in more global markets.

Room for expansion
According to the latest Q2 figures from Gartner, Lenovo held onto its position as the fourth biggest smartphone vendor despite seeing its smartphone share fall from 6.6 per cent to 5 per cent a year ago. Lenovo’s smartphone shipments fell from 19 million a year ago, to 16.4 million.

Rival Xiaomi  however has narrowed the gap on Lenovo to just 0.1 per cent having increased its own share from 4.3 per cent to 4.9 per cent, shipping just over 16 million smartphones in the quarter, a rise from 12.5 million a year ago.

“Motorola isn’t strong enough in certain parts of the world,” said Jeronimo. “They re only present in a handful of European countries. They don’t have a presence in some Nordic countries, as well as Spain and Portugal, so there is plenty of room for expansion, both through distribution and direct.”

“It really needs to work a lot closer with the operators and retailers in Europe, but that is not happening at the moment, and that is why they are losing market share and volumes are declining year-on-year.”

Lost market share
Gleeson said Lenovo’s biggest concern should be its performance in its home market of China, where Q1 shipments halved year-on-year to six million units.

“Lenovo has been losing market share for the past year. It is a big concern because the Chinese market is not showing any signs that it will grow at the same rate it once did,” he said.

Also at Mobile World Congress, Motorola attributed much of its growth to its consumer handset proposition across its Moto G, X and E smartphone ranges, which it claimed provide high-end experiences for consumers at affordable prices.

Motorola has attempted to continue these trends with a trio of new smartphones announced in July. Moto G was made available through a number of retail channels, including Carphone Warehouse (£179). Moto X Play is available through online retailers, such as Expansys (£274), while the Moto X Style (£359) is expected later this month.

Following their launch, Motorola UK and Ireland general manager Miles Norman told Mobile News it is now capable of competing with the very best, and expects to be an established top three manufacturer in the UK by 2020. According to figures from Kantar Worldpanel ComTech for Q2, Motorola accounted for 3.3 per cent of the UK market – seventh in the overall rankings.

However, while the analysts agree that although Motorola has a solid device portfolio, it is now coming under increasing pressure from a price perspective at the mid- and low-end from the likes of Huawei, Alcatel OneTouch and Xiaomi.

Milanesi praised this strategy from Motorola, but admits confusion around which market tier it is focusing on is starting to become more apparent as it continues to release more products across multiple and aggressive price points.

“In markets that are important to them, such as Latin America and North America, there is more competition around price points. Lenovo’s mobile business is weak in the high end and is coming under increased pressure in the low-end.

“There is more that needs to done in terms of very clearly understanding which audiences they are going after. Lenovo needs to decide if Motorola is the high end brand that it needs or if it will focus more on the mid-tier.”
Jeronimo added: “It’s been quite tough for Lenovo because one of the key advantages of the Motorola brand is they were able to provide and launch very premium handsets at very affordable prices.

“Today there are other vendors investing a lot more at the point of sale to promote their brands, such as Huawei and Alcatel OneTouch. They have therefore lost a bit of that price advantage.”

Bright future?
Is Lenovo therefore having second thoughts over its acquisition of Motorola, albeit at a hugely reduced price of $10 billion from what Google paid for it in May 2012?

Gleeson still sees a bright future for Motorola, adding that after showing increasing struggles in China, having an international brand in Motorola will open up key markets for it in the likes of the Americas and Europe where it may have previously found it difficult to establish itself.

However, with question marks now hanging over the Motorola brand and its future direction, what can Lenovo do to turn its fortunes around and meet the long term goal of returning it to profitability.

Firstly, both businesses need to play off each other’s strengths. At Mobile World Congress, Motorola told Mobile News a number of channels and routes to market have become shared and the combined power helps in terms of the breadth of the consumer offer.

The analysts claim this has yet to truly materialise. Lenovo’s strength is in manufacturing, maintaining a tight supply and its global sales reach, while Motorola has a strong handset design history and a known mobile brand.

“The main thing they need to do is to try to integrate and play off their complimentary strengths that each of the businesses brings to the table,” said Gleeson.

“Motorola has a very good brand and is strong in the design and development of handsets, while Lenovo has a stronger track record around keeping the supply chain tight, manufacturing and has a wider global sales force.

“Through its PC history, it has a lot more contacts in the non-operator sales channels whereas Motorola has more contacts in the operator sales channels. These are the complementary strengths they can really work together on to build something better.”

Milanesi admits Lenovo is moving slower with Motorola than they should but suggested bundling Lenovo smartphones with Lenovo PC and laptops in the enterprise space and using Lenovo’s large global presence
to introduce Motorola into many more countries as a solution to this.

“From an enterprise perspective, Lenovo could bundle Motorola smartphones with its products. Motorola wouldn’t be successful just doing that because the consumer segment produces bigger volumes, but adding that to what they are already doing makes sense. Motorola can now also look at new markets because they have the global backing of Lenovo.

“Lenovo is moving slower than it could with Motorola. I don’t know if that is because they are frantically paddling below the water and we don’t see the duck move or if they are not paddling as fast as they could.”

Jeronimo said Motorola must work harder to form closer relationships with mobile retailers and operators to expose the brand more at the point of sale to consumers.

Like HTC, he admits Motorola has a strong portfolio, but that alone is not enough and will require Motorola to significantly increase its marketing spend to gain the full trust and commitment of sales partners.

“This isn’t just about the portfolio and more about working closely with the channels to be able to get devices into consumers’ hands. With so many players out there, operators are not keen on supporting a brand that is not investing in their stores to promote the devices.

“On the other hand, they can’t have the money if they are going to compete on price differentiation where prices are getting lower all the time. It is therefore very difficult for them to secure the budget to invest at the point of sale.

“They really need to move slightly higher in terms of price points and to differentiate so they can have some margins to work with and be able to invest in the channels.”

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