Lenovo’s Yang to End Losses at Motorola Within Six Quarters

Feb 25, 2014 7:49 am ET

(Updates with head of PC division in final paragraphs. For Mobile World Congress coverage, see SHOW <GO>.)

Feb. 25 (Bloomberg) -- Lenovo Group Ltd., which is buying Motorola Mobility from Google Inc., plans to make the phonemaker profitable within four to six quarters without eliminating jobs, Chief Executive Officer Yang Yuanqing said.

“Don’t be scared by the $1 billion-a-year loss,” Yang, 49, said in an interview at the Mobile World Congress in Barcelona yesterday. “We will improve that even from day one. Google is very good at software, ecosystems and services. But we are stronger in the manufacturing of devices.”

Yang has bet he can use the purchases of Motorola and International Business Machines Corp.’s low-end server business, for a total of $5 billion, to move beyond the shrinking personal-computer market to become a broader technology company. The acquisitions, both of which are larger than any Yang has previously completed, will challenge his ability to absorb the new teams and find the cost savings to make the units profitable.

Motorola Mobility had operating losses of more than $1 billion last year, according to data compiled by Bloomberg. The timetable to turn around Motorola begins after the acquisition is completed, and Yang said he’s optimistic Lenovo will receive regulatory approval.

Improved profitability will come from increased production and sales as the company targets emerging markets, Yang said. The company also will seek to reduce costs from internal communication and computing services. Motorola’s gross margins are “pretty decent,” he said.

Lenovo shares fell for the seventh straight trading day, dropping 1 percent to close at HK$7.72 in Hong Kong.

Visibility Gone

Lenovo announced plans on Jan. 23 to buy IBM’s low-end server business for $2.3 billion. A week later, Lenovo said it would acquire Motorola Mobility for $2.91 billion.

Shares of Lenovo have slumped from HK$10.96 the day before the Motorola Mobility purchase was announced on investor concerns the unit would be a drag on the PC manufacturer’s profitability.

“People are very worried that the visibility of Lenovo as an investment is out the window,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “We don’t know what the impact will be of these deals on the financials.”

Lenovo can “easily” cut 70 percent of the Motorola business’s operating expenses, according to estimates from Kirk Yang, an analyst at Barclays Plc in Hong Kong. Lenovo’s Yang declined to comment on that estimate.

Third Biggest

The Motorola acquisition will create the world’s third- largest smartphone vendor with about 6 percent of the global market, trailing only Samsung Electronics Co. and Apple Inc., according to Strategy Analytics.

“We are very complementary,” Lenovo’s Yang said of the deal. “We could become a stronger player in the mobile market to challenge the top two.”

Lenovo aspires to be No. 1 in the global smartphone market, Chief Financial Officer Wong Wai Ming said in an interview today with Bloomberg Television. He didn’t supply a timeframe for achieving that objective.

“We want to do it as soon as we can, and do it in a sustainable way,” Wong said. “Motorola is a very strong brand, a very well-known brand with great technology, great products and great business relationships with the carriers. Together with our existing smartphone business, we will achieve what we set out in our strategy.”

PC Revival

The two purchases both exceed the $1.25 billion acquisition price of IBM’s PC unit in 2005. That transaction, which came at a time when the business hadn’t made a profit for 3 1/2 years, helped Yang transform his company into the world’s biggest PC maker from No. 8.

Yang is expanding Lenovo’s product lineup after global PC shipments fell last year. The 10 percent decline in shipments in 2013 was the worst ever, researcher Gartner Inc. said last month.

“A company should focus on not just the short-term performance, but also long-term sustainable growth,” Lenovo’s Yang said. “If we only focus on PCs, one to two years later we cannot further grow. So we must find a new area so we can help our shareholders make more money and see more growth.”

Chief Operating Officer Gianfranco Lanci, who was put in charge of Lenovo’s PC division last month, said in a separate interview today that he expects the industry to return to growth in the next couple of quarters.

Customers are running up against the limitations of tablets, which are good for consuming content and bad for creating it, he said. Lenovo will focus on “ultra portable,” lightweight laptops with smaller screens, he said.

--Edmond Lococo and Cornelius Rahn, with assistance from Caroline Hyde in Barcelona and Amy Thomson in London. Editors: Suresh Seshadri, Kenneth Wong