Analysts See Lenovo’s Motorola Buy as a Blow to Second-Tier Brands But Not Samsung, Apple

Lenovo’s proposed purchase of Motorola Mobility from Google for $2.91 billion will be felt hardest among competitors including Huawei, LG and ZTE, which have been jockeying for the No. 3 position among worldwide smartphone makers behind Samsung and Apple, analysts said Thursday. “If you're a Samsung or an Apple, this isn’t going to hurt you too much right now, but if you're anybody else this is pretty significant,” IDC’s Ramon Llamas told us.

IDC’s most recent smartphone tracker showed Lenovo as the No. 5 smartphone maker worldwide in Q4 but trailing No. 3 Huawei by a mere 0.4 percent market share and No. 4 LG by 0.1 percent share (CED Jan 29 p5). In that report, IDC had warned Huawei faces a crowded group of competitors in third through fifth places and that Lenovo could challenge Huawei for the No. 3 spot this year “if it’s able to expand into more developed markets,” which would become a foregone conclusion if the Motorola Mobility buyout is approved. Samsung and Apple ended the year with 31.3 and 15.3 percent market share, far ahead of Huawei’s 4.9 percent.

The purchase would enable Lenovo, well-known in the China market but with little penetration elsewhere, to get “the all-important foothold into the West,” Llamas said. He noted that Lenovo has zero presence in North America and Latin America and has been “struggling” in Europe. Chinese competitors Huawei and ZTE have been trying to get a stronger foothold in the U.S. for years, he noted. “Lenovo bought their way into it, which saves a lot of time, money and resources,” Llamas said. While $3 billion is a hefty price to pay for market share, buying Motorola with entrenched carrier distribution is “a quicker way than slogging your way through some of the smaller carriers in a second-tier capacity as Huawei and ZTE have done,” he said.

Lenovo had been looking at the U.S. market “for some time,” said DisplaySearch Tina Teng, in a blog post Thursday. She compared Lenovo’s strategy for Motorola Mobility with the former IBM ThinkPad brand in PCs, which has enabled it to become a top global player in computing. While smartphones have a much different set of product and ecosystem issues from PCs, the deal puts Lenovo “in the same league as Samsung” with a global portfolio covering PCs, tablets and smartphones, she said.

Lenovo reportedly had its sights on BlackBerry, but BlackBerry has its own OS and uses both Qualcomm and Marvell for baseband processors, which would have involved running “completely different hardware and software platforms,” Teng said. “Lenovo likely concluded that the challenges would outweigh the benefits.” Motorola phones are Android-based, but they use Qualcomm and Nvidia for applications processors, while most of Lenovo’s products use MediaTek solutions, Teng said. Lenovo has experience with Qualcomm products via the Vibe Z and A706 smartphone, she noted, but added that multiple hardware platforms can result in “design complexity and procurement challenges."

Teng questioned Motorola’s brand value as it holds just an 8 percent share of the U.S. smartphone market, which is declining, according to DisplaySearch data. “Can the Motorola brand really help Lenovo to boost its growth outside of China?” she said, leaving time to tell whether the acquisition is worth $2.9 billion.

With just 1 percent market share, according to Gartner numbers, the acquisition won’t have a big impact on Motorola brand market share, but it does get Lenovo into the coveted U.S. market, Gartner’s Hugues de la Vergne told us. It will be tough to gain market share with Samsung and Apple holding 60 percent of the market, said the analyst. He predicted Lenovo’s strategy will be to leverage the Motorola Mobility brand and use aggressive pricing in the mid- to higher end of the market “to achieve what Huawei and ZTE have not been able to do” -- to “move up-market from sub-$100 no contract phones."

On the value of the Motorola Mobility brand versus the up-and-coming Lenovo brand, IDC’s Llamas said, “You don’t want to turn off the faucet for the Motorola brand, at least here in North America.” In the U.S., Motorola stands for “mobility and great devices,” and Lenovo doesn’t have those associations, he said. “I challenge you to go to Times Square and ask 100 people to name 10 smartphone companies. Chances are they won’t name Lenovo,” he said, despite Lenovo’s No. 2 ranking in China. More than likely they would name Motorola “so why do you want to do away with that brand equity?” he said.

Recently Motorola has had “decent presence” in the mid- to high range in the North American market, Llamas said, but he acknowledged “there’s a lot of work to be done” in developing a broader product line. The high end of the market is saturated but “there’s some low-hanging fruit to be had,” he said.

Google’s sale of Motorola Mobility to Lenovo could have a major impact on Flextronics, which launched manufacturing of the Moto X smartphone -- the first smartphone to be manufactured in the U.S. -- at its Fort Worth, Texas, plant in August. Sales to Google/Motorola Mobility represented more than 10 percent of Flextronics’ fiscal Q3 sales of $7.2 billion, said Flextronics Chief Financial Officer Christopher Collier on an earnings call. But any impact from the sale isn’t likely to be felt for several months as the deal goes through regulatory reviews, Collier said.

"It’s probably going to take six months to get the regulatory approvals and all those other things,” Collier said. “And then who knows” what Lenovo’s “operating strategy is going to be on a go-forward basis. We just know we are well positioned with them. We've got a capability that they need and I think we will just go and build that relationship with Lenovo and see how it works. I don’t expect anything to change in the near term,” he said.

While Flextronics doesn’t build smartphones for Lenovo, it does about $500 million in annual sales with the company, largely in notebook and desktop PCs, servers and work stations. Flextronics extended an existing supply agreement with Lenovo in 2010 to include building products for the European and Middle Eastern and Africa markets for it out of plants in Europe, including one in Sarvar, Hungary. Flextronics also provides Lenovo with “mechanical and systems solutions” in China, including repair and logistics, and manufacturing services in Brazil, the company has said. Flextronics also purchased Motorola Mobility’s set-top box factories in Brazil and China from Google for $75 million in 2012, as Google moved to sell the set-top business to Arris. Lenovo invested $793 million in 2012 with plans to build a mobile phone and R&D facility in Wuhan, China, with annual capacity for 30 million to 40 million units. Lenovo has a range of other plants, including four in China and one in Whitsett, N.C., that opened last year to assemble notebook PCs.

"We are going to leverage this relationship that we have to do more work” with Lenovo, said Flextronics CEO Michael McNamara. Lenovo could shift some Motorola Mobility production to its own plants, but that “would probably take a long time and they don’t even internally source everything they have today,” he said.

Flextronics’ original pact with Google to make Motorola Mobility smartphones was aimed at securing business with Google for other products as well, McNamara said. Flextronics has programs with Google that will remain intact separate from the Motorola Mobility business and “we have been quite successful making the transition to build a broader relationship,” he said. “Our original intent with the whole Motorola deal was to build a broader relationship within Google ecosystem where we believed over time we would find a lot of different disruptive hardware products coming out that we would participate in,” he said. “We think that’s intact.”