Lenovo has one more worry to add to slowing growth: trouble in China. The tech group's revenue fell eight per cent to $13 billion in the three months to December on the back of cooling demand for smartphones and personal computers. Even though it is slashing costs, competition from domestic rivals such as Huawei and Xiaomi spells further trouble for margins.
The hardware giant is feeling the squeeze from a shrinking global PC market. Revenue from computers, which make up 62 per cent of the total, fell 12 per cent year-on-year to $8 billion in the quarter. Currency swings further squeezed profitability in Lenovo's core business: pre-tax income tumbled 18 per cent year-on-year.
Meanwhile, Lenovo is still struggling to establish itself in the smartphone business. The group's mobile division - which absorbed Motorola in 2014 - hit its self-imposed milestone by breaking even, after excluding certain charges. But Lenovo is selling fewer phones and losing market share: shipments in the quarter fell 18 percent compared with the same period of 2014.
Aggressive cost-cutting may be the one bright spot. Last August, the company announced plans to slash $1.35 billion from annual expenses. The restructuring is already yielding results: quarterly operating expenses were down 15 per cent year-on-year, allowing the group to report a much-need increase in earnings.
Troubles at home are mounting, though. China accounts for less than a third of the company's total revenue, but over half of pre-tax profit. While Lenovo's smartphones have so far failed to gain traction with Chinese consumers, the company still commands 40 per cent market of the domestic PC market.
That makes it a target for the likes of rival Xiaomi, which is gearing up to enter China's premium notebook market this year, according to analysts at Maybank Kim Eng. Competition is already evident in Lenovo's pre-tax profit margin in China, which fell to 4.7 per cent in the most recent quarter - a full percentage point lower than a year ago.
After a 10 per cent share price drop on February 3, Lenovo's market value is now just $9.5 billion, less than twice the combined $5 billion in cash and stock that it splashed out on Motorola and on IBM's low-end server business in 2014. In the absence of top-line growth, it's hard to see investors regaining much confidence.
