This round of rumors about Lenovo's acquisition of BlackBerry seemed very serious, with claims that both parties had signed a non-disclosure agreement, allowing Lenovo to review BlackBerry's accounts. Wang Shi Yu, a former member of the Delong Group, even disclosed details of his role in connecting the two companies. Although the outcome is unknown, "it can be seen that Lenovo is very interested in BlackBerry and has already done a lot of preparation work for potential acquisitions," he said.
However, Lenovo has never denied its interest in acquiring BlackBerry. At the beginning of the year, when the first wave of rumors spread, Lenovo Chairman and CEO Yang Yuanqing said: "We always have such goals and plans (referring to preparations for acquisitions), just like eating every day."
Lenovo CFO Wong Wei Ming was more explicit: "We will not acquire for the sake of acquiring. Even if an opportunity arises and the acquisition would be very meaningful for us, we may still choose not to proceed."
Regardless, Yang Yuanqing will definitely give Liu Jun, Senior Vice President of Lenovo and President of the Lenovo Group, a "gift." On one hand, Lenovo phones are eager to go global; on the other hand, he won't let what happened when Acer took Gateway from Lenovo happen again. Acer continues to benefit greatly from that acquisition.
"We already have an acquisition plan for PC+ and have identified acquisition targets, but acquisitions are driven by opportunities. The chance of success is greater when the market environment is poor," Yang Yuanqing said.
Now, BlackBerry, HTC, or even Sony and LG, have all fallen within Lenovo's "range." Who will be the final piece of the "puzzle"?
Dilemma
Due to patent issues, Lenovo had to prepare early for possible acquisitions. Even though Lenovo has recently focused most of its patents on mobile internet and added patents faster than in the PC era, it still cannot solve this problem. "There is no doubt that patents are our biggest obstacle to entering the US market," a senior Lenovo executive said at the beginning of the year at the Consumer Electronics Show in the United States.
Next year will be Lenovo's real entry into mature markets. According to Lenovo Europe, Middle East, and Africa President Gianfranco Lanci, evaluations for smartphone business in the European market have been ongoing for a long time. Liu Jun also stated that products for the European and American markets are in the late stages of development. All of this requires Lenovo to solve patent, operator, and channel problems in a short period of time.
In fact, Lenovo considered not initiating any acquisitions. Whether it was the "Think phone" rumored at the end of last year or the recently launched "VIBE" brand, these prove that point.
Peng Haitao, Senior Director of Product Planning for Lenovo's Mobile Business Group and former Director of Product Planning for Samsung China Mobile Communications Division, said, "After working at Samsung for four years, I am very clear on how Note and Galaxy S were made." He revealed that compared to acquisitions, Lenovo hopes to create its own high-end brand.
The failure of the first generation LePhone caused a long period of post-mortem analysis within Lenovo. What Lenovo regrets is that at the right time, they had created good momentum, but unreliable products caused them to miss a good opportunity. This is why Liu Jun reorganized the product development management process as soon as he became President of the Mobile Internet and Digital Home Business Group in early 2011.
K900 was a good result. As Lenovo's confidence in their products grew stronger, part of their team naturally believed that mature markets were not out of reach.
Liu Jun rarely talked about strategies to enter mature markets, but Lenovo's layout in this area never stopped. In November 2012, after Motorola's Nanjing R&D Center laid off employees, Lenovo immediately established a research center in Nanjing. Among the over 500 laid-off employees, Lenovo hired 40 people at the time and later recruited dozens more.
A lot of core product developments for the U.S. market came from Motorola's Nanjing R&D Center. Afterwards, Lenovo's marketing campaigns for flagship products intentionally aligned with international markets, including hiring NBA superstar Kobe Bryant as the spokesperson for Lenovo phones. Since the third quarter of 2012, Lenovo's domestic sales have consistently ranked second, giving Liu Jun enough confidence to operate independently rather than rely on acquisitions.
As time went on, the mainstream opinion within Lenovo began to lean towards acquisitions. On one hand, after several major and successful acquisitions, Lenovo's mindset has changed significantly. "Today, we are a true multinational company, whether viewed from the outside or inside. Acquiring IBM PC taught us a lot, and our approach to mergers and acquisitions has become more mature," Yang Yuanqing said.
On the other hand, Lenovo could not completely outpace its competitors domestically despite having excellent products, forcing them to engage in price wars. If Lenovo could successfully enter mature markets and expand brand recognition, it would instantly enhance Lenovo's competitiveness in the domestic market.
Who is the puzzle piece?
