Is Lenovo a Threat to Samsung?

This PC champion is about to turn up the heat in the smartphone market, challenging Samsung.

Jan 23, 2014 at 10:45AM

While many investors focus on the battle between Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF), Samsung's real fight is in the mid-range and the low end -- in other words, the mass market. While Apple is unlikely to really want to play in the low-cost, low-end smartphone market, there are a number of very strong players gunning for the mainstream and value segments. One of the more prominent of these players is Lenovo (NASDAQOTH:LNVGY).

Lenovo is gaining some serious momentum
A quick look at smartphone market-share numbers reveals a rather interesting trend:


(Via International Business Times)

Samsung is the clear leader, showing some pretty impressive unit-growth numbers on a year-over-year basis. However, it's interesting to note that the No. 3 player by market share in smartphones during the third quarter of 2013 was Lenovo, a company well-known for its rise to the top as the world's leading PC vendor.

Keep in mind that Lenovo captured just 5.1% of the market, up a full point from the year-ago period. That pales in comparison to Samsung's behemoth 32.1% share. However, since Lenovo participates across the gamut of price points and sub-segments within the smartphone market, it is not inconceivable that the company's smartphone shipments will continue to outpace the industry at large, implying continued share gains.

Could this come at Samsung's expense?
Lenovo does not yet sell smartphones to the North American market. Its presence is principally in China, although it does sell phones elsewhere. Management has been extremely aggressive about its intentions to become the leading smartphone vendor in China. Further, the company has made some pretty interesting moves to facilitate this, most notably shelling out $793 million to build its own smartphone manufacturing plants.

Given the strength of Lenovo's brand, the quality of its products, and the company's propensity to gain share rather quickly in whatever markets it participates in, it's tough to see Lenovo not becoming a major pain for Samsung in the handset space, from top to bottom. There's nothing fundamentally stopping Lenovo from developing better phones than Samsung does -- it arguably does it in PCs. The major hurdle will be in building the same kind of brand awareness and equity.

Long term, Lenovo and others are a threat
The smartphone market is likely to end up like the traditional PC markets. Apple will have its very highly profitable, high-end niche -- a position that should strengthen when Apple releases larger iPhones. The rest of the traditional PC players, such as Acer, Lenovo, Samsung, and LG, will compete in the Android space.

Samsung has the advantage of the incumbency and the cost structure to really go to town. But at the same time, it's hard to ignore some of the excellent phones that Lenovo, HTC, and others have been putting out. Remember, Apple and Samsung now control the vast majority of the profits in the smartphone industry, and given the fairly low barrier to entry in smartphones, it's tough to see all of that profit continuing to be concentrated among just two players.

Apple is probably much safer given that Apple products sell precisely because they're Apple products. But Samsung's position -- despite its many advantages -- is not unassailable, even though it will be a tough fight. It will be interesting to see how Lenovo and others end up faring here longer-term.

Foolish bottom line
Watch Lenovo closely -- it's a very well-run company that tends to develop excellent products. Its brand, thanks to its PC lineage, is quite powerful, and the company's current market-share position is quite encouraging. There's no reason to suspect that this won't grow over time, and given that Lenovo's phones are very much competitive with Samsung's, it's also not inconceivable that Lenovo's gain could be Samsung's pain.

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Ashraf Eassa 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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