By Eydie Cubarrubia

Lenovo, the company considered to be China’s answer to Sony, posted a 23 percent earnings increase Thursday, good news despite its lagging efforts building share in Western markets.

China

For the quarter ending in December, Lenovo earned $57.7 million, up from $46.8 million the same quarter a year ago. Revenues were stagnant, though, rising less than half a percent to $4 billion.

Like its revenue, Lenovo has fallen flat in its attempts at conquering the United States and other Western markets, causing its Americas head to resign (see Lenovo Americas Exec Steps Down). That’s despite Lenovo’s $1.25-billion acquisition of IBM’s PC business in 2005.

United StatesLenovo Americas Exec Steps Down

There even could be trouble in the region that generates a bulk of the company’s sales.

“Lenovo’s operations in its core market of China appear to be losing steam,” said Martin Kariithi, an analyst at Computer Business Quarterly. He pointed to the drop in operating margins to 5.1 percent from 6.5 percent a year earlier—indicating the company is cutting prices in favor of sales and unit growth.

China

Lenovo faces competition from Hewlett-Packard and Dell, he said, who are threatening Lenovo’s 36.2 percent PC share in the Middle Kingdom—a market that makes up 39.6 percent of the company’s revenue.

More notably, the Chinese company needs to watch out for Taiwan-based computer maker Acer, which ranks fourth behind Lenovo in global PC shipments.

“Acer is definitely a huge threat to Lenovo and has seen very strong growth in 2006 driven by strong retail sales and is expected to continue growing in 2007… Lenovo will have difficulties maintaining its lead on Acer,” Mr. Kariithi said.

Bad news elsewhere also plagued Lenovo. Its PC shipments in the Americas decreased 4 percent despite attempts to court the U.S. market with new ThinkPad notebooks and the Lenovo 3000 line, and possibly even go public there (see Lenovo’s U.S. Push, Lenovo May Go Public In U.S.). And shipments for the Asia Pacific region excluding Greater China decreased 1 percent.

U.S.Lenovo May Go Public In U.S.

Growing Nonetheless

However, Lenovo execs tried to paint a rosier picture as they promised to improve.

“Continued high growth in our China business enabled Lenovo to hold global market share,” Chairman Yang Yuanqing said in a statement.

China

Lenovo did see global PC shipments grow 8 percent, ahead of the industry average of 7 percent, the company said. Plus notebook shipments were up 20 percent, the company said, generating $2.1 percent of sales—52 percent of all revenue. Desktops, while slow, still showed growth of 2 percent.

For the calendar year 2006, said IDC analyst David Daoud, Lenovo was the third-largest PC vendor with 16.614 million units shipped. That constituted an increase of 10.4 percent, giving the company 7.3 percent of the worldwide market.

So the company won’t give up on its dreams of becoming a major force. Lenovo CEO William J. Amelio wants the company to continue its priority of building the Lenovo brand around the world.

But to do that, Mr. Kariithi said Lenovo should increase its margins in China in order to buoy its businesses in North America and Europe.

Europe

“Growth in its Lenovo 3000 line of SMB-targeted PCs launched last year [in the United States] is not growing fast enough to offset enterprise market declines,” Mr. Kariithi said.

United States

Phones Disconnected

Meanwhile, just like Sony, Lenovo has more than one product line. Its mobile phone business in Asia has traditionally been its most profitable, but quarterly shipments fell 6 percent.

Asia

The analyst said handset revenue fell even further, to 19 percent, thanks to lack of growth beyond the ultra low-end market—something that’s plagued the mobile phone industry lately (see Telecom: The State Of The Market).

Telecom: The State Of The Market

Mr. Yuanquing acknowledged the need to work on margins and efficiencies, but urged patience.

“Transformation takes time, but we are confident that we have the right plan in place to achieve our goals and deliver enhanced shareholder performance,” the chairman said.