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A Local Call

By Benjamin Shepherd on January 31, 2013

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With Research in Motion (NDSQ: RIMM) taking the name of its marquee product, the BlackBerry, in an attempt to revamp its image and revive is waning fortunes, you’d be right to think smartphones are a tough business.

If you need more evidence of that, just ask Stephen Elop, chief executive of Nokia Corp (NYSE: NOK), which has struggled for years to gain market share against Apple’s (NSDQ: AAPL) iPhone.

But just as some companies are fighting to avoid making an ungraceful exit from the smart device market, others are coming in.

Just two years ago, Lenovo Group (Hong Kong: 0992, OTC: LNVGY) made its smartphone debut, launching its LePhone, its first touch-screen handset, in China. Since then, Lenovo has quickly become the second-largest vendor of smartphones in the Chinese market with 19 different devices, an impressive feat for a company that’s had an on-again-off-again relationship with mobile phones in general.

Back in 2008, Lenovo sold off its mobile phone division to focus its efforts on its personal computer business not long after it purchased IBM’s (NYSE: IBM) personal computer segment. But just over a year later, the company reacquired the same business for USD200 million as it realized that the real opportunity resided in smart devices.

Despite that change of heart, Lenovo has been slow to tackle the smartphone market, preferring to focus on devices like tablet computers. But over the past six months it has expanded its smartphone presence beyond China and pushed into the Philippines, Russia, India, Indonesia and Vietnam.

Many analysts have argued that Lenovo is spreading itself too thin, based on the markets it has chosen. Startup costs in those markets are higher, because there’s little existing infrastructure. But so far, the company is proving its detractors wrong.

The company just reported record fourth-quarter 2012 earnings, thanks to its smartphone operations as that division locked in its first profit.

Take that, BlackBerry and Nokia!

So how has Lenovo gone from less than two percent market share in China less than two years ago to nearly 15 percent today?

For starters, it enjoys strong name recognition in China and among its distributors. Lenovo has invested heavily in advertising in China and across much of Asia over the past several years, playing up the cachet it gained by purchasing the IBM business.

Lenovo has also become the largest supplier of smartphones to China Mobile (NYSE: CHL) and China Unicom (NYSE: CHU), both of which also happen to be among the largest and best known providers of cellular and data service in the country.

On top of that, Lenovo’s devices have a clear cost advantage at just half of the cost—or less—than most competing devices. That’s largely thanks to the fact that it has been able to leverage generally lower Chinese labor costs on both the design and manufacturing sides and it uses all domestic parts to make them.

Lenovo has also established relationships with a broad range of suppliers, allowing it to sidestep the occasional component bottlenecks that occasionally affect other device makers.

Those advantages alone have allowed Lenovo to quickly gobble up market share in China and, while it has had to accept razor-thin margins to do it, quickly become profitable.

Lenovo also has pursued huge expansion opportunities, particularly in other emerging markets that many smartphone makers largely ignore. The company already has a foot in the door with China.

As a Chinese company making products for the Chinese market, Lenovo “spec designs” its devices to operate on Chinese technology and standards. Not incidentally, the Chinese global telecom company Huawei Technologies (SHZ: 002502.SZ) has invested more than USD1.5 billion in building communication networks in Africa. As a result, Lenovo’s devices will already work across much of that continent without having to be adapted to new and different networks.

Given the company’s history of ambitious expansion into foreign markets for all of its products—it’s already a globally known brand—I don’t think it will take long for it to begin pushing into Africa.

While there’s not a huge market for smartphones yet in Africa, much beyond more developed areas in the north and in South Africa, Lenovo could quickly make inroads on the continent because of a lack of significant competition.

Needless to say, this won’t be Lenovo’s last quarter of smartphone profits even as other companies are struggling.

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