On November 12, Lenovo released its second-quarter earnings report for the fiscal year 2015-2016 as of September 30, 2015. According to the report, Lenovo Group (including SystemX and Motorola's overall quarterly results) revenue of 12.2 billion US dollars, up 16%; the group's loss before tax was 842 million US dollars, the company's equity holders attributable to the group's loss of 714 million US dollars. This is the first time Lenovo has suffered a loss in a single quarter in six years.
In the context of the continued decline in the global PC market and the weak development of Lenovo's mobile business, more and more voices expressed concerns about Lenovo's prospects. In this regard, Lenovo Group Chairman and CEO Yang Yuanqing said, "Lenovo's most difficult time has passed." But everyone knows that the difficulties faced by Lenovo and the new challenges faced by Yang Yuanqing have only just begun.
Push for mergers and acquisitions
After the huge loss in the mobile phone business in the last quarter, Lenovo’s latest quarterly earnings report as of September 30, 2015 was even worse, with a loss of $714 million. The explanation given by Lenovo is that the loss stems from the implementation of the restructuring plan. Lenovo generated a one-time fee of $923 million during the quarter, including restructuring costs of $599 million and clearing smartphone inventory costs of $324 million.
The loss of the financial report is not unrelated to Lenovo’s large-scale acquisition in the past two years. In the past two years, Lenovo has invested 2.9 billion US dollars to acquire Motorola Mobility and US$2.3 billion to acquire IBM X86 server business. For the two acquisitions, the industry’s decision on Yang Yuanqing has always had different voices. In particular, the acquisition of Motorola Mobility, many market analysis believes that "this is a loss-making business for Lenovo."
Regarding mergers and acquisitions, Yang Yuanqing has his own set of experience. After all, after Lenovo's acquisition of IBM's personal computer business, similar difficulties have emerged. However, through Yang Yuanqing's efforts, not only will this asset be smoothly integrated into the Lenovo system, but also the development of Lenovo's entire PC business. In the second quarter of 2013, Lenovo PC market share has become the world's number one, and since then it has been the top spot in the industry.
When talking about mergers and acquisitions, Yang Yuanqing once told the "Economic Information Daily" reporter that through mergers and acquisitions, on the one hand, Lenovo can acquire technology, on the other hand, it can gain market and channels. Indeed, Lenovo's acquisition of IBM's personal computer business, as well as the Japanese PC giant NEC, have produced the above-mentioned effects of Yang Yuanqing, not only successfully entered the relevant national and regional markets, PC sales are also remarkable.
With many successful M&A experiences, Yang Yuanqing wanted to replicate the success of the PC era. But this time the acquisition of Motorola Mobile may not be as he wished. At present, the industry generally believes that Motorola's mobile and the heyday are simply not comparable. In mobile services such as mobile phones, Motorola Mobility has not only been left behind by brands such as Apple and Samsung, but has even been surpassed by domestic Huawei and Xiaomi. More importantly, before being sold to Lenovo by Motorola, Motorola moved the real value of the family - more than 25,000 patents, almost swept away by Google, and Lenovo only received more than 2,000 patents, as well as Google's patent license .
If it is said that Lenovo has vacated the "access to technology", Yang Yuanqing also did not take any advantage in "acquiring the market and channels." Despite the opportunity to enter the US and European markets with Motorola Mobility, according to agencies such as Strategy AnalyTIcs, Motorola Mobility currently has a combined market share of only 10% in the global market, and its market in the US in the second quarter of this year. The share fell again, only 4.8%. For Yang Yuanqing, who is particularly concerned about the US market, it is not worthwhile to spend $2.9 billion to buy less than 5% of the US market.
What is even more worrying is that Motorola’s performance in China is equally unsatisfactory. According to the latest data from market institutions, Motorola Mobile's new mobile phone products launched in the domestic market have not yet entered the top ten sales. Faced with this situation, Yang Yuanqing said frankly, "It is really anxious to bring Motorola back this year. It does not consider whether the products are marketable. The performance, functions and prices do not take into account the needs of Chinese consumers."
