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Introducing Lenovo

In this article we introduce Lenovo Group (Chinese: 联想集团)(HKEX: 0992), a diversified Chinese tech company with a business portfolio spanning consumer electronics (including the popular Lenovo PCs), smart collaboration and software services, augmented and virtual reality (AR and VR), as well as infrastructure data center solutions. Lenovo is currently active in more than 180 markets supporting over 125 million devices.

 

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Corporate History

Lenovo was founded in 1984 by a group of engineers associated with the Chinese Academy of Sciences (中国科学院). The company was originally named Legend (Chinese name: 联想) and sold Chinese character extension cards which facilitated the input and display of Chinese characters on imported personal computers (PCs). Legend primarily generated revenue from bundle sales of imported PCs combined with Chinese character extension cards.


Legend went public on the Hong Kong Stock Exchange in 1994 (HKEX: 0992).


In 1996, Legend launched its first self-branded PC. The company invested significantly in marketing and sales channel expansion during subsequent years to become the dominant PC brand in China.


In the early 2000s, Legend began its global expansion. In 2003, the company changed its English name to Lenovo while keeping the Chinese name unchanged, citing the reason that the name Legend has already been taken and registered as a brand name in many countries. In 2005, Lenovo acquired IBM's PC business line ThinkPad. Lenovo priced its laptops outside China at lower than domestic prices in order to compete with international players such as Dell and HP. Eight years later in 2013, Lenovo became the largest PC brand in the world in terms of number of units sold. In subsequent years, Lenovo and Dell alternated between ranking first and second in terms of number of PC units sold globally.


In 2010, Lenovo launched its first smartphone product LePhone (Chinese: 乐Phone) to tap into the emerging smart phone market. Subsequently, Lenovo released several other in-house developed smartphone brands and acquired Motorola from Google in 2014, although the company's venture into the smart phone market eventually proved to be unsuccessful after facing fierce competition from other Chinese smartphone brands such as Xiaomi, Oppo, and Huawei.


Also in 2014, Lenovo acquired IBM's industry dominant x86 server business to establish a strong foothold in the enterprise hardware market, after which the company struggled to turn a profit in the server business until 2021.


Following Lenovo's failed attempts to penetrate the smartphone market, the company re-focused its efforts on growing the core PC business (while still maintaining a selection of smartphone offerings) and consistently ranked as the world's top PC seller in terms of number of units sold from 2018 onwards.


Business Overview

In this section, we provide an overview of Lenovo's three operating business segments. Lenovo initially defined operating segments based on geographical region of sale, but switched to a product-based segmentation approach starting in 2019 with the establishment of the Intelligent Devices Group and Data Center Group. In fiscal 2022, management adopted a new business group structure reporting format comprising of three segments: the pre-existing Intelligent Devices Group, the pre-existing Data Center Group renamed as the Infrastructure Solutions Group, and a newly added Solutions and Services Group.


We walk through each of the three segments below.


#1: Intelligent Devices Group (IDG)

The IDG comprises of the PCs and Smart Devices and Mobile Business Group business units, with a combined portfolio of products, software, and other services ranging from traditional PCs and smartphones to innovative smart collaboration and augmented and virtual reality solutions. Examples include ThinkPad, Yoga, and Legion gaming laptops, the Legion Phone Duel gaming smartphone, remote learning solutions, ThinkReality augmented reality smart glasses, and various smart home devices.


Lenovo Legion Laptop
Lenovo Legion Laptop (Source: Lenovo.com)

Lenovo Yoga Book Laptop
Lenovo Yoga Book Laptop (Source: Lenovo.com)

Lenovo Legion Phone Duel
Lenovo Legion Phone Duel (Source: Lenovo.com)

#2: Infrastructure Solutions Group (ISG)

The ISG, previously known as the Data Center Group, provides smart infrastructure solutions to business enterprises across various industries. These solutions span the areas of edge computing, cloud computing, analytics, and artificial intelligence.


Note: edge computing refers to a type of distributed information technology architecture where data is processed at the periphery (i.e. edge) of the network, closer to the originating source of the data, as opposed to at the central hub of the network. Edge computing can help to mitigate bandwidth limitations, latency (i.e. network communication delay) issues, or other network disruptions.


