Lenovo Boss Quits as PC Maker Reports A Loss

Personal computer maker Lenovo Group posted its first loss in nearly three years and its CEO resigned, as weak demand and cut-throat competition hit the earnings of technology companies.

Lenovo, which bought IBM’s PC division in 2005, has been facing competition from the likes of Hewlett-Packard and Acer. In addition, Lenovo has been impacted by lower spending on enterprise PCs, such as the ThinkPad, and the slowing Chinese economy.

Analysts say a recovery for the world’s fourth-largest PC maker, which competes with Hewlett-Packard, Dell and Acer, depends on how it manages to switch to the low-priced consumer market from corporate clients, which account for the bulk of its sales.

“The outlook is not rosy. A China recovery is nowhere in sight,” said Joseph Ho, telecom analyst at Daiwa Securities. “The push into emerging markets and the commercial segment will take time (to show significant outcome).”

China’s largest maker of personal computers said the next several quarters would remain very challenging for it and the sector as demand falters in an economic downturn.

Lenovo expects to save $300 (£204) million in the year to March 2010 from a restructuring involving axing 2,500 jobs worldwide, cutting executive pay and consolidating its China and Asia-Pacific operations into a single division.

The company reported an October-December loss of $96.7 (£66) million, worse than a wide range of analyst forecasts ranging from a $8 (£5.5) million loss to a $96 (£65) million loss.

Sales fell by a fifth and Lenovo’s gross profit margin was squeezed by a continued market shift to entry level PCs, aggressive pricing and currency fluctuations, the company said.

The quarterly loss was Lenovo’s first since January-March 2006, when it posted an $89 (£60) million loss on restructuring costs.

Its shares ended 2.7 percent lower at HK$1.46 (13p) in a broader Hong Kong market up 0.9 percent. The stock has lost 78 percent from its 52-week high of HK$6.75 (59p).

Analysts expect the current fourth quarter to be even bleaker than the previous quarter as the results would include restructuring costs.

“Look at our historical business trend and you will see the fourth quarter is the weakest quarter of our fiscal year,” Lenovo’s Chief Financial Officer Wong Wai Ming told a telephone conference.

However, further declines in profit margin will be limited and its business outlook will be better next fiscal year when savings are realised from the restructuring plan, Wong said.

As part of a senior management reshuffle, Lenovo said its chief executive William Amelio will be replaced by Chairman Yang Yuanqing, while the company’s founder, Liu Chuanzhi, will be the non-executive chairman.

Amelio, formerly a senior vice president for Asia-Pacific and Japan at Dell, was named as Lenovo’s CEO in December 2005. His 3-year contract has expired and he will act as special adviser at the company until end-September.

Lenovo, whose operations were previously all in China, inherited its corporate client focus when it bought IBM’s PC business in 2005 for $1.25 (£0.85) billion.

“The real challenge is to modify its business model to support the low-margin consumer business, which will take a longer period of time and is subject to its execution capabilities,” Morgan Stanley said in a note ahead of Lenovo’s results.

Of the world’s top four PC names, Lenovo posted the smallest growth last year, with shipments up 8 percent, compared with a 53 percent gain for Acer, 13 percent for HP and 11 percent for Dell.

Lenovo had around 7.5 percent of the global PC market in 2008, when it was overtaken as the No.3 player by more aggressive rival Acer, according to research firm IDC.