"We are not afraid of pricing competition," Chairman Yang Yuanqing said in an interview on the sidelines of the World Economic Forum's China Business Summit in Beijing yesterday.

Lenovo is fighting to keep its lead in China, where the world's top two computer makers, Dell and Hewlett-Packard Co., are cutting prices and increasing production. Dell on Aug. 18 said it would be able to "lower costs" in China by expanding the use of Advanced Micro Devices Inc. chips.

A price reduction by Lenovo "is inevitable as most of their competitors, such as Dell, are doing the same thing," Benny Lo, a Hong Kong-based analyst with E2-Capital Ltd., said. Lo has a "sell" rating on Lenovo shares.

The Chinese company, which is based in Raleigh, North Carolina, also hired five executives from larger competitor Dell in the past eight months.

Lenovo's shares fell 0.7 percent to HK$2.76 in Hong Kong as of 11:02 a.m. in Hong Kong. The stock has declined 23 percent this year, compared with a 15 percent gain in the benchmark Hang Seng Index, and Lenovo was one of two companies dropped from the index today.

Further Growth

Personal computer sales in China, the world's second-biggest PC market, will rise 16 percent to $15.1 billion this year, compared with a 6 percent gain to $67.4 billion in the U.S., according to researcher IDC.

Lenovo will seek growth in the nation's smaller towns, where fewer people own computers compared with the big cities, Yang said. The company, which last year bought the PC business of International Business Machines Corp., also plans to take advantage of a growing trend to replace desktop computers with notebooks, he said.

"I'm very optimistic about further growth in China," Yang, 41, said, estimating the economy will grow about 10 percent annually.

Lenovo, China's biggest PC maker with a 35.3 percent market share in the country in the three months ended June 30, had a 16.6 percent share of Asian sales, ahead of Dell's 11 percent and Hewlett-Packard's 10.6 percent, according to IDC.

Still, it may not be able to sustain price cuts long-term, E2-Capital's Lo said.

"They're already facing a narrowing profit margin so they can't do keep doing this in the long run," he said.

Potential Buyers

Yang declined to comment on whether he was interested in buying Irvine, California-based Gateway Inc. Lenovo is considering the purchase of South Korea's Trigem Computer Inc., he said.

Trigem, which used to make computers for companies such as Hewlett-Packard, has attracted about 10 potential buyers, the company said Aug. 28. Gateway, the third-largest U.S. PC maker, rejected a $450 million offer for its retail unit Sept. 1 from EMachines Inc. founder Lap Shun Hui.

"It's too early to give out any details,'' Yang said of Trigem. Lenovo bought IBM's PC unit for $1.25 billion, gaining its distribution and sales network covering 160 countries and the rights to use IBM's brand for five years.

Lenovo in March said it would cut 1,000 jobs as it merged its operations with the IBM unit, helping it save up to $250 million annually starting this fiscal year.

`Pricing Competition'

"We will use part of that savings to face pricing competition," Yang said. "We don't like it but we will have to face it."

Lenovo was upgraded on Sept. 5 to "buy" from "neutral" by Merrill Lynch & Co., which cited a potential increase in sales and market share.

Lenovo's new products and increased distribution channels "can drive growth," Merrill Lynch analysts Tien Yu Sieh and Ronnie Ho wrote in a report. Also, "management is focused on reining in surging operating expense/gross profit ratios," wrote the analysts, who have a 12-month target price of HK$4 on the stock.

Merrill Lynch raised its revenue forecast for the year ending March 30 by 1.9 percent to HK$119.6 billion, citing China sales. Lenovo reported sales of HK$103.6 billion a year earlier.

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