Lenovo is a leading PC manufacturer, a top-five player in the server market and has recently returned its smartphone group to profit. Here's where the company is going next.
How often have you read that the PC is dead or dying? Many times, no doubt. Yet it's a good bet that the articles in question were typed on a keyboard attached to a traditional desktop or notebook PC, rather than tapped out on a tablet or smartphone, or dictated into a smartwatch or a smart speaker.
Of course, sales of 'post-PC' devices have eaten into those of traditional PCs in recent years, but it looks as though there will be a place for devices with a keyboard and mouse, a decent-sized screen and local processing power for a good while yet.
As Lenovo's chairman and CEO Yang Yuanqing told ZDNet in Beijing: "This is still a $200 billion industry -- if you try to find another $200 billion industry, it's not easy."
Sure enough, Lenovo is big in PCs, which deliver over three-quarters of its revenue, and has recently returned its smartphone group to profitability.
Next in line for the turnaround treatment is the data centre group, which has seen double-digit revenue growth for the past five quarters but has yet to make a profit. So can Lenovo bring together PCs, smartphones and data centre into a comprehensive strategy?
Lenovo's new Beijing HQ officially opened in October 2018, and ZDNet visited in November to discover more about the company's current operations and future plans.
The new campus is located in the Zhongguancun Software Park northwest of the Chinese capital and aims to create a "Silicon Valley style working environment" for its employees -- over 10,000 of them. A cluster of Chinese tech giants -- including Baidu, Netease, Sina and Tencent -- are nearby. As a result, the whole area has been dubbed the 'Silicon Valley of China'.
Lenovo's Beijing HQ certainly packs many of the perks -- climbing wall, gym, child care centre -- that Silicon Valley workers would recognise. The low-rise set of buildings, perhaps unconsciously, echoes Lenovo's products, resembling a stack of laptops or servers.
But the company is also aiming beyond PCs to the cutting edge of tech: inside the new buildings are showcases of its wearable technology and holographic displays, augmented reality and more.
Beijing is notorious for its heavy traffic and poor air quality, but the streets and skies were remarkably clear for the duration of ZDNet's visit. What's the market weather forecast looking like for Lenovo?
Lenovo by the numbers
Lenovo is best known as a PC manufacturer, and currently occupies the number-two spot just behind HP Inc in IDC's latest worldwide rankings (Q1 2019). In Lenovo's most recent quarterly results (Q3 for fiscal year 2018/19, ended 31 December), the PC & Smart Device (PCSD) business group accounted for over three-quarters (77%) of the company's $14 billion revenue (Figure A).
The PCSD group delivered record revenues of $10.7 billion in Q3 FY18/19, up 11.6 percent year-on-year. Beyond PCs, the Mobile Business Group (MBG) became profitable for the first time since the acquisition of Motorola in 2014. Meanwhile, the Q3 highlight for the Data Center Group (DCG) was 31 percent revenue growth year-on-year to $1.6bn -- a fifth consecutive quarter of double-digit growth.
Geographically, Lenovo's revenue is quite evenly balanced, with the Americas accounting for 31 percent in Q3 FY18/19 followed by China (26%), EMEA (25%) and Asia Pacific (18%) (Figure B).
Revenue has increased year-on-year for the past five quarters, with growth hitting a peak of 19 percent in Q1 FY2018/19 (ended 30 June 2018) (Figure C).
All this adds up to an increasingly healthy picture profits-wise (Figure D).
Lenovo's current strategic mantra is to "become the leader and enabler of Intelligent Transformation", which it aims to achieve via products and services targeting smart IoT, smart infrastructure and smart vertical solutions.
The company is putting plenty of investment into the artificial intelligence (AI) and machine learning (ML) needed to power the 'smart' elements of its mission, with much of this research funded via the Lenovo Capital and Incubator Group (LCIG), which launched in May 2016. The LCIG funds and nurtures advances not only in AI, but also in IoT, big data and VR/AR, across sectors such as manufacturing, healthcare and transportation.
Lenovo spent $1.27 billion on research and development in 2017/18, or 2.81 percent of its $45.4 billion revenue. R&D is increasingly important to the company, with expenditure as a percent of revenue doubling since the beginning of this decade, from 1.41 percent in 2010/11 to 2.81 percent in 2017/18 (peaking at 3.32% in 2015/16) (Figure E).
