According to a recent survey conducted by Gartner, Hewlett-Packard Company (HPQ - Analyst Report) lost its position as the world’s top PC maker to China's Lenovo Group Ltd. This marks the end of a six-year long spell as the world’s leading personal computer manufacturer.
Not only did HP lose its leadership position, which it has held since 2006, but the company also lost a substantial amount of its market share during this time. As per the recent data from IDC, Hewlett-Packard’s share tumbled to 15.9% from 17.4% in the previous quarter. Lenovo’s share climbed to 15.7% from 13.1%.
While management issues have been a lingering problem for the company, the flagging economic conditions and a paradigm shift from computers to mobile devices, such as those offered by companies like Apple Inc. (AAPL - Analyst Report), Samsung and others have also hurt revenues.
Separately, a survey by IDC showed that HP still holds the leadership position when measured in terms of worldwide PC shipments. However, here too, H-P’s leadership is at a threat as it managed a mere lead of roughly half a percentage point. The studies reveal that HP is going through a tough phase.
We believe HP lost its market share, first as HP has relatively higher manufacturing costs, since all its operations are not located in China and other low-cost areas. Therefore it is not able to price its products as competitively. Second, most of the current demand for computing devices is coming from developing countries.
Therefore, there is a greater demand for cheaper PCs that HP is not going to be able to provide. This is the reason the company decided to sell off the PC business, but later changed its strategy because investors didn’t take that so well. So, weak demand is impacting HP same as other PC makers.
HP is not competitive enough in emerging markets, so a lot of individuals and even small companies are moving to lower-cost devices. According to Gartner, global PC shipments declined 8.3% from the year-ago quarter to 87.5 million. Separately, IDC reported a decline of 8.6%.
The PC industry experienced double-digit growth during most of the years as the companies and households switched to notebook computers from traditional PC’s over the last year and a half, before the trend changed toward iPads and smartphones.
The PC industry is now seeing a boost from the introduction of Windows 8 during the current month, the new version of Microsoft Corp.’s (MSFT - Analyst Report) window’s operating system.
Lenovo’s achievement of the top position marks a new era in Chinese computing history. The Chinese company moved into the PC market in 2005 with the acquisition of IBM's personal computer division. In the second quarter, it grew market share to 15.7%, shipping around 13.77 million units, which is an increase of 10% compared to the year-ago period.
Lenovo has benefited from certain acquisitions it made. The company is also benefiting from the growth in emerging markets, which is superseding developed markets.
To add to investor concerns, HP recently provided a bearish outlook. HP’s CEO Meg Whitman said that investors should not expect a recovery until fiscal 2014, when current investments would generate returns. She also said that high executive turnover in recent years have dampened HP’s business.
HP is particularly bearish on the enterprise business. The company projects enterprise services revenue to decline 11.0% to 13.0% during fiscal 2013. Operating margins are estimated to range from break even to 3.0%.
Some industry experts commented that the competitive PC market has pulled down its margins significantly and reduction in IT spending is another headwind. Also, a declining personal computer business has largely affected HP’s business activity.
HP’s outlook appears particularly bleak when compared with that of IBM Corp (IBM - Analyst Report), which raised its full-year 2013 earnings outlook.
Currently, HP has a Zacks #3 Rank, implying a short-term Hold rating.