Lenovo posted its first-quarter financial results last night, and overall the news was good. Revenue was up 11 percent compared to the same quarter last year, and profit after operating expenses was up to $283 million from $202 million. These aren't huge numbers if you're used to looking at results from, say, Apple or Google or Microsoft. But overall Lenovo seems to be doing a good job of keeping its head above water and growing share in a time when that's hardly guaranteed for old-guard PC companies. In fact, Lenovo has been one of the few companies to grow faster than the wider PC industry over the last three-or-so years, as tablets and smartphones have taken a sizable chunk out of the traditional PC market.
Even more interesting was the information Lenovo presented about its smartphone sales—the company says it is now the largest seller of smartphones in its home market of China, though worldwide it's still a fairly distant fourth. Lenovo doesn't have a presence in the US market, but increasing share in China has become a major goal for other smartphone makers of late. Apple was very enthusiastic about its partnership with China Mobile earlier this year, and Apple's earnings drive home the extent to which China and other non-US markets are driving the company's continuing growth. Lenovo also says that 20% of its smartphone sales are coming from other countries, up from five percent a year ago—it's slowly beginning to expand outside of its home country, something that Xiaomi, Huawei, and other Asian phone companies are also looking to do.
From that perspective, Lenovo's pending purchase of Motorola from Google makes a lot of sense. Why fight to expand your market share when you can buy a ready-made smartphone manufacturer for relatively little money (at least, compared to what Google paid for it in 2011)? Motorola has lost money so consistently under Google's leadership that Lenovo's purchase might seem odd, but it gets the company a foothold in established Western markets and will help Lenovo expand its presence in other markets, too.
Motorola is actually on a Google-subsidized upswing lately, buoyed by strong sales of low-cost, high-quality phones like the Moto G and Moto E. ABI Research says Moto sold 8.6 million phones in the second quarter of 2014, roughly twice the number it sold in the same period last year. Once the deal finally closes, Lenovo thinks it can return the company to profitability within 12 to 18 months.
Lenovo will hopefully know better than to mess with success: keep the Motorola branding in countries where it's recognized and doing well, focus on offering a good mix of features for the price, and offer quick Android updates for phones that don't include heavy skins or huge complements of pre-loaded apps. Google has never really discussed in plain terms how much it is driving Motorola's design decisions—it has always been too nervous about alienating its other Android OEMs to take an obviously hands-on approach. Hopefully, whatever division within Motorola came up with the Moto X, G, and E keeps doing its thing under its new parent company.
If successful, it wouldn't be the first time Lenovo bought its way into a foreign market. Lenovo bought IBM's PC business along with the ThinkPad name back in 2004, and it has been able to maintain and grow its PC business in the US and elsewhere. According to data from the likes of IDC and Gartner, Lenovo is still a fairly distant third place in US PC shipments behind both HP and Dell, but it continues to grow its share and typically matches or slightly beats Apple in terms of unit shipments (once you account for the fuzziness of some of these numbers). Lenovo is hoping for a repeat performance when it buys IBM's server business for $2.3 billion—the company hopes to turn that into "a $5 billion enterprise business with higher margins than PCs" within a year after the deal closes.
Lenovo is actively looking to become more competitive in the entry-level and mid-tier smartphone markets, segments that are only going to continue growing as hefty smartphone subsidies fade away. As those plans become less prevalent, the full cost of a $649 or $749 smartphone will become more apparent to casual phone users, who will turn to less-costly options to replace their current phones. We're already seeing the effects of this phenomenon on Samsung, whose profits are taking a beating because of increased competition at the low end. That $150-to-$300 price bracket is exactly where Motorola is the strongest right now, and a focus on cheaper phones will also help Lenovo to compete in "emerging markets" where low-end, low-cost phones are competing more with dumbphones than with iPhones.
If Lenovo does succeed in growing its share in mainstream and lower-cost phones, the downside is that market share doesn't automatically translate to revenue or profit. Apple and Samsung are the only two companies making a significant amount of money from the smartphone market, and it's the premium $600-and-up handsets that earn that money. We've already seen how this one plays out in the PC market—it could become impossible to convince most consumers that they should spend more than the bare minimum on a new phone, and profit margins will get thinner and thinner as OEMs race to the bottom. Lenovo is poised to become a major force in smartphones, but when you're playing with margins like these, the line between "success" and "failure" becomes awfully thin.