Lenovo Group Ltd, China's biggest maker of personal computers, said it's counting on its LePad tablet computer and LePhone smartphone to fend off Apple Inc's expansion in the country.

"We have an extreme focus on the innovation of LePad and LePhone because these products will dominate the future market," Chairman Liu Chuanzhi said in an interview at the World Economic Forum in Davos Thursday. "Anyone who loses this battle will be phased out from the history of this industry."

Lenovo, which gets half of its sales in China, faces competition from Apple after the iPhone-maker last year opened three stores in a market Chief Operating Officer Tim Cook has called a "top priority". Consumers may shun Lenovo's tablet because it will adopt a modified version of the Android system that won't be compatible with programs on Google Inc's online app store, according to analysts such as Vincent Chen.

"Lenovo will have to convince vendors they can grow big, otherwise consumers will not be interested because there will be very limited choice of software," said Chen, a Taipei-based analyst with Yuanta Securities Co. "Lenovo is the PC king in China, so they think they can differentiate and attract enough interest. In my view that's a challenge."

Apple didn't open its first store in China until 2008. Apple's four stores in Beijing and Shanghai generate, on average, the company's highest traffic and highest revenue, Chief Financial Officer Peter Oppenheimer said last week.

Lenovo dropped 0.9 percent to close at HK$4.61 in Hong Kong trading Friday.

Lenovo, maker of Thinkpad laptops, is diversifying to boost revenue and seeking to expand outside of China. The company said Thursday it agreed to invest $175 million to form a venture with NEC Corp and expand in the Japanese PC market.

Lenovo started selling the LePhone in China in May, and plans to launch the LePad by the end of this quarter, according to Liu.

When Lenovo launched the LePhone in May, it projected sales of more than 1 million units in 12 months. Sales were initially reduced by a supply problem with display screens that wasn't resolved until September, Chief Executive Officer Yang Yuanqing said in November. At the time, he projected sales of the device last quarter would be about 120,000 units.

The iPhone is Apple's top-selling product, accounting for 39 percent of revenue last fiscal year. The iPad, introduced in April, accounted for 17 percent of sales last quarter.

"History has proved we are good at catching up with the market's leaders," Liu said. "Though Apple is winning a significant share in the Chinese market, it has not gained a clearly leading position yet. Our advantage is we know this market better."

Apple's iPhone is the best-selling smartphone in China with first-half shipments of more than 900,000 last year, according to industry consultant BDA China Ltd. The company will start selling the iPad 3G model in China this quarter, the Shanghai Daily reported this week, citing an unidentified official at China Unicom.

US-based Apple posted a 78 percent jump in quarterly profit in the three months ended December, helped by holiday demand.

Lenovo received 98 percent of its 2009 sales from personal computers, and less than 1 percent from mobile phones. The company had 10 percent of the world PC market in unit terms during the first nine months of last year, ranking it behind Hewlett Packard Co, Acer Inc and Dell Inc, according to data from industry researcher IDC.

The company said Thursday Lenovo and NEC will transfer their Japan PC assets into the venture, named Lenovo NEC Holdings BV, in which Lenovo holds a 51 percent stake.

The new venture would help Lenovo gain on Round Rock, Texas-based Dell, the third-ranked PC maker with 12.7 percent of the global share, IDC data shows.

Bloomberg

(HK Edition 01/29/2011 page3)