NEC's PC Talk With Lenovo

JANUARY 26, 2011,   the wall street journal

By JAMES SIMMS

A personal computer tie-up between Lenovo Group and NEC can fairly be described as a win-win situation. It's just not a very big win.

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The two companies are in talks, though exactly what shape things will take remains unclear. Investors may learn more when NEC reports its third-quarter profits Thursday.

There is logic behind a joint venture between the two. It would distance NEC from a marginally profitable business. NEC once accounted for half of Japan's PC market. More recently its share, measured by shipments, was down to 20%. The unit that includes PCs has the lowest operating margin of NEC's five main businesses, at 1.6% in the September-end quarter.

Last year, NEC made similar moves with its semiconductor and mobile-phone operations, dumping them into JVs as a way of diluting their impact on its bottom line, in an effort to refocus itself on cloud computing and telecommunications infrastructure.

For Lenovo, the pairing offers a chance to lower manufacturing costs—by taking advantage of an increased scale of production—and possibly gain access to NEC's wireless and cloud technology. The larger scale and the new technology could make it more competitive in the fast-growing Chinese market.

But in neither case is this deal going to be transformative. The PC business is commoditized, highly fragmented and threatened by the popularity of smartphones and tablet computers. In that environment, pairing NEC's PC business with Lenovo's may not provide enough of an increase in scale to substantially bolster margins.

Consider that Taiwan's Acer Group, which shipped nearly 25% more PCs than Lenovo in 2010, according to data from IDC, is expected by analysts to have generated an operating profit margin of 2.9% in 2010, according to data from Starmine. True, that's better than the 1.8% analysts expect from Lenovo, but even adding NEC's entire PC business would leave Lenovo short of Acer's production levels.

"Partially correct"—that's the PC answer to whether this deal would be a win-win.

Write to James Simms at james.simms@dowjones.com