To put this R&D effort into perspective, Lenovo was ranked 127th in Strategy&'s 2018 Innovation 1000, a study of the world's largest corporate R&D spenders. The company came in 39th out of 309 IT companies, and 5th (behind Alibaba, Tencent, ZTE and Baidu) among the 46 based in China or Hong Kong.
Here are the top 50 IT companies in the 2018 Innovation 1000 rankings (no doubt Lenovo will be pleased to see archrival HP Inc. several places adrift) (Figure F).
The average level of R&D expenditure in 2018 among these top 50 IT companies was 16.9 percent of revenue, which is well above Lenovo's 2.8 percent.
These numbers suggest that Lenovo spends its R&D budget wisely. Indeed, according to Strategy&: "There is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance. Instead, what matters is how companies use that money and other resources, as well as the quality of their talent, processes, and decision making, to create products and services that connect with their customers."
Let's dive into some of the activities of Lenovo's business groups in more detail to see how that works in practice.
Lenovo's PC & Smart Device (PCSD) Group
Despite a recent rally, the traditional PC market is in a long-term decline, with 24 of the last 29 quarters in IDC's figures showing negative year-on-year growth in shipments (Figure G).
However, the picture isn't quite so gloomy if you're a market leader like Lenovo, which shipped 59.8 million PCs in 2018, 58m in 2017 and 55.5m in 2016, according to IDC. Market shares for Lenovo and HP -- who have traded the number-one spot in recent years -- have been rising, at the expense of other PC vendors (Figure H).
Although regular top-five PC vendors like Dell, Apple, Acer and Asus have held their own, smaller manufacturers have suffered in this mature, shrinking market where margins are often paper-thin. So how has Lenovo managed to prosper under these circumstances?
The company's flagship PC product line is its ThinkPad range of premium business laptops, which was acquired along with the rest of IBM's PC business in 2005 for $1.25bn. IBM's first ThinkPad was the 700C, released in 1992 with the now-classic Richard Sapper-designed black livery and red accents -- including the distinctive TrackPoint -- all in place from the start. Fast-forward to 2018, over 100 million ThinkPad sales later, and we have the 6th-generation ThinkPad X1 Carbon, which clearly retains its 26-year design heritage.
By contrast with this admirable design consistency, if you check out 1992-era portable computers from Apple, you'll find few if any precursors of the modern-day MacBook. For a deep insight into the genesis and evolution of the ThinkPad, and of portable computers generally, we recommend How The ThinkPad Changed the World -- and is Shaping the Future, by Arimasa Naitoh (the 'father of the ThinkPad') and William J Holstein.
The continued success of the thin-and-light ThinkPad is an example of Lenovo's wider strategy in the PC market, which is to concentrate on this and other high-growth segments such as workstations, displays, gaming systems, Chromebooks and PC-related services (Figure I).
Meanwhile, on the smart devices front, CES 2019 saw the launch of a Google Assistant-powered Lenovo Smart Clock to join its existing Smart Display, and a pair of Android tablets called Smart Tabs that turn into Alexa-powered displays when docked.
Speaking to ZDNet at Lenovo's Beijing campus in November 2018, CEO Yang Yuanqing was confident that there's plenty of life left in the PC market: "By volume, the PC business is very stable, and by revenue it's growing. This is still a $200 billion industry -- if you try to find another $200 billion industry, it's not easy."
And there is still scope for innovation in the PC market, Lenovo's CEO stressed: "We should make PCs smarter than before -- at least they should be always on, always connected. We should also use more natural language to interact with PCs, and gather data from customers to make our devices easier to use."
Part of Lenovo's strategy for the next three to five years is to defend the company's position in the PC market while building the mobile (MBG) and data centre (DCG) groups into engines of growth. Although Windows 10 adoption may drive enterprise PC sales through 2019 and into 2020, Forrester analyst Danny Mu sounds a note of caution: "The PC market is a mature market, and the key players (Lenovo, HP and Dell) all have abundant experience in R&D and global supply chain to support their leading positions. But PCs are a low-margin business: wholly relying on the profit from PCSD to turnaround the MBG and DCG would be difficult."
