"Lenovo's strength is that its China PC business is a cash cow that can fund the cost of its smartphone expansion," said Barclays managing director Kirk Yang. PC earnings allow Lenovo to focus its smartphone business on growth over profit for now, he said. Lenovo's China PC business had an operating margin of 5.9% in the latest quarter.
Explosive demand among first-time smartphone buyers in China and other emerging markets is changing the global market, creating opportunities for players other than Apple and Samsung to gain economies of scale. But fierce price competition for inexpensive smartphones means handset makers risk becoming chronically unprofitable.
Lenovo says its smartphone business is unprofitable, without disclosing the loss. But its market share in China, where the company sells most of its phones, soared to 15% in the third quarter from 1.7% a year earlier.
Even if Lenovo's smartphone business becomes profitable in China, pressure on its margins won't ease, analysts said, because prices of low-end phones are falling faster than expected.
The prices of entry-level smartphones in China have dropped from 40% to 50% in the past year, according to CLSA. More smartphones sold at about 1,000 yuan ($160) now come with larger screens, better cameras and more powerful processors than they used to. "The scary implication here is that these phones do not differ greatly in terms of quality and performance" from higher-priced branded smartphones, the report said.
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