1,400 to Lose Jobs at Lenovo: ‘Totally Gut-Wrenching’ Cuts Come After a Similar Round in ’06

By Anne Krishnan, The News & Observer, Raleigh, N.C.

Apr. 20–The paint is barely dry at Lenovo’s glittering headquarters in Morrisville, but already the company is asking 350 employees to move out.

The company said Thursday that it will eliminate about 20 percent of 1,700 local positions as part of global layoffs.

Lenovo, the world’s third-largest computer manufacturer, is cutting 1,400 jobs worldwide as it tries to boost sales and profits amid tough competition and a weak market for its products.

The computer market grew just 3.6 percent in the United States and 10.9 percent globally in the first quarter, high-tech research firm IDC reported Wednesday. Although Lenovo’s worldwide sales grew 17 percent, it’s now tied for No. 3 with Acer, a Taiwanese company whose sales rose 41 percent. Hewlett-Packard, at No. 1, extended its lead with a 28 percent increase.

Given the slow market for PCs, analyst Rob Enderle wasn’t surprised by Lenovo’s layoffs.

“The market had been very soft, and we’d certainly seen a lot of pressure brought on by the big players,” said Enderle, principal analyst with The Enderle Group. “It seemed likely Lenovo was going to have to make an adjustment.”

IBM’s personal computer business, which had 1,900 local employees, was losing money when Lenovo bought it for $1.25 billion in 2005. Lenovo has been trying to shape it up ever since. The company laid off 330 Triangle employees in spring 2006 — part of 1,000 job cuts worldwide — to trim costs.

But Lenovo’s expenses were still too high and its revenues too low to be competitive with the leading PC companies, said CEO Bill Amelio, who called the layoffs “totally gut-wrenching.” The cuts announced Thursday, would save Lenovo $100 million over the next year, he said. But they won’t make the company extremely competitive, he said. Lenovo now must focus on increasing its revenue.

Analysts don’t expect to see more layoffs from Lenovo any time soon, at least not on this scale.

“I don’t think the company has a lot of fat left to cut,” Roger Kay, president of Endpoint Technologies Associates, wrote in an e-mail message from China, where he was visiting Lenovo. “From here on in, it’s more like muscle and bone. And you don’t want to be cutting those if you’re interested in revenue growth.”

It’s OK to have two large layoffs during difficult market conditions, but three would indicate serious problems and probably lead to a leadership change, Enderle said.

Although Amelio said that layoffs won’t become an annual event for Lenovo, he didn’t make promises. “This is a seriously competitive industry,” he said. “I would love to be able to say we’d never do one of these things again. Unfortunately, I can’t predict the future.”

His predecessors have shown that to be the case. Lenovo promised to add 400 jobs over five years when it agreed in 2005 to build a Morrisville campus in exchange for $14 million in state and local incentives. But the company must create the jobs to receive the incentives, and it hasn’t done that.

“Given our understanding of the company’s current situation, they wouldn’t be receiving payments under those grants in the foreseeable future, unless they come into compliance at some point down the road,” said Don Hobart, general counsel for the N.C. Department of Commerce. He said state leaders are disappointed about the layoffs but hopeful about growth.

For now, Lenovo is holding off on further expansion on its campus. Employees moved into two new buildings in Morrisville this spring, and Duke Realty Corp. expected to deliver a third and final building in 2009. Amelio indicated Thursday that the company has no immediate plans to start that construction.

The local employees, who work mostly in Lenovo’s global supply chain and software testing, were notified of the cuts Thursday. They will lose their jobs over the next 30 to 45 days. Lenovo is offering severance packages and job placement assistance, and employees will be allowed to apply for other open positions at Lenovo.

Lenovo said it would recreate 750 of the 1,400 cut positions in emerging markets closer to its suppliers and manufacturing operations. The company was not specific about how many of those will be from the Triangle. However, it said it would integrate software testing into its China operations and strengthen its supply chain, which has operations in Singapore and China.

Lenovo’s local work force probably won’t pick up until the U.S. computer market picks up, which isn’t expected until 2009, Enderle said. In the meantime, he said it makes sense for the company to concentrate on emerging markets, where there is more opportunity.

What’s more, Lenovo will struggle outside China until it implements a broad strategy targeting consumers, he said. Global demand from corporate customers has been particularly weak, he said.

Lenovo announced this week a partnership with Microsoft to develop computers and hand-held electronics, and this month said it was starting a consumer division. But Amelio isn’t rushing into the consumer market.

“When we enter the United States market, we want to make sure we do it with great products,” he said.

Amelio said he’s optimistic about Lenovo’s momentum, even in the U.S., where it recently had its first market share gain in “many, many quarters.” Still, it didn’t crack the top five in market share, according to research firm Gartner.

“We’ve seen acceleration in our business. We’ve seen it occur in every geography,” he said. “That means the initiatives we’ve put in place are absolutely taking hold.”

But Amelio, hired in December 2005, doesn’t have much longer to start demonstrating real progress, Kay wrote. “I’d say it better happen within the year,” he said. “Management doesn’t get years and years to turn things around.”

Staff writer Anne Krishnan can be reached at (919) 829-4884 or anne.krishnan@newsobserver.com.

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Copyright (c) 2007, The News & Observer, Raleigh, N.C.

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