Lenovo's Mobile Business Group (MBG)
After a long period of growth, the smartphone market is now entering a mature phase, with high penetration levels and lengthening replacement cycles in many regions, and high growth rates restricted to a few emerging markets (Figure J).
Samsung and Apple have been the market leaders for years, with Samsung usually occupying the top spot and Huawei usurping Apple's hitherto-customary second place in recent quarters (Q1 2019, Q2 and Q3 2018). Lenovo has not featured in the top five worldwide smartphone vendor rankings since Q4 2015, and isn't even among the top five vendors in its home Chinese market: IDC's figures for Q4 2018 have Huawei in first place in China with 30 percent of the market (by volume), followed by OPPO (20.3%), vivo (19.4%), Apple (11.8%) and Xiaomi (11.5%) (Figure K).
The arrival of 5G networks and innovation in the shape of foldable phones during 2019 could give the smartphone industry a lift at the high end. However, IDC research manager Anthony Scarsella warned recently that "Consumers continue to hold on to their phones longer than before as newer higher priced models offer little incentive to shell out top dollar to upgrade. Moreover, the pending arrival of 5G handsets could have consumers waiting until both the networks and devices are ready for prime time in 2020."
Lenovo's Mobile Business Group (MBG) accounts for around 12 percent of the company's revenue (Q3 FY 18/19) and centres on the Motorola brand, which Lenovo acquired from Google in 2014 for $2.91bn. The company's turnaround strategy for the MBG saw it break even in Q2 and become profitable worldwide in Q3 for the first time since the Motorola acquisition. This was achieved by cutting costs, streamlining the smartphone portfolio and focusing on core markets, Lenovo said.
Speaking at an investor day on 18 March, Sergio Buniac, SVP and co-president, Mobile Business Group, chairman and president, Motorola, outlined the MBG's strategy going forward. Buniac had a five-point plan: (1) to protect and strengthen Lenovo's core markets and reignite growth in emerging markets; (2) to strengthen and broaden the company's position with its 2019 product portfolio (see below); (3) to capture synergies and increase cost benefits; (4) to expand non-device monetization and under-leveraged channels; and (5) to lead the next wave of innovation with 5G.
Lenovo's 2019 portfolio has four tiers of Motorola (Moto) handsets, and one Lenovo-branded tier (Figure L).
Moto Z is the flagship range, with the latest Moto Z3 model offering a 5G Moto Mod that will run on Verizon's network (launched in Chicago and Minneapolis in April, with 'more than 30 markets' due to follow in 2019). The Motorola One, launched in October 2018, is designed to showcase new technologies and appeal to the youth market, in particular. According to Buniac, two more Motorola One products are expected in the next six months, the first of which (due in May) will feature "one first -- and it's a long time since we had a feature ahead of all our competitors". The Moto G range is well established in the 'affordable' smartphone sector, with the latest G7 models being well received. Lenovo-branded phones are being lined up to boost sales in emerging markets, Buniac said, while the 6.9-inch Lenovo Tab V7 recently launched in EMEA. The Moto E range, meanwhile, serves the budget end of the smartphone market.
Another Lenovo phone, teased at MWC 2019, is the Z6 Pro. It's reportedly a 5G handset with a 100MP camera capable of 'Hyper Video' and 'Super Macro' modes (yet to be explained in any detail). The rumoured March 27 launch date has been and gone, and we await developments.
Following the unveiling of the Samsung Galaxy Fold and the Huawei Mate X at Mobile World Congress (MWC) in February, there's a lot of buzz about foldable smartphones. Although Lenovo has yet to announce a foldable phone, the company has plenty of research under its belt in this area, having shown concept devices back in 2016 and securing a patent for a clamshell-type phone in September last year. Netherlands- based website LetsGoDigital has had these designs rendered.
Another rumoured folding phone, with a similar design, could reprise Motorola's iconic RAZR brand, according to xda-developers.com. Codenamed 'Voyager', this Snapdragon 710-based device reportedly has a 6.2-inch foldable primary display and a secondary (closed) display with a resolution of 800 by 600 pixels.
