Lenovo completes $2.9B deal for Motorola, will pursue dual-brand strategy in emerging markets

Lenovo officially closed its $2.91 billion deal to buy Motorola Mobility from Google (NASDAQ: GOOG), a move that immediately turns Lenovo into the third largest smartphone player in the world by market share. Lenovo, which is popular in China and many markets where Motorola doesn't play, will use a dual-brand strategy to grow the combined company's mobile businesses in emerging markets.

Lenovo will operate Motorola as a wholly-owned subsidiary and Motorola's headquarters will remain in Chicago, along with its research and development operations. Lenovo is taking on Motorola's 3,500 employees around the world, including about 2,800 in the U.S.

Liu Jun, who is a Lenovo executive vice president and president of the company's mobile business, will also serve as chairman of the Motorola management board. Motorola President and COO Rick Osterloh will remain in his role.

Earlier this week at Re/code's Code/Mobile conference, Osterloh said that while Motorola is not yet profitable, it is growing sales 100 percent per year. Lenovo said it continues to expect to make the Motorola business profitable in four to six quarters.

Speaking on a conference call with reporters and analysts, Lenovo CEO Yang Yuanqing noted that Lenovo has a strong presence in China, Asia-Pacific and Eastern Europe and a proven track record of operational efficiency. He said Motorola has a strong presence in the U.S., Latin America and other developed markets, strong carrier relationships, an iconic brand and a solid patent portfolio. "We are very complementary to each other," he said.

Yang said that the company's goal is to sell 100 million smartphones by the end of the fiscal year, or March 2015. "I am certain we will achieve this target," he said. "But this is just the start."

Both Yang and Liu said that the Motorola brand will be used exclusively in mature markets like the U.S., but that that the company will use a dual-brand strategy in emerging markets like India. The company will heavily push entry-level phones like the Moto G, Yang said, but will also use higher-end devices like the Moto X and Nexus 6 to re-establish Motorola's brand in China, Eastern Europe and other markets.

Research firm IDC said Lenovo was the No. 4 player in tablets worldwide in the third quarter, after Apple (NASDAQ: AAPL), Samsung Electronics and Asus. Osterloh said the deal will let Lenovo tablets get distributed more broadly and that he is "very excited about the future possibility of working on tablets together."

Osterloh also said that Motorola would not change its approach to Android, where it makes relatively few changes to the experience aside from the addition of select services. He also said that Motorola would keep Google services off its Android phones in China, since Google services are blocked by the Chinese government. "We intend to comply with what's happening today in the market," he said.

In a blog post, analysts at research firm Strategy Analytics said the two firms combined captured 8 percent of the global smartphone market in the third quarter (Lenovo at 5 percent and Motorola at 3 percent), making the combined firm the world's No. 3 smartphone player. The combined entity will have greater scale, lower costs, and the ability to sell smartphones, tablets and wearables in more countries and in more retail stores, operator stores and online stores. The firm will also have a greater marketing budget, the analyst firm said.

However, Strategy Analytics said "Lenovo's rapid smartphone growth of recent years is now coming to an end, due to fierce competition from Xiaomi and others." The firm said Lenovo's global smartphone annual growth rate has more than halved from 74 percent year-over-year in the third quarter of 2013 to 30 percent in the third quarter of 2014. Further, Motorola continues to post hefty financial losses, and Strategy Analytics said that smartphone mergers usually take several years to integrate.

"Clearly, Lenovo and Motorola have strong tailwinds--such as 8% global smartphone market share and two well-known brands," the analysts wrote. "But Lenovo and Motorola also face major headwinds. Lenovo's golden era of easy smartphone growth is coming to an end, while Motorola continues to lose money. Merging these two firms next year will NOT be as easy as many expect."

For more:
- see this release
- see this Motorola blog post
- see this Bloomberg article
- see this Strategy Analytics post

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