What kind of puzzle piece does Lenovo need? First, there must be enough patents and they must be useful. HTC was banned from entering the U.S. market in late 2011 for infringing on Apple's patents, which was almost the root cause of HTC's decline. Second, there must be strong relationships with carriers, as more than 90% of phones in mature markets are sold through carrier contracts. Third, there must be a strong brand presence in consumer markets. Fourth, the acquisition price and difficulty must be within acceptable limits. A gradually stabilizing Lenovo finds it hard to pull off another 'snake swallowing an elephant' deal.
Based on these criteria, there isn't currently a perfect candidate. HTC lacks sufficient patents, and its chairman, Wang Xuehong, has repeatedly said that HTC is not for sale.
For BlackBerry, although its patent assets are valued at $2.25 billion, Lenovo would find it difficult to smoothly integrate BlackBerry. Lenovo's net profit in 2012 was $470 million with a profit margin of about 4.37%, while BlackBerry's asking price of $4.7 billion is equivalent to ten times Lenovo's annual profitability. Moreover, BlackBerry's rate of financial bleeding exceeds Lenovo's tolerance, with a loss of $965 million in the second quarter of this year. Analysts predict that in the next six quarters, BlackBerry will burn over $2 billion.
More critically, BlackBerry's brand value in the consumer market is minimal, with its strength lying in the enterprise market. Lenovo has deeply felt the difficulty of entering the consumer market in Europe and America over the past two years, so this shortcoming of BlackBerry might be the reason preventing the deal from happening.
A senior Lenovo executive once revealed that Lenovo might continue its acquisition rhythm in PCs, considering acquisition opportunities in different regional markets separately. Following the acquisition of IBM PC, Lenovo's other three significant acquisitions were Germany's Medion, Japan's NEC, and Brazil's CCE. These companies share the trait of not being leaders in their regional markets, but after joining Lenovo's global resources, their rankings quickly rose. Due to their relatively small size, Lenovo found them easy to digest.
Following this logic, Lenovo might use VIBE entirely in mature markets and then acquire some regional brands methodically, slowly integrating them into Lenovo's brand system.
Challenges
Mergers and acquisitions are just for the European and American markets. Lenovo's internationalization of phones has already moved to the second phase. Starting last year, Lenovo phones have been launched in Russia, India, and Southeast Asia, breaking through 10% market share in several countries. The second wave starting this year includes Brazil, Ukraine, and the Middle East.
According to Liu Jun, Lenovo's development in these countries has been extraordinarily smooth, "The competition there is easier." Lenovo's price advantage helped it gain a large number of mid-to-low-end users.
Both Yang Yuanqing and Liu Jun highly recognize this strategy. "The market is actually changing, shifting from high-end to mid-to-low-end. The growth rate of mid-to-low-end is clearly higher, indicating that we adopted the right strategy from the start," Yang Yuanqing said.
From a certain perspective, Lenovo has firmly established itself in the 2000 yuan range. Its advantages in supply chain are evident at this price segment. However, Lenovo encountered some issues in the "3000 yuan" range. K900 performed well but did not bring too many surprises to Lenovo. Initially priced internally at 3999 yuan, the final price was only 2999 yuan, obviously sacrificing 1000 yuan of profit margin.
In May, Liu Jun set a "military order": surpass Samsung in China within two years. In October, he told the Economic Observer reporter that Lenovo internally needs to consider how to take market shares from Apple and Samsung. Lenovo must quickly make itself qualified to stand before them.
Now, Yang Yuanqing and Liu Jun frequently meet foreign telecommunications operators. In some countries where open channels are relatively developed, Lenovo can directly sell phones through local computer channels. But this is a minority situation. In most cases, Lenovo's bargaining power with operators is weak. "This is not something we excel at, but it is the rule of the game in this field," Lan Qi said. Even if they gain market access through acquisitions, a great deal of work remains afterward. "Our opportunity lies in the changes in operators themselves. For example, North American operators used to sign contracts with users for two to three years, but recently they have changed the contract terms, allowing users to change contracts after one year or even six months," Yang Yuanqing said. A similar case occurred in Singapore, where Lenovo phones grew rapidly due to the shortened replacement cycle. Lenovo always manages to add the latest technological elements to its products in the shortest possible time.
Liu Jun can hardly wait. Yang Yuanqing urges him daily on his progress. The entire MIDH (Mobile Internet and Digital Home Business Group) has started working overtime at the pace of a startup.
Although it seems that only one acquisition stands between Lenovo and its goal, for Liu Jun, the challenges are just beginning.