Similarly, the acquisition of the IBM X86 server business did not make Lenovo and Yang Yuanqing happy – although the related business was narrower than the previous quarter, it was still at a loss. Perhaps it is based on this that Yang Yuanqing has no choice but to lay off staff. In August of this year, Lenovo announced that it would lay off 3,200 people worldwide, and the news came out, which immediately triggered concerns about Lenovo's future performance.
In this regard, Yang Yuanqing said that layoffs will save Lenovo about $650 million in the second half of the fiscal year, and reduce annual savings by about $1.35 billion. Since then, Lenovo's performance will be greatly improved. Yang Yuanqing also said that layoffs are not the ultimate goal, but to restore confidence through the growth of post-throttle performance, and ultimately achieve real business growth.
Stick to the PC
If the merger is for Lenovo, it is only a pain. Then, the continued weakness of the PC market is a big problem that Yang Yuanqing can't take lightly – and this is one of the main reasons why the market is worried about Lenovo's prospects.
Since 2012, the global PC industry has entered a negative winter of negative growth. This trend has not changed today. According to market research firm Gartner, global PC shipments fell 6.7% in the first quarter of this year, down 9.9% in the second quarter and 7.7% in the third quarter.
Lenovo currently has four major businesses, including personal computer business, mobile business, enterprise business and ecosystem cloud service. Among them, the personal computer business accounted for nearly 2/3 of Lenovo's revenue. A tough market environment will be a bigger crisis for Lenovo.
"The big environment is not good, this company can't control." Yang Yuanqing is helpless, but he believes that the future prospects of the PC industry are still optimistic, Lenovo's goal is to occupy 30% of the global PC market share within three years. "The PC industry is worth 200 billion US dollars, and we have great confidence in the global PC market to resume growth."
Yang Yuanqing said, "What we have to do is to live better in the winter and prepare for the arrival of spring." He said so, and he did the same.
In early November, Lenovo held a new product launch conference, which sent a variety of new PC products, including multi-mode notebook YOGA 4 Pro, YOGA Tab 3 Pro/Tab 3 series tablet, and 2-in-1 brain MIIX 4. This new product launch was seen as an example of Yang Yuanqing’s determination to show himself and Lenovo’s determination to stick to the PC position.
But the reaction from the outside world is not as exciting as Yang Yuanqing expected. Despite the highlights of the above products, Lenovo's share price closed at HK$7.56 per share, up only 0.132% from the previous trading day.
According to market analysis, in the future, Yang Yuanqing will continue to buck the PC market against the trend. This may be a "double-edged sword" for Lenovo: on the one hand, many new products will help Lenovo gain more market share. Further consolidate the status of the global PC market leader; but on the other hand, it may drag down the development of new business including Lenovo's mobile business.
Yang Yuanqing has repeatedly said that the current PC market is not as severe as 2008. When the PC market is shuffled, it will give Lenovo a chance.
Some market institutions are also on the side of Yang Yuanqing. Nomura Securities Research reported that Lenovo PC shipments in the third quarter of this year were about 3.2 percentage points higher than the industry as a whole, while the global share of Lenovo PC business continued to rise and exceeded 20% in markets in the US, Africa, and the Middle East. The share has also increased further. Therefore, it remains optimistic about the Lenovo PC business and gives its stock a “buy†rating with a target price of HK$11.5 per share. In addition, BOCOM International and other institutions continue to be optimistic about the Lenovo PC business, and give a higher rating of Lenovo stocks.
"The PC market will begin to recover next year." In talking about the expectations of the future market, Yang Yuanqing used the words "very optimistic". "Although the impact of smart phones may slow down the cycle of computer replacement, no one can really get rid of the computer. The entire PC industry still has room for development and will gradually resume growth."
Mobile dilemma
Despite the mergers and acquisitions, Lenovo's earnings report still has a bright spot - Lenovo's mobile business revenue increased by 28% in the second quarter of 2015, with a significant growth rate. However, for this achievement, the industry does not seem to buy it. Many analysts pointed out that Lenovo, which was once one of the "China Cool Alliance" in the domestic mobile phone industry, is currently in a domestic market position that is not as good as it used to be, not only with Huawei and Xiaomi. The domestic first-tier manufacturers have opened up the distance, and even the pace of rising stars such as LeTV and Qiku seems to be difficult to follow.
