Lenovo swings the axe as things get tough

Lenovo has defied gravity in the PC market for a while but a tough quarter has forced it to take drastic action

Gravity never seemed to be a problem for Lenovo as the Chinese firm seemed to be able to soar in struggling market sectors even when its competition floundered.

But this year has seen the PC market, its original core area of operations, hit by a combination of price increases due to exchange rates and a slowdown in commercial spending as the XP upgrade winds down.

Those factors have caused a combination that has meant that lenovo has had its wings clipped and it has not been able to defy the challenging market conditions.

Even when the PC market was contracting Lenovo still managed to gain share and over the past few years it has been developing a PC plus strategy to reduce its reliance on desktop sales.

This year saw it add the former IBM x86 server business to the UK and the firm has also been building up its mobile phone business after acquiring Motorola Mobility.

It is in the last area that there have been some additional challenges, on top of the declining PC market, with its native Chinese market being fairly well saturated by the competition.

The devaluations in the Chinese currency over the last few days and fears that the country will deliver the lowest growth in 20 years are also bound to cause some jitters as the global markets wait to see if this is a temporary blip or the start of a longer term crisis.

The impact of the current changes in the market can be seen in Lenovo's Q1 numbers, which saw a 51% drop in net income to $105m. Although revenue for the three months ended 30 June increased by 3% year-on-year that was short of market expectations.

In EMEA, which accounts for a quarter of Lenovo's sales, the firm saw turnover decline by 5% to $2.6bn.The vendor was able to grow PC market share in the region to 19.9%, up 1.9% percent year-over-year. It also saw growth in smartphone shipments with 153% growth and in enterprise the integrated team is making headway.

The reaction from the hardware player has been to announce fairly significant job cuts, bidding farewell to around 10% of its non-manufacturing employees, which equates to 3,200 jobs.

The aim of the cuts is to try and chalk up savings of $650m over the second half of its fiscal 2015 and $1.35bn on an annual basis. A lot of the cuts will fall in the firm's mobile business group, with the introduction of a more streamlined product portfolio.

The vendor will also reposition its enterprise business group to increase speed and cost-competitiveness and make sure it is aiming at market segments that offer growth.

There is still an ambition to maintain the grip on the PC crown with the target being to take 30% share of the market.

"Last quarter, we faced perhaps the toughest market environment in recent years, but we still achieved solid results. Our PC business remained number 1 for the 9th straight quarter. In the smartphone business, our strategic shift from China to the rest of world has paid off. And our combined enterprise business achieved operational PTI for the third consecutive quarter," said Yuanqing Yang, Chairman and CEO of Lenovo.

"But to build long term, sustainable growth, we must take proactive and decisive actions in every part of the businesses. We will further integrate elements of the acquisitions with our legacy businesses in Mobile and Enterprise, while building the right business model and cost structure," he added.

"We will reduce costs in our PC business and increase efficiency in order to leverage industry consolidation increase share and improve profitability. We will come through these efforts as a faster, stronger and better aligned global company," he concluded.

Lenovo has quite a lot of things going in its favour given that it is already the largest player in the PC market and has already made the strategic acquisitions to bolster its server and mobile options.

The vendor, along with many others, will be hoping that some of the economic issues around exchange rates will ease and that there will be a Windows 10 effect on PC sales in the next few months.

For Lenovo in particular there will also be a fair amount of nervous tension trying to work out exactly what the future holds in its native China.

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