Lenovo Takes a Leap

The unveiling by Lenovo Group of a new line of low-cost PCs on Thursday -- its first major push into the U.S. market -- promises to heat up competition here, but the tack's counterintuitive nature was particularly intriguing. At a time when most of the top PC companies are looking east for growth, Lenovo sees opportunity on American soil.

However, with the PC market in the U.S. already mature and saturated, some investors wonder if Lenovo is bringing wood to the forest.

"Certainly there's a business replacement cycle and there's upgrades from time to time. But are PCs a growth industry in the U.S.? I would say no," says Mark Hillman, the chief investment officer of Hillman Capital Management, which owns Hewlett-Packard(HPQ) shares as one of the firm's core assets.

Moreover, he adds, Lenovo is going after a market that IBM(IBM) decided it didn't want to deal with. Big Blue sold its PC division to Lenovo in May 2005 for $1.25 billion. Part of the reason, says Hillman, is that IBM concluded it was impossible to compete with Dell(DELL), the world's No. 1 PC company.

"It's going to be tough for them," says Hillman of Lenovo. "They're trying to enter a highly commoditized market with entrenched players."

The difficult nature of the market was illustrated earlier this month, when Gateway's(GTW) quarterly financial results came in below its own expectations, hurt by a 39% drop in direct sales and a 9% decline in professional sales. The following week, Gateway CEO Wayne Inouye stepped down to "pursue other interests."

Still, some analysts say Lenovo's U.S. push could pay off. The IBM deal gave Lenovo the well-known line of ThinkPad notebook PCs, which are fairly high-end products and popular within large corporations throughout the world. Thursday's announcement, however, also introduces a new line of Lenovo low-cost desktop PCs, filling an important hole in the company's lineup.