Lenovo, the world's No. 4 PC brand, will invest $175 million with NEC Corp to form a joint venture to sell personal computers in Japan, it said on Thursday, as it prepares to take on bigger rivals such as Hewlett-Packard and Dell.
Lenovo will own 51 percent of the joint venture with NEC taking the remainder and NEC will also have the option of selling its share to Lenovo at the end of five years, the Chinese company said in a statement filed to the Hong Kong exchange.
The completion of this transaction will give the company a majority stake in a joint venture with a stronger market position, enhanced product portfolios and expanded distribution channels in Japan, Lenovo said in the statement.
NEC is Japan's biggest PC brand with an 18 percent market share, according to research firm Gartner, where many foreign players such as HP have tried to break into but have failed to beat companies such as Toshiba on their home turf.
The acquisition also marks a second attempt by Lenovo to expand in mature markets, with its 2005 purchase of IBM's PC unit having helped it bring its name to the global stage.
It's probably NEC's clients and the additional scale that Lenovo is looking for, said Vincent Chen, an analyst with Yuanta Securities in Taipei. Most of NEC's PC production is outsourced, so this could help give Lenovo more bargaining power with the contract manufacturers.
PC companies mostly work on razor-thin margins that are improved only by cost savings and economies of scale. Lenovo had an operating profit margin of about 1.8 percent in the last reporting quarter, while bigger rival Acer clocked in at 2.9 percent.
Others such as HP and Dell have turned to higher-grossing data services and mobile devices such as tablet PCs and smartphones to shore up their earnings, which typically command gross margins in the double digits.
(Reporting by Kelvin Soh; Editing by Muralikumar Anantharaman)