Lenovo as new 800-pound gorilla: Opportunities, challenges abound

Summary:Lenovo bolstered its tech stack with $5.21 billion in acquisitions, but the challenges outweigh the opportunities for now.

Lenovo will be officially an information technology behemoth once it closes its purchase of IBM's x86 server business and Motorola Mobility from Google. And then the fun will really begin.

For a combined $5.21 billion, Lenovo has acquired a tech stack that can create a bit of an enterprise halo effect for the company. Rest assured that the Motorola purchase from Google is more about consumer smartphones, but those devices will make their way to the enterprise. If Samsung can make a big business-to-business push with its Android devices Lenovo, which has more corporate relationships via the ThinkPad franchise and PCs, can easily and very quickly.

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If you toss in Lenovo's storage joint venture with EMC, there's a strong stack of hardware to sell. Lenovo still has a few gaps like networking, but it certainly has enough to compete with the likes of Dell and Hewlett-Packard in the enterprise. In other words, the battle that played out in the PC market could repeat in servers as well as mobile devices.

Lenovo's plan is obvious. Lenovo is hoping to replicate what it did with IBM's PC business in 2005 and do the same with servers and smartphones. The server handoff from IBM to Lenovo should be seamless. After all, IBM and Lenovo have done this before and servers are basically fancy PCs when you really boil them down to components and purpose. The smartphone business will be trickier to manage because the Motorola brand was flagging a bit with consumers and hasn't regained its previous enterprise footing.

The big question here is whether Lenovo can manage these moving acquisition parts well. Integrating acquisitions is hard enough, but managing two at once can be a bit complicated.

Lenovo recently reorganized around four groups to make this 800 pound tech gorilla hum. Those groups are:

  1. The PC group with the Lenovo and Think brands. 
  2. A mobile business group with smartphones, tablets and smart TVs.
  3. Enterprise with storage and servers.
  4. Ecosystem and cloud services, which include Android and Windows development, China monetization.
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Lenovo's strategy and organization is sound, but there's one big problem: The plan and hardware stack resembles a few other players such as Dell and HP, two IT giants that also have services and software units as they try to resemble IBM.

Here's a look at some of the opportunities and challenges facing Lenovo, the new 800-pound enterprise technology gorilla.

Opportunities:

Scale. Lenovo can use its No. 1 share in the PC market and supply chain scale that goes with it. There's a reason IBM unloaded the server business---the margins are thin and you need a lot of scale to make money. When IBM sold its x86 server business to Lenovo it said the two companies would be able to leverage their strengths. Lenovo's strength is that it can make money on commodity hardware. There's also a reason Google sold Motorola Mobility to Lenovo. Google CEO Larry Page said "the smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices." In other words, you can't half-ass a commodity market or you die.

The cross sell. It only makes sense that an enterprise customer buying PCs from Lenovo would also want to buy servers. Lenovo takes over IBM's support contracts and probably won't miss a beat. Motorola is a trickier integration, but Lenovo can sell multiple screens to businesses. Sound familiar? It should Samsung is trying the same thing in the enterprise without the relationships enjoyed by Lenovo.

lenovo vibe z

Hardware can lead to higher margin businesses. In enterprise IT it's not uncommon to garner a installed base with hardware such as PCs and servers and then move more into software that acts as glue for an overall stack. If Lenovo can sell its stack it can move into value added software to manage it all. Perhaps Lenovo ultimately enters the services business.

Lenovo owns China. Lenovo can enter these markets largely by using its home turf of China as a staging area for the rest of the world. That geographical advantage is huge. Most IT vendors are trying to figure out China and defend against local companies. Lenovo has a massive advantage. As a double bonus, Lenovo doesn't raise eyebrows like a company like Huawei does because it has a large U.S. base in North Carolina too.

Challenges

thinkserver

Motorola won't be all that simple to integrate. Sure, Lenovo is a smartphone player in China and emerging markets. Yes, Lenovo has the Android drill down. But the company just bought a brand that has lost its luster, may not carry the engineering talent it used to and spent the last two years trying to be a part of Google. Lenovo will have brand challenges---what do you do with the Motorola nameplate in the U.S.---as well as the integration of design approaches. Motorola also doesn't bring a lot of market share to the party.

The server market will have a post-server evolution. There's a good reason that IBM was looking to exit low-end servers: Virtualization and the cloud ultimately mean fewer boxes to sell. Lenovo navigated the post-PC era better than any other PC maker via tablets, convertible devices and smartphones. The problem for Lenovo is that the post-server market is really the cloud.

Scaling smartphones. Lenovo has big smartphone ambitions and wants to offer more customization than Apple and Samsung. The problem is that Lenovo doesn't have the supply chain heft of Apple and Samsung yet. Lenovo's PC scale doesn't apply to smartphones.

Integrating two major acquisitions at once. Lenovo has a strong management team, but it's basically bolting together an IT juggernaut on the fly. There will be growing pains for sure.

Lenovo will lose some financial strength. Motorola will ding Lenovo earnings for years to come. Meanwhile, it's unclear Lenovo can cut too much fat from IBM's server business. Lenovo will also have to raise money and float debt since its $3 billion war chest will be largely depleted after closing its latest acquisitions. Ken Hui, an analyst at Jefferies said:

Lenovo admitted that it has no plan to turn Motorola profitable, which is inconsistent with its M&A principles. Without cutting expenses, Motorola has to double sales to breakeven, which is challenging. As smartphone market is saturating in North America, Lenovo has to invest heavily to expand market share to drive growth.

And on the IBM server acquisition, Hui said:

While Lenovo can reduce the costs of IBM’s x86 server business to normalize the net margin to 3-4%, market is overly optimistic on the share expansion and margin accretion opportunities. China market is already crowded with four major domestic vendors.

The PC market. All of Lenovo's big moves are based on the assumption that the PC business will continue to hum along. The big issue is that Lenovo may be distracted from its core business as it chases new markets.

Bottom line: Lenovo is an 800-pound tech gorilla now, but it's going to take some time and patience for the company to really hum.

Topics: Hardware, Data Centers, Lenovo, Mobility, Servers

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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