Why Lenovo still lags in consumer PCs (and how it plans to fix that)

Computerworld - If all had gone according to plan, Lenovo Group Ltd. today would be jockeying with Dell Inc. for the second spot in the PC market while preparing for a showdown with market leader Hewlett-Packard Co.

Instead, the Chinese PC maker remains a distant fourth, the same position it held two years ago when it made a big splash in the hot consumer PC market with the introduction of its Idea line of portable computers and desktops.

Lenovo still rules in units sold over the likes of Toshiba Corp., Apple Inc. and Asus Inc.

But it is left to watch Taiwanese rival Acer Inc. make good on its vow to surpass the faltering Dell and take a shot at HP.

"There's a pretty big gap between No. 2 and No. 3, and between No. 3 and the rest," said Richard Shim, an analyst at IDC.

What happened? Lenovo's consumer sales failed to take off as fast as planned, even as Lenovo's traditional strength -- business PCs like the ThinkPad -- fell off a cliff.

In markets it sought to capture, such as the U.S., Western Europe and Japan, Lenovo ranks sixth, seventh and seventh, respectively, according to IDC.

Lenovo's performance "has been disappointing," said independent analyst Rob Enderle.

As a result, Lenovo has lost money in the past three quarters. It dropped its American CEO, William Amelio, at the beginning of the year.

During a fiscal fourth-quarter 2009 presentation to financial analysts in May, Lenovo put up a slide bluntly blaming its losses in part on its "limited participation" in the consumer PC market.

What has Lenovo done wrong? According to analysts, several things:

1. Poor execution. Unlike its commercial PC business, which is based in Morrisville, N.C., Lenovo's consumer business is based in its Beijing headquarters. On one level, that makes sense: Lenovo has long dominated the Chinese consumer PC market. And PC design and manufacturing is almost wholly done in China these days.

The problem, according to Enderle, is Lenovo's failure to localize. "Most firms who are successful in this [consumer PC] segment have specialists in each key region set up to help create products unique to that region and deal with unique channel issues as well," he said. Lacking this "has hurt them to date."

Or as Shim wrote in a research note in February shortly after Amelio's departure, "There has been the sense that Lenovo has been slow and poorly positioned to respond to PC market conditions."

2. Overestimating its brand. Riding its IBM research and development heritage, "Lenovo's initial strategy when it went into the retail market was to try to get paid a buck for its innovation," Shim said. The problem, he noted, was that Lenovo's launch of its Idea lineup in January 2008 coincided with the rise of low-cost netbooks, which put pricing pressure not just on laptops, but on all consumer PCs.