Inside Lenovo's Bid to Build a Better Tablet

When you bring out 180 new products a year, as Lenovo does, it’s hard to get fired up for every launch. But for CEO Yang Yuanqing, the arrival of the Chinese PC maker’s Yoga tablet, under wraps for over a year, is a big deal and not just because “product engineer” and actor/tech investor Ashton Kutcher fronted the October 29 launch.

In a look-alike market, Lenovo’s Yoga tablet stands out, or, more precisely, it stands up and tilts in a distinctive way to nestle comfortably in your hand, thanks to a lengthways cylinder that houses the battery and processing brains, yielding an ultraslim screen. The Android device, priced starting at $249, has a battery life of up to 18 hours, enough time to cover Yang’s frequent commute between Lenovo’s headquarters in Morrisville, North Carolina and Beijing, where the idea was born.
“On the first day I saw the prototype, I was very excited. Day by day I’ve become more excited,” he says.

This versatile tablet is the world’s largest PC maker’s latest escape vehicle out of its crushing dependence on low-margin desktops and into mobile, and a means to set some trends rather than follow them. Lenovo gets 86 percent of its $37.3 billion in projected fiscal 2014 revenue from PCs at a time when many consumers have fallen in love with mobile touchscreen devices. Best known in the US as the firm that bought IBM’s ThinkPad line in 2005, Lenovo now expects to ship 50 million smartphones and 10 million tablets in the year to March 30, 2014, which would put it third behind Apple and Samsung in mobile computing. In China it’s second in smartphones to Samsung. Mobiles earn a better margin: In the most recent quarter Lenovo raised its portion of non-PC revenue in China from 18 percent to 29 percent of the total. In the same period operating margins went from 4 percent to 5.1 percent.

Yang reckons that PC sales, which have tumbled for six straight quarters, will revive soon. “We’ve already hit the bottom. The volume will come back,” he tells Forbes, citing improving corporate demand in the US and Europe.

Yang’s goal is for Lenovo to be hailed as a global brand. It’s a steep climb. China still accounts for 42 percent of its revenue. Outside of China the ThinkPad name has more cachet than its parent.

The Yoga tablet isn’t revolutionary, but it’s a neat, attractive design, just like last year’s IdeaPad Yoga laptop-cum-tablet. More convertible “PC-plus” models are in the pipeline, as well as high-powered smartphones pitched at US consumers. Behind their creation is a deeper rethink of how a Chinese company can design and build gadgets for a global marketplace.

Since 2010 Lenovo has redoubled efforts to make more of its own products, reward innovation and respond quicker to fickle consumers. It added factories on three continents, including a ThinkPad line in Whitsett, North Carolina and a $800 million plant in Wuhan, China, that will eventually crank out 100 million smart devices a year. In Hefei, China a new factory built with Taiwanese PC assembler Compal makes laptops and PCs. In the next year or so Lenovo expects to move 50 percent of its capacity in-house, up from 30 percent today. Since 2011 it has also invested $1.3 billion to acquire full or partial stakes in electronics firms in Japan, Brazil and Germany that increase its distribution in those markets.

By balancing in-house design and engineering with judicious use of contract suppliers, Lenovo has staked out a middle ground between Apple’s tightly controlled but 100 percent outsourced model and the do-it-all capabilities of Samsung. Yang sees it as the best way to retain control and flexibility along the supply chain. “If [companies] don’t do in-house development, they lose the spark of innovation. We don’t want to be that type of company,” he says.

For decades that’s exactly the kind of company that thrived in the PC industry. Let contract manufacturers do the hard work, went the thinking, and concentrate on distribution and marketing.

Then came the iPad in 2010, a laptop replacement specified down to the screws by Apple. PC makers turned to their contractors to see if they could do the same work, only to learn that their usual partners didn’t sell the right chipset (Intel) or their software didn’t work (Microsoft). “They couldn’t build a tablet,” says Alberto Moel, a senior analyst at Bernstein Research. For companies like Lenovo, which had been shedding capacity and relying on out-sourcers, the lesson was clear. “They had to turn on a dime and reintegrate.”

Lenovo was in a bind. It didn’t have a single smartphone or tablet in the market because, in its pursuit of PC profits, it had sold its phone division for $100 million in 2008. Yang acknowledged that blunder and bought the division back for $200 million. Yang had to outsource at first while building up mobile design and engineering teams and contracting with suppliers that would dedicate capacity to Lenovo and let it control the development process. Relying on assemblers wasn’t an option, says Yang. “They will share the design and innovation with others. You won’t [have] a unique product.”

The Yoga tablet is a case in point. It was hatched in 2011 in the studio of Yao Yingjia, Lenovo’s design guru, whose team crafted the torch for the Beijing Summer Olympics in 2008. Yao’s concept was that holding a tablet should be as natural as reading a magazine, which curves lengthways along its spine when a page is turned. He also wanted a screen with its own kickstand that wouldn’t run out of juice on long journeys. From this concept emerged a versatile tablet with a cylindrical battery case.

Guan Wei, Lenovo’s supply chain executive in Beijing, had to source customised components, including a Lenovo-designed battery that combines a specialised battery cell and circuit driver. “You can’t find the same product in the market,” he boasts.

The same goes for the ultraslim touch panel, which was designed in-house. To assemble the panel Guan tapped two suppliers and insisted on a six-month lockup period barring them from making similar panels for others. Taiwan’s MediaTek, which dominates in China’s price-sensitive smartphone market, supplied the tablet’s chipset.

The final product was assembled in Lenovo’s plant in Xiamen. Assuming that demand is strong, Guan plans to shift production to the new factory in Wuhan, which has already attracted a cluster of suppliers, including MediaTek.

“We know how to manufacture and keep costs competitive,” says Yang, who has vowed to raise Lenovo’s operating margins by another percentage point before 2015. If the new tablets catch on, Yang could easily hit that goal. If not, that invested capital will feel like deadweight. Just ask Research In Motion or Nokia what it’s like to misread the market.