Lenovo Group Ltd, the world's No.3 PC brand, has entered into a $300 million venture with contract laptop PC maker Compal Electronics Inc in eastern China, the companies said, pushing their shares up sharply.
Lenovo rose as much as 8.5 percent in Hong Kong, while in Taiwan Compal rose 5.9 percent to a more than one-month high before pulling back slightly, after the companies announced their plan to form what analysts said was the first joint venture between a PC brand and a contract manufacturer.
Lenovo will own 51 percent of joint venture Lienpal (Hefei) Ltd, with Compal, the world's No.2 contract PC maker, holding the remainder, the companies said in separate statements.
"The joint venture shows the close relationship between Lenovo and Compal, but with this venture I think Compal's other clients such as Dell Inc and Acer Inc will be concerned," said Daiwa Securities analyst Jenny Shih.
Analysts said that in the short run Compal would benefit from the agreement, although there could be some long-term uncertainty over client loyalty.
"There are certain risks in such a cooperation as it could mean the plant relies only on orders from Lenovo," said KGI Securities analyst Angela Hsiang. "On the other hand, the deal will allow Compal to secure production from a key client."
Both companies will invest $100 million initially followed by an additional $200 million over the subsequent 18 months, depending on business climate and capacity expansion.
Lienpal would begin full-scale manufacturing of Lenovo laptop and desktop PCs by the end of 2012, the companies said. The deal will help secure Lenovo's production as it seeks to increase its global market share.
In early September, Lenovo Chairman Liu Chuanzi said Lenovo expected to surpass Dell to become the second-largest seller of personal computers in the world by the end of the year.
"Lenovo has made a lot of investments lately, including in Japan and Germany, to capture market share in emerging markets. The deal with Compal will allow it to secure production lines and have better control over output," said Bank of China International analyst Michael Meng.
Lenovo, which ranks behind industry leader Hewlett-Packard Co and Dell in the global PC sector with a 12.2 percent market share in the second quarter, bought Germany's Medion AG in June, in its biggest acquisition since purchasing International Business Machines Corp's PC unit six years ago.
Earlier this year, it formed a joint venture with NEC Corp to sell laptops in Japan. Compal said in a separate announcement on Tuesday that it planned to invest $31.8 million in Ascendant Private Equity Investment as a long-term investment.