The market's concerns about Lenovo's mobile business are not without reason. Just after the end of the "Double Eleven", Tmall, Jingdong, Suning and other platforms have released the ranking of mobile phone sales, whether it is mobile phone sales or sales, Lenovo has not entered the top five. What is even more embarrassing is that on the day of "Double Eleven", Lenovo did not even have a "explosive" mobile phone, which can compete with competitors.
In this regard, Yang Yuanqing did not agree. He said that Lenovo's strategy in the field of smart phones is to focus on the overseas market on the one hand and the retail market and the operator market on the other. In the second quarter of 2015, Lenovo Mobile’s mobile phone sales in emerging markets grew rapidly. In the Indian market, it grew by 73% and sold more than 2.7 million units; in the Russian market, it grew by 165% and sold 1.5 million units; in the Eastern European market, it grew by 115% and sold 2.4 million units; in the Asia-Pacific emerging market, it grew by 36% and sold 3.6 million units. In the Middle East and Africa, both have increased by more than 20%. Lenovo's financial report also showed that from April 1 to September 30, the total sales of Lenovo's smartphones outside China increased by 295% year-on-year, with 24.7 million units sold. At the same time, Lenovo's tablet business also performed relatively eye-catching and completed contrarian growth. The data showed that its tablet business achieved profit for four consecutive quarters, with a global market share of 6.3%, ranking third in the world.
However, from the sales situation, the sales of Lenovo smartphones and the gap between Huawei and Xiaomi cannot be ignored. According to public information, Lenovo sold a total of 35 million mobile phones in the second and third quarters of this year, while sales of Huawei and Xiaomi were 47 million and 40 million respectively.
Faced with the disadvantages in the domestic mobile phone market, Yang Yuanqing attributed the reason to "the mobile phone market is not healthy, the competitors are not for profit, and the sales volume is the demand." He also believes that the smartphone market only accounts for 20% of the overall market. Why do you want to be shopping in this market? So Lenovo will choose between 70% and 80% profitable markets.
But the outside world does not seem to recognize Yang Yuanqing's logic. Zhuang Ruihao, president of Greater China at Kearney Management Consulting, said that he is not optimistic about Yang Yuanqing’s Lenovo mobile phone strategy. He said that Lenovo's mobile phone does not have a strong domestic core business, so it is not even a replicable expansion model. In addition, Lenovo mobile phones and Motorola mobile phone users are completely different, even two extremes, which is also a relatively taboo aspect of international expansion.
Zhuang Ruihao said that although Lenovo PC had similar experience in the acquisition of IBM's personal computer business, the merger took a long time to digest, and finally eliminated the IBM brand. Therefore, he is not optimistic about Lenovo's successful path to copy PCs in the mobile phone industry. Because the fundamentals of the industry are different, the opportunities and paths of globalization for different industries are different.
Indeed, pure internationalization is not necessarily an antidote to Lenovo. At present, domestic mobile phone manufacturers such as Xiaomi, Huawei, Nubia and Meizu have successively announced their respective internationalization strategies. It is foreseeable that starting from 2016, domestic mobile phone manufacturers will also enter India, Southeast Asia, Africa, South America and other markets. From the current situation, at least in the domestic market, Lenovo mobile phones have no obvious advantages in terms of price, hardware and software. Once domestic manufacturers enter the international market, it is likely to have an impact on Lenovo, which directly leads to a decline in sales.
In retrospect, after the acquisition of IBM's personal computer business in 2004, Lenovo's development suffered a bottleneck. Yang Yuanqing did not come up with too many measures to help Lenovo quickly get out of trouble. In desperation, in February 2009, Liu Chuanzhi once again served as chairman of Lenovo Group, and Yang Yuanqing was transferred to CEO. Until 2011, Yang Yuanqing took over as Liu Chuanzhi and served as chairman and CEO of the company. At that time, Liu Chuanzhi publicly stated that after the past tempering, Yang Yuanqing has matured and will be able to lead Lenovo to face any difficulties. Now, the new challenge is once again in front of Lenovo and Yang Yuanqing, who needs to prove himself to Liu Chuanzhi and everyone.
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