Lenovo Plans to Cut Jobs, Restucture on Falling Demand

HONG KONG (Reuters) - Lenovo Group , the world's fourth-biggest PC maker, forecast a quarterly loss as China's slowing economy hit sales, and said it will axe 2,500 jobs as part of a restructuring to cope with falling demand for computers.

Shares in the company, which bought IBM's PC business for $1.25 billion in 2005 to put the Chinese brand on the global stage, slumped by more than a quarter, their biggest fall in 11 years.

"Lousy quarterly earnings were widely expected, especially from its major markets overseas, but a faster-than-expected slowdown in the Chinese economy worries investors," said Conita Hung, head of equity research at Delta Asia Financial.

"The market had initially expected the China market to offset part of its bad performance overseas."

Lenovo noted that weaker global demand by businesses for personal computers also dented sales as the economic slowdown bites.

"Although the integration of the IBM PC business for the past three years was a success, our last quarter's performance did not meet our expectations," Chairman Yang Yuanqing said in a statement.

The company said it would consolidate its China and Asia Pacific organizations into a single Asia Pacific and Russia (APR) business unit, and will cut executive compensation, including merit pay and long-term incentives, by 30-50 percent.

Shares in Lenovo, ended 26 percent lower to close at HK$1.91 on Thursday after being suspended a day earlier.

Bigger rival Dell announced plans on Thursday to cut around 1,900 of 3,000 jobs at its manufacturing plant in Ireland and move many of them to Poland as part of a $3 billion cost-cutting plan announced late last year.

Loss Coming

Lenovo had posted a 78 percent drop in July-September net profit to $23.44 million, its worst performance since it bought the IBM business, and said on Thursday it would report a loss for the October-December quarter.

Earnings are expected to remain under pressure even after a restructuring as information technology hardware vendors see slower growth amid a tougher business environment.

"Although the cost saving plans are seen positive for long term growth, there's no doubt the profit margin will be under pressure," said Delta Asia's Hung.

"As the current environment is much more difficult than before, it is our view that Lenovo needs more aggressive cost control measures," analysts Jenny Lai and Evonne Weng wrote in a research note for CLSA, which rates Lenovo a sell.

Lenovo said the 2,500 jobs, around 11 percent of the workforce, would be lost in January-March and would help realize savings of $300 million for the year to end-March 2010.

It is the third big round of job cuts since the IBM deal, with 1,000 jobs axed in March 2006 and 1,400 about a year later, according to a company spokeswoman in Hong Kong.

Lenovo said it would incur a $150 million pre-tax restructuring charge for 2008/09, which would be reflected in the current January-March quarter.

As part of the restructuring, Lenovo will also move its call center operations from Toronto to its main North American site in Morrisville, North Carolina, in a bid to better leverage its investment in real estate and facilities.

Lenovo shares slumped 70 percent last year amid concerns about its eroding market share and a weakening global economy.

Lenovo's share of the global PC market slipped to 7.4 percent in the 2008 third quarter from 8 percent a year earlier, as it battled aggressive smaller rivals such as Acer and Asustek, both of Taiwan, and Japan's Toshiba .

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