How Lenovo Plans to Win the Smartphone Market

Learn how the world's largest PC manufacturer plans to conquer the smartphone space.

Jan 7, 2014 at 1:00PM

Largely unknown outside its native China for its first two decades, Lenovo (NASDAQOTH:LNVGY) became the world's largest PC manufacturer after purchasing IBM's PC business unit. Currently, the company enjoys a 17.7% market share in the PC space, outpacing Acer and Dell.

But Lenovo isn't your typical PC company. The Chinese PC manufacturer is actively using its expertise in manufacturing low-cost, high-quality devices to enter the smartphone market, which has traditionally been dominated by giants Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF). However, competition in the smartphone arena is extremely fierce. Manufacturers continue decreasing their average selling prices, as the industry becomes highly commoditized. Given this difficult context, how exactly does Lenovo plan to conquer the smartphone market?

Once more, it's all about competitive advantages
Providing high-quality, affordable devices is at the core of Lenovo's strategy.Moreover, to compete against Apple, the company is focusing on emerging economies, where Apple devices are seen as too costly. Note that Apple unsuccessfully tried to reach customers in these countries with its own budget device, the iPhone 5c, which was perceived as another high-end smartphone by most customers. As a result, Apple cut several orders for its iPhone 5c from assemblers in Taiwan, according to The Wall Street Journal.

It seems Lenovo's aggressive pricing strategy is working pretty well. In China, the company is the second-largest smartphone vendor. And in only 12 months, the company grabbed 13% of the smartphone market in Indonesia. Lenovo plans to replicate this success in at least 20 new markets in Africa, Latin America, and the Middle East.

Here's a look at worldwide smartphone market-share figures:

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Source: Lenovo Investor Relations

Lenovo's interest in mobile isn't new. According to Lenovo CEO Yang Yuanqing, Lenovo prepared for the shift toward mobile devices for many years, by undertaking research and development on every aspect of smartphone design: hardware, software, services, and content. And in 2009, Lenovo reacquired its mobile division, which was sold a year earlier, to refocus on mobile Internet devices.

Introducing the Vibe Z
Lenovo is also interested in mature smartphone markets. It plans to start selling smartphones in the U.S. within one year. And the Vibe Z, Lenovo's first smartphone to offer 4G speeds, could help the company to achieve a successful high-end market entrance. Its strong tech specs -- Qualcomm's Snapdragon 800 processor inside, 2GB of RAM, and 16GB of storage -- make it a promising competitor to Samsung's upcoming Galaxy S5, the Korean giant's next-generation flagship Android smartphone.

Services
As Forbes contributor Haydn Shaughnessy mentions, Lenovo is also aware how important it is to offer "strong services coupled to great design" in the smartphone world. This is one of Apple's secrets of success.

In 2012, Lenovo announced a partnership with British music service Rara.com, which allows Lenovo systems to feature Rara's app in the start screen of its tablets. The company could be looking to establish more partnerships with original service providers to differentiate its smartphones and increase margins.

Smartphone commoditization will help Lenovo
Perhaps Lenovo's best ally in the smartphone war is the commoditization of the market. Since early 2012, the average price of a smartphone has plunged from $450 to $375, according to IDC estimates.

Moreover, considering more than half of mobile users in developed countries already own a smartphone, and that price-sensitive consumers in emerging markets are attracted to cheap models, the demand for high-end smartphones is expected to continue decreasing. This trend should help manufacturers such as Lenovo, Xiaomi, and Huawei Technologies, which specialize in low-priced gear. 

Final Foolish takeaway
Lenovo's smartphone strategy -- based on offering low-priced, high-quality devices -- is already showing early promising results. The Vibe Z release and the smartphone-commoditization trend should help Lenovo to continue improving its smartphone revenue. Finally, as the higher end of the smartphone world becomes more saturated, Samsung will probably focus more on selling cheap smartphones.

To protect their market share, competitors such as Lenovo may need to take a stronger focus on services, and innovate permanently, in order to achieve differentiation.

The smartphone war's best-kept secret
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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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