Advertisement

Blog

Mean, Lean, Supply Chain Machine

Lenovo is a well-oiled, fine-tuned supply chain machine. With an unusual hybrid strategy of in-house and contract assembly, as well as vertical integration of the procurement of key components, the company's $5 billion-plus in acquisitions this year will increase its scale and reach, giving it further structural cost advantages over its competition.

The company started 2014 by announcing two mammoth acquisitions within a week of each other. On January 23 the company said it would purchase IBM's x86 server business for $2.3 billion. Then, on January 29, it announced it would spend another $2.9 billion to buy the Motorola Mobility mobile phone business from Google.

In the server acquisition, recently approved by both Chinese and US regulators, Lenovo is receiving System x, BladeCenter and Flex System blade servers and switches, x86-based Flex integrated systems, NeXtScale and iDataPlex servers, and associated software, blade networking, and maintenance operations. Lenovo already had a small server business, but the acquisition will make it the number three server vendor, with 10% of the market, behind Hewlett-Packard and Dell, according to IHS.

The agreement includes the transfer of 7,500 IBM employees around the world to Lenovo's employ at locations in Raleigh, N.C., where it assembles ThinkPads; in Shanghai and Shenzhen, China; and in Taipei. The announcement wasn't clear on whether this includes former IBM assembly operations, but it seems likely. That means Lenovo gains manufacturing capacity, which it can use to build both servers and PCs.

Since it entered the PC market in 2005 by purchasing IBM's PC division, Lenovo has become the number one PC vendor worldwide. With the huge volume of PCs it builds, the company undoubtedly gets a better price on Intel microprocessors than IBM or probably any other company. The server acquisition will only increase that purchasing power. That, combined with volume discounts on other components and the ability to assemble both PCs and servers in the same facilities, should help it make a better margin on the X86 servers than IBM could ever hope for. Servers were the only IBM product line using Intel X86 chips, according to Alberto Moel, a senior analyst at Bernstein Research in Hong Kong. “Lenovo has the entire X86 PC portfolio,” he says. “It's the same supply chain, but instead of making PC motherboards, they are making server motherboards.”

The Motorola Mobility purchase indicates a similar strategy. It will increase volumes while helping Lenovo move into higher-end, and higher margin, products. Since it started making handsets in 2010, Lenovo has quietly grown its mobile phone business. Today, it is the fourth largest manufacturer of mobile phones in the world, and the number one seller in China. In fact, in its latest earnings report, the company points out that in its latest quarter, ended June 30, it sold more smartphones than PCs for the first time.

The company recently built a huge manufacturing plant dedicated to mobile products in Wuhan, China. It was mum at the time of the acquisition about whether it would continue to build the Moto X phones at a factory that Motorola and Flextronics opened last year in Texas. In May Lenovo said it would shutter that plant. Presumably, production of the Motorola Mobility phones will now move to the Wuhan facility, which has the capacity to build 50 million mobile devices a year.

Bringing the Moto phones into the fold will enable Lenovo to build these feature phones using its low-cost supply chain. It will be able to make margins that other manufacturers can't, or at least to make a profit on existing margins because it has lower overall costs. “With the combined scale of Lenovo and Motorola after the acquisition, we can significantly reduce costs in terms of material procurement and supply chain,” said Lenovo CEO Yang Yuanqing shortly after the acquisition was announced. “From day one, we can start working on those cost synergies.”

For its latest quarter, Lenovo reported that PC shipments were up 15%, to 14.5 million units. In tablets, Lenovo shipped 2.3 million, up 67%. In smartphones, it shipped a record 15.8 million units, up 30%. As this giant continues to crank up its supply chain machine, other manufacturers of PCs, servers, tablets, and phones had better watch out.

5 comments on “Mean, Lean, Supply Chain Machine

  1. Ariella
    September 4, 2014

    You say, “The agreement includes the transfer of 7,500 IBM employees around the world to Lenovo's employ at locations in Raleigh, N.C., where it assembles ThinkPads; in Shanghai and Shenzhen, China; and in Taipei.” Did they already agree to make the move to keep their jobs, or is that still in negotiations? I know that companies do tend to make such demands, but it is a serious hardship for anyone who has a family with roots in a particular community to just up and leave to settle in an unfamiliar place.

  2. Daniel
    September 5, 2014

    “The agreement includes the transfer of 7,500 IBM employees around the world to Lenovo's employ at locations in Raleigh, N.C., where it assembles ThinkPads; in Shanghai and Shenzhen, China; and in Taipei.”

    Tam, that may be an internal understanding between IBM and Lenovo; but whether employees agreed for that? They have to get employee concern also; many of them may not be willing to be a part of new company due to various reasons.

  3. Daniel
    September 5, 2014

    “Did they already agree to make the move to keep their jobs, or is that still in negotiations? I know that companies do tend to make such demands, but it is a serious hardship for anyone who has a family with roots in a particular community to just up and leave to settle in an unfamiliar place.”

    Areilla, old company (IBM) may want to save their employees but that may not be the case for new company (Lenovo). They may have surplus employees in their own plants and may want to reallocate to the new division. Whatever may be the outcomes, good or bad employees are going to effect.

  4. FLYINGSCOT
    September 8, 2014

    I have had a couple of recent Lenovo laptops and have been most impressed by their quality and peformance. It is interesting to see they are on the acquisition trail and I am confident they will do very well indeed.

  5. FLYINGSCOT
    September 8, 2014

    I have had a couple of recent Lenovo laptops and have been most impressed by their quality and peformance. It is interesting to see they are on the acquisition trail and I am confident they will do very well indeed.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.