Scepticism at Lenovo’s Appetite
One month ago, on the subject of the Motorola acquisition of Motorola Mobility, I wrote “The payback on Lenovo’s investment to shoehorn itself into the Americas’ large and lucrative mobile market assumes that the magic that occurred with the ThinkPad® can be repeated with the Motorola brand. Let’s watch this pace during the next two or three years…”
It seems we do not need to wait two or three years to feel the scepticism of the markets: Lenovo shares have lost 25% of their value since 23rd January. Now that the celebrations of the Chinese new year are behind us, could Lenovo be waking up with a nasty hangover?
Lenovo’s CEO Yang Yuanqing does not seem to be too bothered about Motorola’s 1 billion losses in the past year, asserting that Lenovo’s know-how in manufacturing would rapidly overcome Motorola’s inefficiencies. Mr Yang is giving himself 18 months to stem the haemorrhage at Motorola and return the company to profitability.
From Lenovo’s perspective, it is understandable that the group wants to expand and move away rapidly from its reliance on the fast shrinking PC and laptop market and is aiming to become a key player in the broader technology market and mobile devices in particular to take Apple and Samsung head-on. Strategically this all makes eminent sense, but how much pain and effort will be needed to realise this vision?
Slimming cure or anorexia ?
An analyst at Barclays in Hong Kong estimated that Lenovo could reduce its operating expenses by 70%. If it really takes that much of a cut to make Lenovo’s acquisition of Mototola Mobility worthwhile, then I join the ranks of the sceptics who are behind the drop in Lenovo’s shares. I have worked on cost reduction programmes requiring 15, 20 or even 25% cuts in operating costs. Beyond those numbers the expected outcome is a totally different business. After a 70% cut one may wonder what, if anything, is left of the original business. Motorola has not commented on the feasibility of these drastic cuts and is probably wise not to commit to such action, giving Mr Yang some latitude in choosing the way forward.
In fairness, Yang Yuanqing aims to grow Motorola’s sales quite dramatically by targeting emerging markets, thereby generating economies of scale as well as setting up operations in China on a very different cost base than that used by Motorola in Texas. Still, the magnitude of the change remains huge, and what will matter in the end is whether Motorola can digest the integration of Motorola at the same time as it absorbs IBM’s low-end server business.
Coming soon, in a business school near you…
Either way, the journey on which Lenovo is about to embark is guaranteed to become an iconic case study for a generation to come in business schools across the globe, either filed next to the ominous Daimler Chrysler merger and demerger disaster, or hailed as a truly amazing feat of strategic vision and supreme excellence in execution.
I wish the latter to Mr Yang, because failure would just result in a “told you so”, whereas succeeding in the huge challenge that lies ahead for Lenovo would provide positive learning which is in short supply in the business world today.