Although most media attention focuses on innovative, high-end mobile devices, Forrester analyst Danny Mu suggests that Lenovo's best prospects lie at the affordable end of the market: "Cutting-edge innovations like folding phones or modular phones (Moto Mods, for example) are fancy, but for most consumers, mobile phones are not a luxury -- they should be affordable. Forrester believes we are in the age of customer: smartphone manufacturers should be customer-led, approaching real time."
Lenovo's Data Center Group (DCG)
According to IDC, the server market "continues to experience robust demand", with Q4 2018 delivering the highest total revenue ($23.6 billion) ever recorded in a single quarter -- a year-on-year growth rate of 12.6 percent. Just under 3 million server units were shipped in Q4, five percent up year-on-year (Figure M).
Reduced demand from hyperscale companies depressed server market growth rates in Q4 from the heights of earlier quarters (38% in Q3, 44% in Q2, 39% in Q1). But, said Sebastian Lagana, research manager, Infrastructure Platforms and Technologies, at IDC, "This was offset by increased server sales to enterprise customers and higher average selling prices (ASPs). Enterprises are buying richly configured servers to support resource intensive workloads, resulting in higher ASPs [Average Selling Prices] and pushing revenue growth higher than growth from unit shipments."
HPE and Dell are the leaders in the server market, with the remainder of the top five drawn from IBM, Lenovo, Cisco and, recently, Inspur. In Q4 2018 Lenovo was tied for fourth place with 6.2 percent of the market by revenue and 6.4 percent by unit shipments (Figure N).
Lenovo "made mistakes" after buying IBM's x86 server business in 2014 for $2.1bn, admitted Executive VP and Data Center Group (DCG) president Kirk Skaugen at the company's recent investor day. But now, after five consecutive quarters of double-digit year-on-year revenue growth (31% in Q3 FY18/19, 58% in Q2, 68% in Q1, 44% in Q4 FY17/18 and 17% in Q3), the DCG's turnaround is well underway. There's still some way to go, though, as the group lost $55 million before tax in Q3 FY18/19.
The DCG's vision is to be the "most trusted data centre provider," Skaugen said, adding that "you don't have to be the largest to be the most trusted". To that end, over the past two years, Lenovo has renegotiated thousands of contracts in multiple countries, installed dedicated teams covering sales & marketing and supply chain & quality, launched new channel programs and system integrator relationships, and installed a new leadership team .
In his presentation, Skaugen drew a parallel with the PC group's ThinkPad heritage, pointing out that IBM's x86 server business also had a 25-year anniversary in 2017. In order to exploit this connection, branding is now coalesced into 'ThinkAgile' for software-defined infrastructure offerings and 'ThinkSystem' for server, storage and networking products (Figure O).
According to Lenovo's analysis (see above), the total addressable market (TAM) in smart infrastructure will grow from $113 billion in 2018 to $151bn in 2022, with hyperscale being the biggest segment and OEM/IoT showing the highest growth rate. As Skaugen pointed out: "This is a huge market opportunity for us, in every one of these segments...we have huge opportunities to disrupt the incumbents with our global supply chain, our procurement power and our own manufacturing."
Given that the DCG generated $4.39 billion in revenue in FY2017/18 (ended 31 March 2018), capturing just 3.9 percent of the estimated 2018 TAM, Skaugen is certainly not underestimating the group's growth potential.
Hyperscale customers, who run huge data centres with thousands of servers, in multiple locations, typically buy stripped-down 'white box' servers based on commodity hardware from ODMs (Original Device Manufacturers), avoiding large OEMs (Original Equipment Manufacturers) like Dell and HPE primarily for cost reasons. Lenovo's strategy, which it calls 'ODM+', is to leverage its supply chain and manufacturing muscle to become a one-stop-shop that can design, build and deploy solutions for top-tier and tier 2/3 hyperscale customers at prices that compete with the ODMs. This seems to be working: in its Q3 FY18/19 earnings announcement, Lenovo reported that "The Hyperscale business delivered triple-digit [266%] growth thanks to its investments in improving its in-house design, manufacturing capabilities and customer mix."
Software-defined infrastructure is another high-growth data centre segment for Lenovo, with 68 percent year-on-year growth in Q3 FY18/19. The company's in-house vehicle here is the ThinkAgile CP Series, a 'cloud-in-a-box' solution developed in partnership with Cloudistics that provides a turnkey on-premises cloud experience, managed via a SaaS portal. Lenovo also sees a lot of potential in flash storage arrays, with its September 2018 joint venture with NetApp resulting in product lines such as the ThinkSystem DE and DM Series.
