Why Lenovo Continues Crushing HP, Dell, and Apple in the PC Market

Lenovo (LNVGY -2.55%) widened its lead over rivals Hewlett-Packard (HPQ -0.68%), Dell, Acer, and Apple (AAPL -1.49%) in the PC market during the third quarter of 2014, according to research firm IDC.

Lenovo, which evolved into a personal computer giant after acquiring IBM's (IBM 1.84%) PC business a decade ago, now controls a fifth of the world's PC market. Rivals HP, Dell, and Apple also posted market share gains, while Acer's market share plunged by over 11%.

Global PC market shares. Source: IDC.

What's impressive about Lenovo's 11% market share gain is that it was accomplished as global PC shipments declined 1.7% year over year during the quarter. So why has Lenovo been so successful while other PC makers have blamed the rise of tablets for their misfortunes?

Know how to diversify geographically
In fiscal 2014, just 38% of Lenovo's revenue came from China, its home market; 25% came from Europe and the Middle East and 21% came from the Americas. Lenovo's dependence on China, where it faces cheaper domestic competitors, has decreased dramatically over the years (down from 60% to 70%), and it now mainly relies on foreign markets for growth.

HP faces the same situation. Last year, 64% of the company's top line came from outside the U.S. But as Lenovo strategically decreased its dependence on China, HP expanded there in hopes that it would offset stagnant growth in the U.S.

The decline of China's PC market can clearly be seen in Western tech companies. Cisco recently warned of declining Chinese demand, while IBM reported a sales decline of over 20% in Chinese revenue. That's bad news for HP, which relies on China for roughly 20% of its top line. Therefore, If Lenovo is retreating from the Chinese market, it would be wise for HP to do the same.

Don't stop believing in laptops
Lenovo reacted calmly to the rise of tablets that started with the debut of Apple's iPad in 2010. Despite dire predictions that tablets would eventually kill the laptop market, Lenovo pumped out new laptops, released Android tablets and smartphones to offset possible losses in the PC segment, and gradually modified its Windows laptops into convertible forms.

Today, those businesses are clearly defined -- Lenovo's Yoga laptops are easily recognizable with their foldable "tent" form factor, its Yoga tablets continue to surprise customers with innovations such as built-in projectors and subwoofers, and its phone business will get a lot bigger when the acquisition of Motorola Mobility from Google closes next year.

Lenovo Yoga 3 Pro. Source: Lenovo.

Although Lenovo remained in firm control of the PC market in the third quarter, it steadily decreased its dependence on desktops and laptops while increasing its dependence on mobile devices:

Percentage of annual revenue. Source: Lenovo annual report.

Don't overreact to a technological shift
HP, by comparison, overreacted to the arrival of the iPad with a series of painful blunders. In July 2011, the company launched the TouchPad, a $500-$600 webOS tablet that lasted for a single month before being discontinued and sold in a humiliating "fire sale" for $99. That same month, HP stunned investors by mulling a spinoff of its PC business.

HP's TouchPad. Source: Wikimedia Commons.

The company then abruptly acquired enterprise software company Autonomy for a whopping $10.3 billion to decrease its dependence on the PC business -- which turned out to be its worst acquisition in recent history. Those errors led to the replacement of CEO Leo Apotheker, who had been on the job for less than a year, with former eBay CEO Meg Whitman. Dell followed in HP's footsteps: After launching a series of unpopular consumer-facing devices over the past decade, the company became an IT company in 2012. A year later, founder Michael Dell took the company private.

Overreacting during a critical technological shift not only cost HP and Dell the PC market, but they also missed the opportunity to capture a meaningful share of the mobile space. In the end, HP's absurd anti-PC reaction was unjustified and enabled Lenovo to dethrone it as the world's top PC company. Gartner now predicts that shipments of traditional PCs (desktops and laptops) will decline 5% between 2014 and 2015 -- hardly a decline heralding the end of the PC industry.

The Foolish takeaway
In addition to being the largest PC maker in the world, Lenovo is now also the second-largest PC/tablet maker and the third-largest smartphone supplier. PCs are still clearly its core competency, but it will eventually rely on three key pillars of growth: PCs, mobile devices, and enterprise solutions, thanks to its acquisition of IBM's low-end server business.

Lenovo has become a force to be reckoned with thanks to its disciplined approach to geographic expansion, its slow and steady approach to diversifying its businesses, and a natural evolution of form factors for its products that keeps customers interested in its products.