#3: Solutions and Services Group (SSG)

The SSG was formed in fiscal 2022 to support Lenovo's efforts to grow and become a comprehensive technology solutions provider rather than a place where customers only source individual pieces of hardware, software, or services (we discuss this further in the last section, "The Future of Lenovo"). Specifically, the SSG houses all of Lenovo's services and solutions across the company under a dedicated organization covering warranty, asset recovery, data center, and other (more complex) services and solutions.


Financial Overview

Next, we turn to a financial overview of Lenovo.


#1: Lenovo's Total Revenue Doubled From USD33.9bn In 2013 To USD71.6bn In 2022

Lenovo's total revenue doubled over the past decade, from USD33.9 billion in 2013 to USD71.6 billion in 2022. Operating and net income dipped in the middle of the decade primarily due to high other operating expenses (e.g. severance costs, impairment losses, and losses from asset disposals) as a result of restructuring efforts to reduce costs and enhance operating efficiency during the 2016 to 2018 period, but bounced back starting in 2019.


Lenovo Group Revenue and Income
Data Sources: Lenovo Annual Reports (click image to enlarge)

#2: Lenovo's Gross Profit Margin Is Relatively Resilient, While Operating and Net Profit Margins Declined And Subsequently Bounced Back

Lenovo's gross profit margin was relatively resilient over the past decade stabilizing at the 13% to 14% level before increasing to the 16% range following the company's restructuring and cost optimization efforts. Lenovo's operating and net profit margins fluctuated in the 2% range from 2013 to 2015 before dipping slightly below zero during the restructuring years in 2016 to 2018. Both metrics bounced back in 2019 to reach new highs of 4.3% and 3.0% respectively in 2022. Management states that they are placing continued priority on the ramping up of Lenovo's profitability as a main strategy goal going forward.


Lenovo Group Profit Margins
Data Sources: Lenovo Annual Reports (click image to enlarge)

#3: Lenovo's Revenue Is Primarily Generated By The Intelligent Devices Group

Breaking down Lenovo's revenue by business segment, we see that the Intelligent Devices Group contributes to the majority of the company's total revenue, while the Infrastructure Solutions Group (previously known as the Data Center Group) and the newly established Solutions and Services Group contribute relatively similar smaller proportions (albeit with the former generating slightly more revenue than the latter).


Lenovo Group Revenue Breakdown By Segment
Data Sources: Lenovo Annual Reports (click image to enlarge)

Note: the sum of individual segment revenue numbers exceeds total revenue in each year as management does not take inter-segment elimination into account.



#4: Lenovo's Sales Are Predominantly Generated In The Americas, China, and EMEA

Management provides a breakdown of revenue based on four geographical regions:

  • China

  • Asia Pacific excluding China (APAC ex-China)

  • Europe, the Middle East, and Africa (EMEA)

  • The Americas

The China market contributed the most to revenue from 2013 to 2015, after which the Americas market started dominating. In fiscal 2022, the Americas market contributed the most at 32.0% of total revenue, followed by the China and EMEA markets each at 26% of total revenue, and lastly APAC (ex-China) at 16% of total revenue.


Lenovo Group Revenue Breakdown By Region
Data Sources: Lenovo Annual Reports (click image to enlarge)

Note: individual region revenue numbers may not sum up exactly to total revenue due to rounding



The Future Of Lenovo

Management describes two pillar strategies to drive Lenovo's future growth: innovation and service-led transformation.


#1: Innovation

Management will ramp up research and development efforts going forward in order to create greater barriers to entry for the company's competitors. Specifically, a balance is to be made between developing technology that can quickly generate market returns versus investing in long term foundational research, as well as between promoting continuous improvement on existing technologies versus trying to create breakthrough innovations.


#2: Service-Led Transformation

Management aims to transform Lenovo from a reputable device provider to a diversified, comprehensive tech company that delivers effective end-to-end solutions for clients. As part of the transformation effort, the Solutions and Services Group business unit was formed in fiscal 2022 with a particular focus on providing a greater range of premier support services for clients as well as combining the separate steps of design, deployment, and operations in IT processes into one subscription-based, all-inclusive model of service. Management hopes to benefit from higher profit margins through these services as part of a broader goal of boosting Lenovo's profitability.

 

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