How to save face after losing $10 billion

February 18, 2014 Updated: April 24, 2016

In what signals to be an important strategic shift in its business model, Google decided on January 29th to off-load its 22-month-old acquisition, Motorola, for a paltry $2.9 billion. The winner of this bargain is none other than Lenovo, a Chinese company known for its success in making faded brands glow anew. But wait, paying almost $3 billion for a company that few know still exists doesn’t seem the smart choice, right? Wrong. And here’s why.

Much of the focus has been placed on Google’s ‘disastrous’ deal of May 2012 to buy the creator of the flip-phone for a record $12.5 billion. Some have argued that Google was just interested in scavenging the 17,000 patents Motorola had in its inventory in order to protect its Android “ecosystem” from lawsuits and strengthen its case in the OS wars with Apple and Samsung. They were proved right, because what Lenovo got for its money was essentially the brand and some 2000-odd patents. All others are still in Mountain View’s vaults.

CEO Larry Page announced the deal in a blog post, arguing that the smartphone market is “super competitive” and needs the kind of commitment that Lenovo can provide. He went on to talk about Google’s plans in the future by saying that they will divert their attention to delivering other hardware products that are different from the mobile industry, hinting at the recent acquisition of Nest, a home automation start-up.

In all honesty, Motorola’s time in Google’s portfolio wasn’t all fun and games. The troubled company kept losing money and its market share wasn’t rocket-propelled by the new handsets unveiled in 2013, the Moto X and Moto G. Google quickly found out that phone-makers’ low margins and complex manufacturing process don’t work like the cloud. Despite receiving good reviews, Motorola couldn’t cope with the foray of handsets unleashed on the market by Samsung and LG and was only able to account for 1.7% of shipments in the third quarter of 2013. A mere six years ago, Motorola was in second place, tailing then-leader Nokia.

So what’s Lenovo doing buying rickety brands? Why spend almost all your cash reserve on a company that has a market share that’s almost a statistical quirk. Analysts were skeptical when Lenovo decided to buy IBM’s laptop division, dismissing the deal as foolish. Fast-forward to the present, and the figures paint a different picture. Lenovo plowed through its competitors, snatching the top spot from Dell last year and officially became the world’s biggest PC maker.

Lenovo has a foothold in the Chinese market that accounts for almost half of its revenues. Thanks to its affordable models and good brand recognition, the company has managed to sell roughly 50m handsets in the past year. By purchasing Motorola, it will unseat LG and emerge as the world’s 3rd best maker of phones.

With such figures on its side, analysts predict that 2014 will be Lenovo’s best year yet. In the words of its CEO, Yang Yuanqing, the company ‘dreams to become a global player’. It needs global outreach and global brands to duplicate the success it had with IBM’s ThinkPad line. And if past moves are any indication, Motorola’s acquisition is a step in the right direction.

The stakes are even higher now, since Apple is expecting a big jump in sales after having signed an agreement with China’s biggest mobile operator to sell the iPhone. In the long run, Apple could threaten Lenovo’s domestic market and break its traditional dominance.  Motorola’s patents might just come in handy. Sure, Motorola isn’t what it used to be and it needs billions in investments to catch up, but it takes money to make money. And that’s exactly what Lenovo is doing.

As the recent console wars have shown us, the business world is not that different from the world of politics. Both need strong leaders, cunning strategies and a smart use of your competitor’s weaknesses. A patent deal struck between Google and Samsung earlier this month seemed to show that the two giants are closely working towards aligning their interests in an effort to maintain their domination over Apple. This can’t undo the billions lost in damages and attorney fees they suffered at each others’ hands.

If the Motorola deal receives the approval of Chinese and American regulators, Google will have helped Lenovo in its quest to becoming a world leader in consumer electronics. And that means taking on the likes of Samsung.

 

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