Lenovo is currently the number-one vendor -- in terms of both systems and performance -- in the HPC (High Performance Computing) TOP500 list, which documents the 500 most powerful commercially available computer systems worldwide (Figure P).
Outside of cloud and on-premises data centres, the edge of the network is an increasingly interesting area for server vendors, because the explosion of IoT devices will require a lot of computing power to be located close to where data is generated, in order to address issues surrounding security, latency, bandwidth and downtime. This is the rationale behind Lenovo's new ThinkSystem SE350, which is the first in a new class of small-footprint edge servers that can be mounted on a wall, stacked on a shelf or installed in a rack.
For all the potential in compute, storage and networking hardware, Forrester's Danny Mu stresses the increasing importance of software-defined infrastructure going forward: "Automation will drive the infrastructure and operations (I&O) industrial revolution," he says. "Everything is software, which means the I&O professionals of 2020 will look like developers, and the infrastructure will be operated like codes. The infrastructure software could contribute more profit."
Lenovo Capital and Incubator Group (LCIG)
The Lenovo Capital and Incubator Group (LCIG) launched in May 2016 with $500 million of venture capital to spend on innovation. LCIG's website currently lists 11 'internal incubators' and 53 external 'company investments' in AI & big data, robotics, AR/VR, cloud computing, smart devices, smart health, smart traffic, smart industry and consumer upgrades.
In its Q3 FY2018/19 earnings report, LCIG -- which last year was ranked 11th in CBN Weekly's Top 50 China Venture Capital Investors list -- reported 15 new investment projects and new rounds of investment for seven existing projects.
Commenting on the CBN Weekly ranking, George He, SVP and president of LCIG, said "Lenovo is looking for companies that can truly deliver platform-level technology in core technologies over the next decade. LCIG will rely on its own resources to provide professional teams not only with financial support, but also support for brands, supply chain, management, human resources, legal, finance, etcetera. That is what makes LCIG stand out."
Like many companies, Lenovo is weaving AI and machine learning into the fabric of its business -- from the way it interacts with customers to the design and build of its products and services. Speaking to ZDNet at Lenovo's Beijing HQ last November, Feiyu Xu, VP of Lenovo Group and head of Lenovo Research AI Lab, outlined the reasons why AI has come to the fore in recent years -- big data, machine learning, knowledge and internet technology, and the availability of high-performance computing -- and noted that AI has been incorporated into the national strategy of many countries around the world (in the UK, for example). Challenges in AI include the combination of structured and unstructured data (numbers, text, video and voice), the multiplicity of languages around the world, and the semantic interoperability of data, she said.
At the corporate level, AI can enhance and strengthen products and services, optimise business processes and promote a cutting-edge image internally and externally, Feiyu Xu said, before describing Lenovo's 'AI innovation ecosystem'. This centres on the company's AI Lab, which exchanges skills, expertise and technology with academic partners (principally the German Research Center for Artificial Intelligence, or DFKI) and business groups, collecting data from Lenovo devices and feeding intelligence into the Lenovo cloud.
Research areas at Lenovo's AI Lab include natural language processing (used in smart speakers and smart service assistants), voice technologies (automatic speech recognition, speaker recognition), computer vision (face and object recognition, medical image processing, smart cameras and albums), machine learning and smart data (used in smart supply chain management), and an award-winning AI training platform.
As an example of internal business processes benefitting from AI technology, Feiyu Xu highlighted the machine learning and smart data team's work on intelligent service supply chain management, where the AI system performed 7 percent better than humans (see above) -- a margin that can make a big difference, she said.
Other prominent examples of 'intelligent transformation' include Lenovo's unmanned retail store, E-Health medical imaging, the HoloTable 3D interactive holographic display and the daystAR augmented reality platform.
Trade disputes and security concerns
The ongoing trade dispute between the US and China, along with security concerns over Huawei and other Chinese firms, could potentially affect Lenovo. However, CEO Yang Yuanqing, speaking to ZDNet in November 2018, was confident that the company's reputation and multinational status would stand it in good stead.
