HP versus Lenovo: Competitive advantage in the PC industry.
Competitive Positions of Hewlett Packard and Lenovo.
— — HP
— — — — — — -VERSUS
— — — — — — — — — — — -LENOVO
HP (NYSE: HPQ) and Lenovo (OTCMKTS: LNVGY) are two leading names in the world of PCs and Laptops. Hewlett Packard (HP) is based in the United States and Lenovo in China. However, Lenovo is comparatively a very new brand. However, HP’s business model has also undergone profound changes over time. In 2015, HP divided itself into two divisions — HP and HPE. HP became the division that produces and sells computing and printing products. Both HP and Lenovo are innovative brands of computing products. HP is known for its quality and product innovation, while Lenovo has also acquired a leading position in the PC industry based on product quality and competitive pricing strategy. It has risen fast to the top based upon the quality and durability of its products. The quality and pricing strategy of Lenovo has helped it gain a large market share in the PC industry.
Both companies invest aggressively in research and development. Competition in the PC industry has grown a lot intense with time. Sales of PCs and laptops have also taken a hit due to the rise of mobile computing and other factors. To maintain their respective market shares, both HP and Lenovo have introduced a broad range of products in varying price categories to cater to the needs of the various customer segments. Let us have a look at which one among the two is a more competitive PC brand and will achieve faster growth in the future.
Product Portfolio :
HP and Lenovo are two tough players in the PC industry. Together the two have retained the lion’s share in the global market. One crucial source of competitive advantage for each one of the two is its diverse product portfolio.
HP’s product portfolio includes laptops, PCs, printers, accessories as well as computing and mobility solutions for both small and large businesses. HP deals in an extensive range of laptops and PCs. The main reason behind its high sales is its large selection of PCs and notebooks targeted at the individual users as well as corporate clients. Apart from making standard laptops, the company also makes gaming laptops, convertibles, and detachable serving as both laptops and tablets. In the past few years, the company has also released an excellent range of premium laptops targeted at premium buyers. HP’s range of premium laptops includes Spectre, Envy, Elitebook, and the Zbook range. Omen is a range of premium gaming laptops by HP. Apart from these, there are some premium laptops in the HP Pavilion range as well.
The company has also brought a wide range of premium-priced mobile workstations. The comprehensive range of premium products by HP has widened a lot in recent years. However, the company has also offered a broad range of standard laptops at affordable prices that cater to the average consumer’s needs. HP’s product mix of desktops includes affordably priced as well as premium desktops, including all in ones and towers. In this way, it has introduced a complete range of computing and printing solutions for individuals and businesses. Apart from individual customers, the company also serves small and large companies as well as government customers through its broad product range.
Except for the printing solutions like HP, Lenovo has also brought an extensive range of computing solutions for its customers. It has risen fast to become the most massive laptop and PC brand in the world. However, the factors which led to the rapid growth of Lenovo include affordable pricing and good quality of its products. The result was higher customer satisfaction, which in turn led to faster development of Lenovo’s business around the world. It has also brought an excellent range of premium offerings for higher-end customers. However, Lenovo’s main focus was to reach middle-class consumers who wanted high-performance computing products at affordable prices. The products and services by Lenovo include the following :
- Lenovo Gaming Products
- Laptops & Ultrabooks
- Smartphones & Watches
- Accessories & Software
- Cloud storage
Lenovo has introduced computing products for both the average consumer and the hardcore IT users who want high-performance PCs. Lenovo brought an excellent range of laptops, ultrabooks, and PCs that catered to average users as well as programmers, developers, and gamers. In this way, it has created products that are useful, efficient, affordable as well as durable. In a short period, it has been able to win the largest market share in the computing industry. However, the company has also introduced a limited range of smartphones. Overall, both HP and Lenovo have a broad product mix that is nearly similar except that HP’s range of premium products and printer products has grown larger with time. Both companies have maintained a strong position in the computing industry. The two brands have acquired a leadership position by analyzing and understanding consumer needs well. Their financial performance has also improved significantly over the past few years. Moreover, China is Lenovo’s home turf, and the United States is HP’s domestic market. It is why both the brands are in a stable position and pitted against each other in an international market where the sales of computing products continue to be affected by the rise of mobile computing.
Overall sales and financial performance :
In terms of overall laptop sales, Lenovo has left HP behind. It has become the highest-selling PC brand in the world. Apart from focusing on quality, Lenovo has managed its pricing strategy well. It has resulted in faster growth worldwide. According to Statista, the gap in the sales of HP and Lenovo laptops was relatively narrow during the first two quarters of 2018, which widened a little in the third and fourth quarters. Again in 2019, Lenovo narrowly surpassed HP’s laptop and PC sales during the first quarter, and the gap grew wider during the second quarter. Check out the below table for global PC sales of HP and Lenovo in 2018 and 2019.
(Quarter) HP — Lenovo (PC sales in millions)
(Q1 2018) — 12.73 — 12.34
(Q2 2018)- — 13.59 — 13.6
(Q3 2018) — 14.63 — 15.89
(Q4 2018) — 15.38 — 16.63
(Q1 2019) — 12.83 — 13.2
(Q2 2019) — 13.99 — -15.77
HP and Lenovo are very close contenders in terms of PC sales. HP’s revenue from the sales of personal systems, including PCs and laptops, was $37.7 billion (2018). On the other hand, Lenovo’s revenue from PC and smart devices was $38.5 billion. Lenovo’s sharp rise was mainly because of faster growth in the Asia Pacific and North America in fiscal 2018. In China, Lenovo is already in a stable position. According to IDC, Lenovo was leading the PC and laptop market with a 25.1% market share in 2019, and HP was close behind it with a 23.7% market share.
