Why is Lenovo slashing 10 per cent of its workforce?

Lenovo’s CEO ‎Yuanqing Yang has sent an open email to employees, revealing that 3,200 members of the workforce will lose their positions as part of a restructure.

In the email Yang said: “Changes in the market and in our competition are coming very quickly, and we must accelerate our transformation across the company. You can see proof of this in our earnings today.

“Our core PC business was still strong and we expanded our lead globally, but in a declining market we must continue to become more efficient and reduce expenses so we can make sure this business remains healthy and profitable.”

3,200 jobs will be cut – that’s 10 per cent of Lenovo’s non-manufacturing headcount and about five per cent of its total global workforce of around 60,000 people.

It’s the latest development in what has been a big year of change for Lenovo, as the firm underwent a major rebrand earlier this year.

The CEO informed employees that the job cuts come as a result of challenges that the firm is facing, for example, Yang revealed plans to reduce expenses and become more efficient as the PC market continues to decline.

He also revealed that Lenovo will have a much more simple and streamlined product portfolio with a reduced number of different models, as well as plans to reposition its enterprise business. This was all outlined in Yang’s email, which you can read in full at the bottom of the article.

Yang proposed that the company should "attack" the most relevant and attractive market segments, while increasing overall speed to market. But, customers are also central to Lenovo’s plans, as Yang revealed that the firm will drive greater efficiency across all of the business’ functions, ensuring it is more customer-centric. 

The job cuts are not that surprising, considering Lenovo has published the results for its first financial quarter ended June 30th, 2015, where the firm announced a huge drop in income.

The company’s first quarter pre-tax income decreased by a whopping 80 per cent year-on-year to $52 million (£33.2 million) – that’s a big dip for the company, and it’s not a surprise Lenovo is cutting back to compensate for the fall.

Lenovo also reported that its net income declined by 51 per cent to $105 million (£67 million) year-on-year, another substantial loss for the company.

The drop in income is also reflective of the market, as analyst IDC recently reported that PC shipments are expected to continue declining by 6.2 per cent.

But it’s not all bad news for Lenovo, as its quarterly revenue reached $10.7 billion (£6.8 billion), an increase of three per cent year-on-year.

There were also many challenges in the main markets for Lenovo, whilst facing severe declines in the global PC and smartphones markets. In addition, the firm saw an increase in competition and slow growth in the smartphone market in China.

Despite this, Lenovo still wants to be aggressive in the PC market, with plans to accelerate its drive for an ambitious 30 per cent share of the market.

The firm revealed its PC business reached a record worldwide share of 20.6 per cent, gaining shares in every market and achieving the number three position in the US market, with a share of 13 per cent.

Lenovo’s UK consumer director Alex Ebeid even told PCR recently that the firm wants to become number one in the UK. It is currently number two with a share of about 17 per cent, while the leader is HP with a share of about 25 per cent.

Yang added: "Last quarter, we faced perhaps the toughest market environment in recent years, but we still achieved solid results. Our PC business remained number one for the ninth straight quarter.

“In the smartphone business, our strategic shift from China to the rest of world has paid off. And our combined enterprise business achieved operational PTI for the third consecutive quarter."

Of course, Lenovo isn’t the first tech firm to announce job cuts, with Microsoft also announcing a job restructure earlier this year.

Lenovo’s close rival HP has also introduced its future Board of Directors in preparation for its separation into two companies. HP will work as two companies, including HP Enterprise and HP Inc, which are to be put into action on November 1st 2015. Each board will also include members of the current HP board, as well as other directors that will be chosen following a review of their personal and professional qualifications. 

Here’s Yang’s email in full, which was sent to Lenovo employees:

Dear Team,

At the beginning of this fiscal year, at our kickoffs, I shared with you our strategy for the coming year, our mission to transform our company for the next era. In fact, changes in the market and in our competition are coming very quickly, and we must accelerate our transformation across the company.

You can see proof of this in our earnings today. In many areas we delivered solid results. But Lenovo’s goal is to deliver consistent growth in all of our businesses, and we are facing challenges:

• Our core PC business was still strong and we expanded our lead globally, but in a declining market we must continue to become more efficient and reduce expenses so we can make sure this business remains healthy and profitable. 
• Meanwhile, in our two newer growth engines – mobile and enterprise – we are clearly still in the process of integrating elements of the acquired businesses and building the right business model, cost structure and competitive foundation. 

So, we must be proactive and decisive now, with all of these businesses, so that we can deliver profitable, sustainable growth and achieve our long-term goals. Though very difficult, this action will include a reduction in workforce of about 3,200 people (10 per cent of non-manufacturing headcount and about five per cent of our total population of around 60,000 people) around the world.

This is part of a broader effort to reduce expenses by about $650m in the second half of this year and about $1.35b on an annual basis. To ensure we return to growth across all of our businesses we will: 

• Restructure MBG to align our smartphone development, production and manufacturing and better leverage the complementary strengths of Lenovo and Motorola to quickly drive growth. We will have a much simpler, more streamlined product portfolio with a reduced number of clearly differentiated models. To create a faster, leaner business model, we will leverage our global sales force across Lenovo and we will accelerate the work already well underway to maximize efficiency in our global supply chain.
• Focus and repositioning our Enterprise Business to attack the most relevant and attractive market segments, while increasing overall speed and cost-competitiveness. 
• Accelerate our drive for 30 per cent share in PC by better taking advantage of consolidation, while becoming even more efficient and reducing costs to ensure sustainable, profitable growth.
• Drive for greater efficiency across all of Lenovo’s functions. We need to better leverage technology, the internet and innovative approaches in every function to drive our transformation and become faster and more customer-centric.

You will see more communication today from senior leaders and over the next few weeks across the company. All changes will be completed ASAP. We do not make these moves lightly. I know how hard our people work.

But we must ensure our long-term success and ability to meet our goals and commitments. We will act with logic and respect, speed and precision, clarity and consistency as we make these changes. When we emerge from this effort, we will be a faster, stronger, better integrated and aligned global company.

Thank you,

‎Yuanqing Yang
Chairman & CEO
Lenovo