Why Lenovo Group Travels Through the Cycle: From Hardware Manufacturers to "Digital Engines"

Introduction: Lenovo is no longer a simple hardware manufacturing company, but a new IT company as a "digital engine", becoming a "bridge" connecting manufacturing and digital industries.

Wu Yangyinghui | wen

On April 6, Lenovo Group held an annual global oath ceremony, and Chairman and CEO Yang Yuanqing appeared on the screen in front of employees. Since the outbreak of the epidemic in 2020, Lenovo has held a global cloud oath conference for all employees in the form of live broadcast for three consecutive years. "In this new phase, our first priority is how to successfully navigate the cycle." Yang Yuanqing said.

According to Yang Yuanqing, Lenovo Group's total revenue growth in the past two years is expected to exceed 100 billion yuan, achieving strong growth through the cycle. To achieve this achievement, Lenovo Group not only needs to maintain its own strong internal growth momentum, but also needs to overcome external obstacles such as the global epidemic, geopolitics, and shortage of parts. Lenovo's successful completion of this challenge stems from the direct benefits brought about by its "3S" strategic transformation, and is also the fruit of Yang Yuanqing's strategic determination after spanning a long cycle.

We need to re-recognize Association. In the future, Lenovo will no longer be a simple hardware manufacturing enterprise, but a new IT company as a "digital engine" and become a "bridge" connecting manufacturing and digital industries.

1

Multi-level, three-dimensional value growth network

Lenovo Group's revenue and profit reached a new milestone throughout fiscal 2021.

Yang Yuanqing revealed that lenovo Group's total revenue growth in two years is expected to exceed 100 billion yuan, from 353.1 billion yuan in fiscal 2019 to 450 billion yuan in fiscal 2021. Lenovo Group's total turnover in the first three quarters increased by 22% year-on-year over last year, and its net profit rose by more than 76%.

Lenovo's revenue growth momentum even overwhelmed the two major international technology giants, HP and Dell. In the latest fiscal year just this past, hp and Dell both set new highs in revenue, with HP's total revenue up 12.1% year-on-year and Dell's latest fiscal year total revenue up 17% year-on-year. Among the three companies, Lenovo ranked first, leading HP and Dell in total revenue growth rates of 10% and 5%, respectively.

One point that cannot be ignored is that Lenovo has achieved this series of breakthrough results in the past two years under the conditions of frequent global black swan events and turbulent environment. This makes its counter-trend growth seem quite rare.

The momentum behind the strong growth of Lenovo's performance stems from the strong pull of "basic disk + innovative business", forming a multi-level and three-dimensional value growth network:

On the one hand, it is basically stable and progressive. Lenovo's basic disk includes three major business segments of computers, mobile phones and infrastructure, which are the main business fronts of Lenovo Group for many years, contributing most of the core revenue to Lenovo and playing the role of the basic base in the group. In this round of growth, Lenovo has successfully reversed the decline of their insufficient growth trend and achieved new progress in "old tree blossoming".

First, the personal computer business revenue and profit of IDG Intelligent Device Business Group reached a new high, achieving profit margin improvement for 16 consecutive quarters. Second, the smartphone business, which is also under IDG, has been healthy and profitable and growing rapidly for seven consecutive quarters. Third, the ISG Infrastructure Solutions Business Group, which includes servers, storage and other businesses, its product line was once the main contributor to Lenovo's historical revenue, but it was once in a state of loss. Today, ISG has turned a profit, growing rapidly at 3 times the rate of the market, growing far beyond the market.

On the other hand, it is the innovation business that is determined to forge ahead. The newly established SSG solution service business, as the main front of Lenovo Group's "second growth curve", strives to achieve high profits and high growth. At present, Lenovo Solutions Service business has entered the top four of China's IT service market. More innovative businesses such as the intelligent edge and consumer IoT are also doubling.

In addition, Lenovo Ventures has completed 48 new investments in the past year, invested in 15 chip design companies in total, and added three new IPOs, realizing the important function of accelerating the core business with strategic investment.

Behind this series of achievements, there is an important question: What did Lenovo do right, so that it has the ability to cross cycles?