However, the overall revenue of HP was much higher compared to Lenovo. The net revenue of HP in fiscal 2018 was $58.5 billion compared to the $51 billion net revenue of Lenovo. The Gross Profit of HP was $10.7 billion in 2018 compared to $7.4 billion for Lenovo. So, the overall performance of HP was better than Lenovo in 2018. Moreover, printer sales accounted for around 40% of HP’s revenue in 2018. The net Revenue of HP from printers was $20.8 billion. It is a significant advantage that helped Hewlett Packard. The company has grown its investment in the printing business and acquired Samsung’s printing business (HP Annual Report, 2018). While printer sales are a significant source of revenue for HP, the company is investing aggressively to grow its printer business and reduce its dependence on the PC business. It will also make HP’s business more stable.
During the second quarter of 2020, HP and Lenovo are again close contenders in the PC industry. Lenovo is barely ahead of HP in terms of PC and laptop sales. The difference is now smaller compared to the same quarter in 2019. Lenovo’s market share based on the number of shipments in the second quarter of 2019 was 24.7%, with 15.5 million shipments (Gartner). HP’s market share stood at 21.9% during the second quarter of 2019 with a total of 13.8 million shipments. However, HP found a lot of growth in the second quarter of 2020 compared to the same period during the previous year. Its market share grew to 24.9% in the second quarter of 2020 compared to 21.9% in the second quarter of 2019. The total number of shipments grew from 13.8 million units to 16.17 million units. Lenovo’s market share grew to 25% in the second quarter of 2020, a growth of 0.3% as compared to the same period during the previous year.
According to Gartner, HP’s shipments grew by 17.1% in the second quarter of 2020 compared to the same period last year. Shipments by Lenovo grew by 4.2% in the second quarter of 2020, compared to the same period the previous year.
Covid-19 has led to declining PC sales overall. However, according to HP’s second-quarter of fiscal 2020 performance report, the company experienced a 5% growth in the net sales of notebooks and a 23% decline in the sales of desktop PCs. Here are the highlights of HP’s performance during the second quarter of 2020.
- GAAP diluted net earnings per share (“EPS”) of $0.53 (Q2, 2020); above the previous outlook of $0.46 to $0.50 per share
- Non-GAAP diluted net EPS of $0.51 (Q2, 2020), within the previous outlook of $0.49 to $0.53 per share
- Net revenue of $12.5 billion (Q2, 2020), a decline of 11.2% from the same period in the previous fiscal.
- Net cash used in operating activities of $(0.5) billion, free cash flow of $(0.6) billion (Q2, 2020)
- Returned $0.4 billion to shareholders in the form of share repurchases and dividends in Q2, 2020.
Technology and marketing :
Technology has become a leading source of differentiation in the computing industry. The demand for lightweight and high-performance machines has increased. Customers want laptops that are easy to carry around and offer strong performance. It is why the focus of PC brands on innovation and product quality has grown. HP and Lenovo’s spending on research and development was around the same, except that HP spent around 100 million more than Lenovo on R&D. Overall, while HP spent $1.4 billion on R&D, Lenovo’s R&D expenses were equal to $1.27 billion. Brands need to continually innovate to retain the popularity of their PCs and laptops.
In 2017 and 18, HP spent less than Lenovo on advertising and promotions. While Lenovo spent around $707.7 million on advertising, HP spent only $568 million in fiscal 2018 on advertising. Brand equity in the PC industry also affects sales and revenues. Lenovo enjoys substantial brand equity in China. In the other parts of the world too, its brand equity has grown stronger over recent years. However, apart from marketing and promotions, Hewlett Packard also invests heavily in CSR. The company has managed to build a strong reputation in both the Asia Pacific and North America. For Lenovo to grow its market share further, it will need to focus on branding and marketing. HP is a comparatively older and well-established brand, its position in the market being supported by product quality. Lenovo is also investing in quality and customer satisfaction.
Both the brands of PCs and notebooks are aggressive for growth momentum. Their focus is on achieving the highest customer satisfaction. Quantifying the difference in the brand equity of the two will be a difficult task. However, HP still outweighs Lenovo given it is an American brand and considered more reliable than other PC brands except for Apple.
At this point, it is tough to say which one of the two enjoys superior customer loyalty. However, HP is not very far behind Lenovo in terms of PC sales. Its most significant strength is its business model. The company is investing aggressively in growing its printer business. In the case of Lenovo, while its sales from Mobile Business Group have grown, the PC business remains its primary source of income. Lenovo’s market share in the smartphone industry is much smaller compared to the leading players. Its market share has generally remained between 2 and 3% in the smartphone industry (Counterpoint Research).
HP’s business is more diversified. Moreover, HP has divided itself into HP and HPE so that HP can focus solely on the PC and printer business. Taken together, the total revenue of Hewlett Packard and Hewlett Packard Enterprises would be much higher. Lenovo, on the other hand, is comparatively smaller but has grown at a fast rate. It has acquired a superior competitive advantage in the PC industry. However, the challenge from Hewlett Packard is formidable. HP’s business model is more robust because of its higher diversification. HP looks in a stronger position overall compared to Lenovo but based on the past two to three year’s performance, Lenovo is a fierce challenger in the PC industry for HP. In terms of market cap, HP is much bigger than Lenovo. So, the business model of HP and its overall size and scale are its fundamental strengths. Even if Lenovo is leading the computing market with the highest PC sales, HP’s formidable strengths make HP the main competitor of Lenovo. The restructuring of HP has given birth to some troubles and weakened its market position, but the overall picture is still strong. If we base our conclusion on the market caps of the two companies, HP has a more substantial competitive advantage. HP’s market cap is higher than USD 27 Billion and that of Lenovo at around 61 Billion HKD or approximately 8 Billion USD.