"Lenovo is a trusted supplier, not just in China but also in Europe and North America," he said. "We pay a lot of attention to security: we have taken steps to carefully review all the processes in product development, manufacture and supply chain to make sure that the final product is safe. Lenovo has built a good image -- we are trusted."
Lenovo's CEO was equally sanguine about the possibility of Chinese technology companies becoming embroiled in the US-China trade dispute: "Globalisation has been a trend for a couple of decades, and we wish that globalisation will continue -- to the benefit not just of multinational companies like Lenovo, but of all the people."
More recently, quoted in the South China Morning Post in February, Yang Yuanqing remained optimistic about a US-China rapprochement: "We have heard a lot of positive messages or signals about achieving an agreement, so definitely I think there will be good news."
The outlook for Lenovo
The New Technology Development Company has grown from an offshoot of the Chinese Academy of Sciences in 1984, via a domestic phase as Legend (1988-2003), into the 54,000-employee, $45.4 billion multinational that is Lenovo today.
Having acquired IBM's PC and x86 server businesses, the company is a leading PC manufacturer and a top-five player in the server market (albeit with a single-figure market share). But despite owning the iconic Motorola brand since 2014, Lenovo has not troubled the top five smartphone rankings in recent years.
There are certainly long-term challenges to the PC business, which is a key driver for Lenovo, but its own position remains strong. And although public cloud providers are capturing ever more enterprise workloads and running them on 'white box' hardware, there are enough reasons to deploy workloads on-premises, or at the network edge, for the server business to remain viable for the time being.
Looking ahead, the consumer, business and industrial internet of things (IoT) will see an explosion of smart devices, communicating over high-bandwidth, low-latency links with on-premises, edge and cloud servers. These will deliver services, increasingly enhanced by machine learning (ML) and artificial intelligence (AI), that people will access via a mixture of traditional and post-PC devices.
SEE: TechRepublic Long Reads: More must-read coverage (TechRepublic on Flipboard)
On the face of it, then, a global technology company that makes a well-judged portfolio of PCs and 'smart' devices, servers and services should do pretty well in today's market -- especially if it has extensive experience in efficient manufacturing and supply chain management, and takes a pragmatic approach to research and development.
For long-term growth, Lenovo will look to the IoT and high-growth segments of the server market such as hyperscale, software-defined infrastructure, flash storage and edge computing. Allied to judicious use of AI and machine learning across the board, this strategy could help the company achieve its goal of becoming a leader and enabler of 'intelligent transformation'.
"PCs are still the cornerstone," Forrester's Danny Mu told ZDNet, "but Lenovo's new strategy is '3S' -- Smart IoT, Smart Infrastructure and Smart Vertical, which shows its ambition on intelligence. Intelligent transformation will consume remarkable investment, and Lenovo needs to locate the emerging high-profit engine."
CEO Yang Yuanqing acknowledged the realities of the business landscape in Lenovo's 21 February earnings call: "I'd like to think of Lenovo as a mountain climber. Once we reach one peak, we immediately take aim at an even higher goal," he said. "Getting from one summit to another one sometimes means we have to go down first before we go up. It means we need to develop new tools, new skills and discover a new path to reach new heights. But once we set a goal, we never give up."
That climbing wall in Lenovo's new headquarters might be getting plenty of use in the next few years.
Charles McLellan visited Beijing courtesy of Lenovo. This article originally appeared on ZDNet.
Read more about Lenovo
- Lenovo CEO: "I don't think we have a reason to be targeted" (ZDNet)
- Lenovo taps IBM's cognitive and blockchain tools to improve customer service (ZDNet)
- Internet of Things: Lenovo's new edge server isn't much bigger than a notebook (ZDNet)
- MWC 2019: Lenovo unveils stylish IdeaCentre AIO A340 desktop amid laptop launches (ZDNet)
- Lenovo: New Chromebook, Yoga and ThinkPads with LTE-A, gigabit Wi-Fi and revamped security (ZDNet)
- Motorola Razr classic flip phone returns: This time it's a pricey foldable (ZDNet)
- Galaxy Fold, Mate X, Razr and more: Here are all the foldable phones (CNET)
- Meditations on First ThinkPad: How Lenovo adapts to changes in the PC industry (TechRepublic)
Photo credit for hero image: Lenovo