Both the tech world and business media are abuzz this week with the back-to-back news regarding China based Lenovo’s announced acquisitions of both the IBM low-end server hardware business and this yesterday’s revelation regarding the acquisition of Google’s Motorola unit.
From our lens, both moves point to added global brand presence and further leveraging of the current scale of Lenovo’s global supply chain capabilities.
However, both deals are contingent on government scrutiny, and that may present a challenge.
Lenovo’s thrust into low-end servers where product margins have been an ongoing challenge, can complement the firms core manufacturing presence across China. This is rather significant since the server market has rapidly shifted toward commodity plug-and-play hardware options. It also provides further depth to the firm’s server based product lines, not to mention the previously installed base of existing IBM customers. By our lens, it is a parallel to the actual creation of the Lenovo global brand with the acquisition of IBM’s personal computer hardware business.
The Motorola acquisition provides a more interesting backdrop. Google acquired the Motorola unit in 2012 for $12.5 billion amid lots of market speculation as to why the search and mobile operating system giant would want to get into the smartphone hardware business. Since the acquisition, Google has incurred a reported $2 billion in additional operating losses along with creating additional friction among existing Android OS hardware brands including Samsung. With the announcement of this deal, one Silicon Valley outlet was quick to opine that Google’s prior decision to acquire Motorola was a major mistake and with the deal, Google is taking more than a $5 billion loss on its prior investment.
Reports indicate that Google insisted on holding on to a portfolio of key product patents which was more than likely the original motivation to acquire Motorola. Thus Lenovo is buying the brand, product IP licensing and platform to add to existing line-up of smartphone products. If the acquisition is approved, it would thrust Lenovo into the number three position within the global market, along with a credible presence in the U.S. and North America smartphone market.
Motorola was already attempting to transform itself into a lower-cost, higher volume smartphone hardware provider with the launch of its recent Moto X and Moto G product line-up. Lenovo has its own smartphone line-up, pursuing an aggressive strategy to compete within China’s massive but cost-conscious smartphone market It has been competing directly with Samsung, Apple, Huawei and according to one research firm, has assumed the number four position in China.
In its reporting of the deal, the Wall Street Journal astutely concluded that Lenovo’s greater worldwide supply chain scale positions the company well to be able to leverage low-cost Android devices across the global market. It would appear that Lenovo will retain all Motorola employees in the smartphone segment and thus there an incremental plus in product development and distribution.
In a September 2012 commentary, Supply Chain Matterscommented that from what we extracted from a talk given by Lenovo’s Vice President of Procurement, that its hybrid supply chain strategies were well positioned to be able to enable the company’s strategic business and product outcomes. If these two new acquisitions are approved by U.S. regulators, the Lenovo supply chain may well reap more benefits from its ongoing capability efforts.
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This is a quick but interesting update to our end of January commentary on Lenovo’s intent to acquire the Motorola smartphone business from Google.
A report published by the South China Morning Post on February 4th has the headline- “Lenovo to streamline smartphone supply chain after Motorola purchase”. Perhaps the writer read our commentary. The article quotes the chairman and CEO of Lenovo indicating that the company must win in the smartphone segment no matter how much money is invested. He further states that Lenovo management sees a lot of synergy between the two companies and that an “execution plan” would determine how much both companies production supply chains would be reshaped.
Also mentioned was that Motorola has a longstanding relationship with CMS provider Flextronics and that the contract manufacturer recently took over management of Motorola factories in Tianjin China and Jaguariuna Brazil. The authors speculate through an industry source that Lenovo might consider re-assessing the overall strategy.
Again, all of this speculation is subject to Lenovo gaining regulatory approval of the Motorola deal, but supply chain economies of scale will be an important agenda item, post acquisition.