Lenovo Caught In A 'Thucydides Trap' Between An Old Power And A Rising One

Key Takeaways:

• Lenovo’s shares nosedived after publication of an article citing a research organization saying the U.S. should ban the company’s computers

• Concerns are growing that weak Lenovo sales may have been a factor behind chip giant Intel’s recent worse-than-expected first-quarter revenue forecast 

By Lau Chi Hang

The Greek historian Thucydides once pointed out that “It was the rise of Athens, and the fear that this instilled in Sparta, that made war inevitable” between the two historic rivals. 

Those words carry new resonance more than 2,000 years later in the growing rivalry between the U.S. and China, leading some U.S. scholars to predict the significant likelihood of war as a great power's position is threatened by a rising new power, giving rise to the phrase “Thucydides Trap.”  

The constant tug-of-war between China and the U.S. has yet to trigger an actual war just yet. But successive swipes by the U.S. under various pretexts are taking a toll on China’s tech sector, each time drawing loud objections from Beijing. And concerns are growing that Lenovo Group Ltd. (0992.HK), one of China’s biggest high-tech success stories, could soon become the latest target, after publication of a recent article drawing attention to national security risks. 

The PC giant’s stock was one of the few that defied gravity and held its ground last year when the Hong Kong market went into freefall. It helped to steady the Hang Seng Index with a remarkable 81% gain in 2023, even as other blue-chip stocks tanked. 

Big potential for AI in PCs

As artificial intelligence (AI) shows signs of potentially revolutionizing the world and nearly all sectors, integrating the technology into PCs has taken on a new urgency. As one of the world’s top PC makers, Lenovo has worked hard to show it is rising to the challenge. At last year’s International Consumer Electronics Show (CES), the company showcased more than 40 AI devices and solutions, including a dozen PCs with AI functions. 

Investors were impressed by what they saw, helping to fuel the strong gains for the company’s stock last year, even as the rest of the Hong Kong market faltered. 

Investors looked past the company’s disappointing financial performance in the first half of its latest fiscal year that began last April. Its revenue for the six months through September fell 19.8% year-on-year to $27.3 billion, as its profit tumbled by nearly 60% to $426 million. The company blamed the big profit drop on its clearing out of smart device inventory built up during the pandemic. And within the first half of its fiscal year, its fiscal second-quarter revenue showed a 12% improvement over the previous quarter. 

Investment banks were bullish on its prospects. Goldman Sachs pointed out that its computer sales are at a turning point that could see them start to soar as a new product cycle begins. It overweighted the stock and revised up its target price by 14.6% to HK$13.51 per share. HSBC also believed that new purchasing by businesses this year will contribute to the company’s growth, and maintained an “overweight” rating with its target price adjusted up from HK$9.90 to HK$11.40. 

But just when Lenovo was getting some mojo back in the investment community, its shares fell nearly 10% in a single day after the publication of an article that spooked investors. And with that development, the market suddenly awakened to a major risk associated with the stock that it had conveniently overlooked in the past. 

Politic risk

The incident was caused by a report in Bloomberg Businessweek, which mentioned that a Newsweek article published a year earlier against Lenovo had ulterior motives. The Newsweek article cited a survey done by the organization China Tech Threat (CTT) highlighting the risk posed by electronic espionage. It compared the U.S. government’s use of Lenovo computers to the “spy balloon incident” over Montana last year, saying such PC use had serious implications to U.S. national security. It implied such computers could send U.S. data to the Chinese government, and advised banning them. 

The re-raising of the issue made investors realize Lenovo could easily become the next target of U.S. sanctions, potentially cutting it off from the lucrative North American market that accounts for 36% of its revenue.

Lenovo issued a statement after the Businessweek article’s publication, saying it was “shocked” by a “disinformation campaign” uncovered in the Businessweek article. “Any suggestion that Lenovo is controlled by the Chinese government, or that our ties to China compromise our cybersecurity, is false,” Lenovo said. 

Investor concerns deepened when chip giant Intel (INTC.US) forecast it would post revenue of about $12.7 billion in the first quarter, up year-on-year but below market expectations. Investors began to speculate that the weakness might reflect weaker-than-expected demand for PCs. And as one of the world’s leading manufacturers, Lenovo was automatically assumed to be a potential victim of any potential slowdown.

Lenovo Chairman Yang Yuanqing sold 32 million shares in the company at between HK$9.65 to HK$9.79 between Nov. 28 and Dec. 1, netting HK$310 million ($40 million). William O. Grabe, an independent non-executive director, sold 420,000 shares at HK$8.59 per share in October, cashing out HK$3.61 million. While such sales are relatively common, they nonetheless can spook investors. 

Conspiracy of rivals?

While it’s too early to say how Lenovo’s AI bets will pan out, the threat of potential U.S sanctions is a far more immediate issue for the company. The U.S. has been unrelenting in its attacks on Chinese tech firms, mostly targeting AI and chip companies so far. But even if it doesn't attack today, there’s no guarantee it may not set its sights on Lenovo down the road due to its status as a leading Chinese technology company. The political risks are too great to ignore, especially with so many stakeholders involved. 

CTT, the organization cited in the Newsweek article, has always taken a dark view on Lenovo, seeing its computers as tools of the Chinese government for internet espionage. But the Bloomberg Businessweek article cited people with knowledge of the matter stating that U.S. PC giant Dell (DELL.US), one of Lenovo’s major rivals, is an important financial backer of CTT. 

And while it might appear as an independent entity, CTT is actually a project controlled by DCI Group, a public affairs consultancy whose clients include Dell and U.S. chip giant Micron (MU.US). 

Some might think that Dell was behind the Newsweek article, designed simply to harm a rival and not representing U.S. government policy. Even if that’s true, however, the article could still influence government thinking and lead U.S. politicians to take new notice of Lenovo and express their concerns. 

At the end of the day, the political risk was always there. It was simply ignored by most before. But now the Newsweek article has forced the issue into the open. When that kind of political factor becomes a risk, analysis based on fundamentals can quickly lose its relevance. From now on, at least, such risk is something investors will need to take into account when considering Lenovo. 

This story has been updated to better reflect the chronology of the publication of two cited articles by Businessweek and Newsweek, and to add a statement from Lenovo