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In a toughening market, Lenovo needs to bring in products that stand out, and yet are priced right

In the midst of their growing animosity, there remain precious few companies like Lenovo, who symbolise the power of American and Chinese collaboration. That bond now stands considerably weakened, for Lenovo, the world’s 4th largest PC maker has got on board Yang Yuanqing, former Chairman of Lenovo as CEO, replacing their American CEO William Amelio, who held the mantle of the firm since 2005. Also, Liu Chuanzhi (who was instrumental in the formation of the company 25 years ago) has taken the post of Chairman.

The reasons, however, are more to do with fading fortunes rather than Sino-US relations. The company posted losses to the tune of $96.7 million as opposed to a profit of $171.7 million during the same period last year. Revenue and sales too dipped to $35.92 billion and $3.6 billion from $44.94 billion and $4.5 billion respectively. The main reason was the dampening of demand in the US and European markets and a weak dollar against a CNY. However, amidst gloomy quarterly results and a recession-stricken economy, a ray of optimism is still beaming across Lenovo as it has got on board their former team of Chinese management. Will focusing on ‘Chinese solutions’ set the distraught PC maker back on track?

“Chuanzhi said that the company would refocus on the China market, and expand offerings for homes and small businesses. The biggest challenge (for Chuanzhi) will be to craft and execute a revised business/product strategy during the current economic crisis,” professes Charles King, Principal Analyst, Pund-IT, Inc. Hitherto, Lenovo’s primary focus had been on enterprise customers, which heavily contributed to losses in the last quarter. “This seems a reasonable response… But it’s difficult to see how consumers and SMBs will contribute significant revenues over the short term,” King adds. The company is seeking the low cost route to return to profitability. Moreover, it has to contend with stronger competitors, particularly HP & Acer, which have gained market share y-o-y by 3.5% and 31.1% respectively in the December quarter, while Lenovo has suffered a decline of 4.5% y-o-y (Gartner).

Concentrating on the Chinese market seems to be a good proposition for the time being as further penetration in the US and European markets in such tumultuous times will be difficult. Explains Rob Enderle of Enderle Group, “No competitor will give up shelf space without a fight and currently Lenovo needs much more retail shelf space.” Enderle opines that Lenovo should follow the Apple model of building high profile products and driving consumers to them. “This approach results in fewer products that will require less shelf space and puts most of the rest of the problems within Lenovo’s control,” avers Enderle. With this kind of pull strategy, Lenovo can gain significant bargaining power over retailers. But it must also realise that it cannot price such ‘wow’ products at a significant premium at the moment, so it needs to balance price and features diligently for the recession hit market.

Savreen Gadhoke

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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THE TALE OF TWO 'CITI'ES...

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If the whopping $10.42 billion losses for the nine months ending September 30, 2008 were not enough, Citigroup has once again reported a net loss of $8.29 billion for the fourth quarter of 2008 – its fifth-straight quarterly deficit in a row. Revenues at $5.6 billion are heavily affected by write-downs and losses in securities and banking. This also includes $6.1 billion in net credit losses, which surely means that Citigroup is actually moving on similar lines to meet the fates of many (like Lehman Brothers and Merrill Lynch) who have already fallen flat in their bouts against subprime devil. In fact, today Citigroup is one of the biggest unsecured creditors with a sickeningly shocking $138 billion (an unbelievable 23% of Lehman’s gross outstanding debt of $613 billion) unsecured exposure to the Lehman collapse! Even for the full year 2008, Citigroup has reported a net loss of $18.72 billion against a net profit of $3.62 billion in 2007. Moreover, Citigroup’s share that has plunged over 77% last year on the US bourses (more than 43% in the year through the day of announcement of split), which points out to a further deteriorating situation.

Considering this, the possibility of a revival of this financial conglomerate appears somewhat bleak. Even if the restructuring process ends up without any problems, where the heck on earth will Pandit find a buyer for these limping assets of Citi Holdings amid the dismal state of economies where the loan losses will only worsen. However, on a positive note, instead of attempting to cut costs by not only throwing out employees but interestingly by controlling colour copying, printing, et al (which Pandit tried a few months back), the group has seriously taken up some restructuring plan which if successful can really be a ray of hope for the dying Citigroup.

Meanwhile, the group has also named former Time Warner CEO Richard Parsons (who ran Time Warner from 2002 to 2007) to head its board of directors, replacing Chairman Win Bischoff. But how different will he be from his predecessors is still a big mystery! Moreover, we shouldn’t forget that he was the one who saw the brilliant supernova merger between Time and AOL. Brilliant because the post merger entity which had a combined value of $247 billion at the time of merger in 2000-01, is worth a mind numbingly low $58 billion today. But Parsons may be valuable to Citi for at least one reason: his proximity to US President Barack Obama (he was one of 17 members of Obama’s Transition Economic Advisory Board). Interestinly, Treasury had become one of Citigroup’s biggest investors last year when it acquired $52 billion of preferred shares in the group under the Troubled Asset Relief Program. However, it’s still unclear what the relationship will be between the Treasury and Citi.

So, under such circumstances the best-case scenario for the Citigroup will be a orderly managed sale process of its assets under Citi Holdings (if in case it finds any suitor). Else we can only hope that Pandit does not have to face the situation that former Citi CEO John Reed faced recently. Reed, who engineered the Travelers deal with another former Citi CEO Sandy Weill in 1998, had confessed to the Financial Times in April 2008, “The specific merger transaction clearly has to be seen as a mistake,” and he was unclear whether the company’s model or management deserved the greater share of blame for its problem. God forbid, if in case Pandit has to face such a situation, he might be equally clueless in the blame game that follows!

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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