In January, Beijing-based Lenovo (OTC:LNVGY) announced its purchase of Motorola Mobility from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) for $2.91 billion. This deal comes two years after Google purchased Motorola for $12.4 billion, which some Google investors consider a failure in the mobile business. Lenovo CEO, Yang Yuanqing, believes his company can turn around Motorola in four to six quarters after the acquisition.
How can Motorola help Lenovo?
Google's Motorola offers Lenovo an opportunity to access the U.S smartphone market and build its mobile brand outside of China. Motorola has an established global smartphone brand with a product portfolio tapping into all price segments that fits with Lenovo's strategy. Motorola's Moto X, Moto G, and the DROID Ultra series will bolster Lenovo's product pipeline to compete with mobile giants Apple (NASDAQ:AAPL) and Samsung.
In 2005, Lenovo purchased IBM's PC business to expand the company's PC offerings in China and gain consumers in the U.S market. With IBM's ThinkPad brand and strong supply chain and distribution channels, Lenovo surpassed Hewlett-Packard and Dell to become the largest seller of personal computers. Motorola, like IBM, will supply Lenovo with strong retailer and carrier relationships to connect with end-users in North America and key markets in Latin America and Western Europe.
Some investors are concerned that Motorola's failure to generate profits may deteriorate Lenovo's bottom line in coming quarters. Google reported operating losses of $393 million and $1.029 billion in fiscal 2012 and 2013, respectively. Yuanqing believes the acquisition will benefit shareholders in the long term, but it could have a negative impact on the company's bottom line in the short term.
"We have already identified areas where we can cut expenses. With the combined scale of Lenovo and Motorola after the acquisition, we can significantly reduce costs in terms of material procurement and supply chain," Yuanqing told the Wall Street Journal in a telephone interview.
Lenovo's uphill battle against Samsung and Apple
In the first quarter of 2014, Samsung topped the global smartphone market with 30.2% market share on shipments of 85 million (+22% YoY), according to market research firm IDC. Strong demand for Galaxy S and Note models, including the company's low-cost offerings, helped sustain Samsung's dominant position. Apple followed and accounted for 15.5% share on 43.7 million units (+16.8% YoY). Apple's growth stems from strong sales of the iPhone 5S in mature markets and continued success of the earlier 4S model in emerging markets.
Apple's recent partnership with NTT DOCOMO in Japan and China Mobile in China has improved the company's regional sales and market share. According to Apple's second-quarter results, the company reported Japan sales of $3.963 billion, up 26.41% from a year ago. Apple saw China sales increase 13.10% with operating income in the region up 26.44%. Sales in the Americas (+1.84%) and Europe (+4.38%) showed minor growth.
Apple's rumored 4.7-inch and 5.5-inch iPhone 6 models, iPads, and new Mac computers may be released later this year with the new iOS 8 operating system. The new 5.5-inch iPhone 6 will rival Samsung's Galaxy S4/S5 devices and Lenovo's 5-inch Vibe X smartphone, which was released last October in a bid to compete in the premium market.
Lenovo was in the fourth position behind Chinese rival Huawei with 4.6% market share on 12.9 million shipments. The company posted the highest year-over-year change among leading smartphone vendors with 63.3% growth. When the Motorola deal finalizes in late summer or early fall, Lenovo may control approximately 6% of the global smartphone market. It will become the third-largest smartphone vendor ahead of Huawei, and the second-largest Android vendor behind Samsung.
"We expect Lenovo to double its worldwide smartphone market share within two years and achieve double-digit market share by 2015 at the latest," said Canalys analyst Chris Jones.
The acquisition of Motorola Mobility will strengthen and accelerate Lenovo's penetration in the U.S and global smartphone markets. Motorola offers Lenovo a wide range of popular mobile devices that fit well with the company's current pricing strategy. Lenovo's array of mobile devices, with Motorola's brand presence in mature and emerging markets, will add pressure on current market leaders' regional sales and market share. Yuanqing aims to sell 100 million smartphones and tablets in the coming year, but the deal awaits U.S regulatory approval.