2

Lenovo's new momentum: from hardware to service

Lenovo in most people's minds, or a hardware business image of selling computers. But in fact, Yang Yuanqing has been laying out for several years, and it is necessary for Lenovo to complete the transformation from product-oriented to service-oriented. Its success or failure will determine whether Lenovo can become a more profitable company.

The key to this transformation is the "3S" strategy proposed by it.

"We have entered an intelligent era in which data intelligence drives industrial change." Yang Yuanqing made a judgment. Based on this, he launched the "3S" strategy - Lenovo comprehensively launched the transformation of three strategic areas: intelligent Internet of Things (Smart IoT), intelligent infrastructure (Smart Infrastructure) and industry intelligence (Smart Verticals), committed to becoming a leader and enabler in the era of intelligent change.

In order to undertake this strategy, Lenovo then carried out a drastic reform of its organizational structure. On April 1, 2021, Lenovo reorganized the company into three business groups: IDG Intelligent Devices Group, ISG Infrastructure Solutions Group, and Solutions & Services Group, which respectively undertake the "3S" strategy of intelligent Internet of Things, Smart infrastructure and industry intelligent business landing.

Behind a series of changes, Yang Yuanqing made a forward-looking decision to follow the trend - to upgrade Lenovo from a hardware product manufacturer to a high-tech-driven solution provider.

Shortly after the launch of the "3S" strategy, it suddenly encountered a global epidemic. This variable makes Lenovo face many challenges, but it also allows Lenovo to change inadvertently win the booster.

In the past two years, in the difficult downward cycle, Lenovo has faced many challenges such as the global epidemic, the shortage of spare parts, and geopolitics. In 2020, Yang Yuanqing publicly stated at the Global Cloud Oath Ceremony that it was completely unpredictable what challenges he would face in the next twelve months. In the face of uncertainty, Lenovo announced the freezing of salaries and promotions, proposing to exchange "tight days" for "long days".

After that, Lenovo had to face many problems such as factory shutdown and production stagnation. Lenovo has a total of 33 manufacturing bases around the world. To this end, Lenovo rotates different domestic and overseas production centers to ensure that there are always factories that continue to produce, and the elastic supply chain continues to meet the needs of customers from all over the world.

However, it is also due to the challenge of the epidemic that Lenovo has based itself on its own unique manufacturing genes and accelerated its entry into the new digital dividend market. Lenovo transformed from a manufacturer selling equipment to a digital service provider, exerting the power of science and technology to help people adapt to the new way of life and work under the new normal, helping enterprises to digitize and intelligentize the process, and achieving strong growth in performance.

As a result, Lenovo began to cut into the competition of China's digital new market dividends. This arena is precisely the industrial Internet field that is in full swing, among which there are already major giants such as Ali, Tencent, Baidu, and Huawei in the dragon disk. As a manufacturer of hardware, how does Lenovo compete with Internet and IT companies?

Lenovo's manufacturing genes have become an important competitive advantage here. Based on the hardware manufacturing capabilities accumulated over the years, Lenovo has formed a complete technical architecture of "end-edge-cloud-network-intelligence", formed intelligent solutions through powerful computing power, served the intelligent transformation of various industries and departments under new needs, and used "new IT" to empower the transformation and upgrading of the real economy.

Lenovo's more important secret weapon is "endogenous externalization". It is a strategic move for Lenovo as a whole to bring new IT to customers, including two aspects:

The first is "endogenous", using Lenovo's self-developed products and solutions to drive the company's strategic transformation. This has two advantages: first, Lenovo itself, as a seed customer, iteratively optimizes the product with its own insights; second, through its own practical experience, it tells customers how core products such as DaaS and TruScale can help enterprises complete digital transformation.

On the other hand, it is "externalization", which brings Lenovo's solutions verified in the endogenous process to the market, brings customers with similar needs, and provides new IT hardware, services and its accumulated experience in manufacturing digital transformation to more industry partners.

Relying on the "3S" strategy, Lenovo Group empowers the digitalization and intelligent transformation of the real economy, providing digital transformation services for enterprises in many industries such as Asia Cement, Tongkun Group, Sany Heavy Industry, etc., further consolidating the foundation for performance growth.

