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By | Andrew Orlowski 31st January 2014 10:01

HELLO LENOVO. Do you really, really want to make smartphones?

It's a dog-eat-dog world in the tech industry

Analysis Lenovo has bought third place in today's smartphone market by acquiring fallen giant Motorola. Not a bad performance since it only created its 'MIDH' mobile division three years ago. But is this really a prize worth fighting for?

Lenovo took the No.1 spot in PCs last year from HP with a huge home advantage in China, where it sells one in three of all PCs sold. It's a well-run company that cannily dodged the Windows 8 bullet because a healthy proportion of its sales go into enterprises.

Steve Sinofsky's gift to the PC industry made PCs very hard to sell - but Lenovo was able to keep on giving businesses what they wanted (Windows 7) and it saw terrific sales growth in Europe. It's been playing footsie with HP for the No.1 spot for the past two years.

So acquiring a ubiquitous American brand gives Lenovo an overnight foothold in the US market, but Motorola had already dismantled much of its operation outside the USA. PCs are a declining market and now - whisper it - peak smartphone has come and gone. Volumes will rise but profitability becomes more elusive. The market today is over-saturated and everybody's margins are heading south - yes, even Samsung's and Apple's.

This indicates that phones today in Western markets are over-specified and too expensive - and nothing illustrates this better than Motorola's own comeback phone, the Moto G. It's available today for £135 (8GB) or £155 (16GB) and is an excellent product. Unless you have quite specific needs, such as high quality imaging or carrying around hods of music, it should do anyone on a budget just fine.

And the consequences are beginning to ripple through into the financial performance of the vendors. Samsung's phones sales fell 9 per cent and profits by 18 per cent – a hefty $3.7bn. Apple is selling more phones than it sold a year ago, but revenue actually fell (by 1 per cent) in the last quarter.

But worse is to come. Much worse. Android has done for smartphone prices what Windows did for PC prices - and look what happened to the established PC players there. Perhaps Lenovo wishes it can do the same: counting on huge domestic sales to claw share away from Samsung.

This is a great time to be Qualcomm or Mediatek, providing package silicon for phones. It's not a great time to be marketing and selling phones, though. The low end is being squeezed by no name brands - particularly on Lenovo's home turf rice fields … and why even bother at the high end any more?

Now you don't have to be McKinsey to figure out Lenovo's strategy. It's going to try and dodge the carnage in the smartphone market the same way it profited from the carnage in the PC market. It will continue build up domestic scale and use that to try and stay ahead of the collapse in smartphone margins.

The Motorola acquisition - described by Ben Wood as "wealth destruction on a spectacular scale" - is an ideal, as the G demonstrates it can deliver on high quality and low cost. And its timing is immaculate: Lenovo didn't invest enormous resources into creating its own skins and apps, as Samsung and HTC did, when Android was immature.

Now that Android has matured considerably, many buyers just want stock Android. Lenovo will cheerfully provide it. It isn't going to be plain sailing, though. ®

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