3

Crossing the cycle: Yang Yuanqing's strategic determination

One of the biggest characteristics of Yang Yuanqing is that he "can hold his breath and withstand setbacks." In the 20 years since he took over Lenovo, he has amplified this personality trait of his own into the strategic focus of Lenovo as a company. This has become the foundation for Lenovo to be able to cross the cycle and grow against the trend.

Lenovo's acquisition of Motorola is a typical embodiment of Yang Yuanqing's ability to withstand external pressure and lead Lenovo through the cycle.

In 2014, Lenovo spent $2.9 billion to acquire former U.S. mobile phone giant Motorola from Google. However, this acquisition has been criticized by the outside world, due to the high difficulty of integration of international mergers and acquisitions, Lenovo's mobile phone business has not turned against the wind, but has fallen into losses because of the acquisition. To this end, Yang Yuanqing came under great pressure and voluntarily gave up his annual bonuses and restricted stock incentives in 2015 and 2016.

Four years later, Yang Yuanqing and Lenovo have finally shown their due potential for this unpromising acquisition with continuous efforts. In the second quarter of 2018, Motorola's business was profitable for the first time in 10 years, with a profit of approximately $200 million. In the fourth quarter of 2021, Lenovo Motorola mobile phones achieved double-digit growth, of which Motorola shipments reached 14.9 million units, a growth rate of 54% compared with the same period last year, and its market share in North America reached 13.1%.

In Lenovo's change from "hardware-oriented" to "service-oriented", Yang Yuanqing's strategic determination has also played a key role. From 2019 to 2021, Lenovo focused on the "3S" strategy, solidly laid out digital and intelligent transformation, successfully crossed the cycle, and achieved the counter-trend growth of the first stage of change.

In order to answer the big proposition of how to "cross the cycle" in the next five years, Yang Yuanqing led Lenovo to target the future of global IT services - this is a large market that will exceed the trillion US dollars in 2025, and the scale will exceed 10 times that of the personal computer market.

Yang Yuanqing revealed that in the next stage, Lenovo will focus on the technical architecture of "end-side-cloud-network-intelligence", focusing on the short-term, medium-term and long-term, and invest resources in three tracks.

The first track is to focus on innovations around existing products, applications and business models over the next 1-2 years, including innovations in equipment, key components, applications and the "everything is at service" business model within each business framework.

The second track is an incubation business that focuses on the next 2-3 years, driven by new technologies. In addition to the familiar data intelligence and cloud-network convergence services, it also includes three innovative areas of incubated businesses, namely AR/VR technology based on meta-universe applications, edge computing and cloud service businesses.

The third track focuses on core technologies and emerging technologies, focusing on basic and breakthrough research for 3 years or even longer. This includes tackling key technologies in the ICT field such as next-generation artificial intelligence and next-generation communication protocols; continuing to explore new computing scenarios such as in-vehicle computing and metacosm; and exploring basic research on computing power sharing and data circulation such as privacy computing and multi-heterogeneous advanced technology architecture based on the field of large computing.

The three tracks have clear responsibilities and resources, seize the high-profit and high-growth opportunities in the existing market, and expand to related technical fields and market segments, while creating the core technical advantages of Lenovo Group and establishing a moat.

Lenovo's existing infrastructure capabilities and manufacturing genes will undoubtedly play a unique competitive advantage in it. But to win the market competition with huge new digital dividends, this leg is not enough. Lenovo must further transform into a high-tech-driven company and become a technology-driven "new IT" company.

Yang Yuanqing has shown his determination. On April 5 this year, Yang Yuanqing issued an internal letter saying that he was willing to give up the 80 million yuan of long-term incentives given by the company and distribute this money to front-line grassroots colleagues as a special reward. At the same time, he said that by the end of the 23/24 fiscal year, Lenovo Group's R&D investment will double from the 20/21 fiscal year, and the total R&D investment will exceed 100 billion yuan in the next five years. In the new fiscal year, Lenovo will continue to recruit about 3,600 R&D talents and increase the number of campus recruits to achieve the goal of adding 12,000 R&D personnel in 3 years.

We need to re-recognize Association. In the future, Lenovo will no longer be a simple hardware manufacturing enterprise, but a new IT company as a "digital engine" - exporting digital capabilities to the society, helping the transformation and upgrading of China's industrial economy, and becoming a "bridge" connecting manufacturing and digital industries.