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A global power made in China
By Simon London
Published: November 8 2005 18:24 | Last updated: November 8 2005 18:24
On the morning of September 30, Beijing’s press corps gathered at the headquarters of Lenovo, China’s largest personal computer company. As flashbulbs popped and television cameras whirred, Yang Yuanqing, chairman, announced a management restructuring that gave half the company’s top jobs to executives of American, Australian and Indian origin.
Mr Yang had signalled his international intent in December 2004 by announcing the $1.75bn acquisition of the PC division of IBM. At a stroke, the deal transformed Lenovo from a company selling exclusively in China to an international group with 60 per cent of its sales in other countries.
Ten months on, however, the 41-year-old computer scientist was ready to go even further. The restructuring would create China’s first technology multinational. Management would be spread across national boundaries and time zones in a way that few companies anywhere have attempted. For students of international management, the ambition is breathtaking.
“They are trying to make a massive leap,” says Christopher Bartlett, professor emeritus at Harvard Business School and an authority on multinational management.
Michael Dell, founder and chairman of the world’s largest PC company, is more scathing: “It won’t work.”
Whether Lenovo triumphs has implications that spread well beyond the PC industry. Success would surely encourage other Chinese companies to hasten their international expansion. Failure would send a warning signal: for all their energy and ambition, China’s emerging technology giants may not have the management skills to take on the world’s best.
Conventional wisdom suggests that the odds are stacked against. Academic research has repeatedly demonstrated that most big acquisitions end in failure. The challenge of integrating large organisations seems to outweigh the hoped-for economies of scale or scope. The failure rate for cross-border deals is even higher.
As Mr Yang is quick to point out, however, every deal is unique. Lenovo defied expectations to achieve a dominant 30 per cent share of the Chinese PC market (see below). He thinks it can do so again: “We are ­pioneers.”
Yet the nature of the challenge was on show even at the September 30 press conference. The organisation chart presented to journalists showed a multinational team. Yet all but one of the faces blinking into the bright lights of the television cameras were Chinese. Alongside Mr Yang sat Liu Jun, newly appointed as head of global supply chain; Mary Ma, veteran chief financial officer; George He, chief technology officer; Chen Shaopeng, general manager for China; Lu Yan, head of the desktop computer business. The only former IBM executive, seated at the far end of the top table, was Bill Matson, head of human resources.
The absence of other managers from the IBM side was perhaps understandable. The flight from Beijing to New York, where Lenovo has established a small international headquarters and many of its US executives are based, is 13 hours across 12 time zones. To get to Raleigh, North Carolina, where the former IBM business has its main operations, travellers must change planes in Chicago and add another few hours to the journey. Making the trip in either direction for a quick press conference – or even a full day of meetings – is out of the question.
“You can’t get people together just for a day because you lose a week. You have to plan on a week and try not to screw up everyone’s weekends in the process,” says Fran O’Sullivan, head of worldwide product strategy and development under the new management structure.
It was not only Mr Matson’s Caucasian features and jet lag that set him apart from his Chinese colleagues. His father worked for IBM. So did his grandfather. Mr Matson himself joined the company in 1981, giving him 24 years in the service of Big Blue before the deal.
Alice Li, head of marketing and communications for Lenovo in Beijing, tells a very different story. She joined the company despite stiff opposition from her parents at a time when private enterprise was still regarded as a risky experiment for the Chinese economy. Signing with the technology upstart meant leaving the dull but secure job with a state-owned enterprise to which she had been assigned on graduation.
“My parents were very worried. They told me not to ‘break my rice bowl’,” she recalls.
Ms Li is the face of the new urban China. Like most of her colleagues on Lenovo’s Chinese management team, she is relatively young, educated and in a hurry. Lui Jun is 36. Chen Shaopeng is 35. Prior to the IBM acquisition, the average age of employees at China’s largest technology company was 28.
Senior IBM executives had several months to get the measure of their new colleagues before the deal was announced. Fact-finding and negotiations were in progress throughout the second half of 2004. But rank-and-file IBM employees had only rumours to go on. The deal was unveiled on December 8 in Beijing – the middle of the night in Raleigh – so most IBMers first found out about it from breakfast news bulletins.
Many in Washington were taken by surprise too. Lobbyists and politicians soon voiced concerns about everything from China’s growing industrial might to the potential for industrial espionage. The transaction was approved only after lengthy vetting by the Committee on Foreign Investment in the US, a high-powered group including representatives from the Departments of the Treasury, Commerce, State, Defense and Homeland Security.
Eleven months on from the announcement, the sense of shock has faded in both Washington and Raleigh. Even so, not everyone is happy. In Germany, where labour laws dictated a voluntary transition of IBM employees to Lenovo, the company finds itself short-staffed. Ms O’Sullivan concedes that the former IBM operations in Japan are having to be “over-managed” to get them comfortable with the idea of Chinese ownership.
Some politicians also remain wary. “I don’t think Lenovo will encounter any hostility from the [Bush] administration, but Congress won’t be reconciled to this deal any time soon,” says Bill Reinsch, president of the National Foreign Trade Council, a Washington-based lobby group.
Among former IBM executives, there seems to be genuine enthusiasm. It was no secret within IBM that PCs were not core to the group’s strategy. “As part of IBM we were handcuffed because IBM was not willing to invest in what is, let’s be honest, a relatively low ­margin business,” concedes Bill Owens, head of services and support in the new ­integrated management structure.
Now the handcuffs are off. For all the challenges of integrating a Chinese company with a US-based one, Mr Yang has made clear that he wants to take the fight to Dell and Hewlett-Packard, the market leaders. By combining Lenovo’s strength in China – the manufacturing hub of the worldwide PC industry as well as its fastest-growing market – with the international expertise of the former IBM division he believes he can create a potent third force.
Ravi Marwaha, 62, the Indian-Australian charged with running worldwide sales, says: “I spent 36 years in IBM. I could easily have retired. Why am I here? Because it is exciting.”
ANATOMY OF A DEAL
The acquisition of IBM’s PC division was much more than a straight purchase. Lenovo paid part of the $1.75bn in stock, giving IBM a 13.4 per cent stake in China’s largest PC company and the right to appoint two non-voting “observers” to the board.
Moreover, it was agreed that IBM’s sales force would be offered incentives to sell Lenovo PCs, just as they had with IBM’s own-brand machines. Similarly, IBM global services was contracted to provide maintenance and support.
Lenovo also received the right to use the IBM logo for up to five years.
The idea was simple: customers of IBM’s PC division – mostly large corporations – would see no change. So far, that seems to have been achieved.
“I’m waiting for the quality [of products and support] to decline but I haven’t seen it yet,” says a senior US executive at one of Lenovo’s largest rivals.
Initially, the Lenovo and former-IBM sides were left to run as separate units. Procurement was consolidated in the interests of efficiency. A small worldwide headquarters was opened on the top floor of a nondescript office building outside New York. Otherwise, it remained business as usual.
This began to change on September 30, with the unveiling of a unified management structure. Supply chain, product development, marketing and other functions are now being integrated. But there are no plans for job cuts. The only overlap was in China itself, where the IBM sales force has joined its former rival.
Before the deal, Lenovo was the ninth largest PC company while IBM was third. The combined company remains in third place behind Dell and Hewlett-Packard and ahead of Acer and Fujitsu-Siemens.
HOW BREAKING EVERY RULE IN THE BOOK HELPED A STRUGGLING COMPUTER COMPANY OVERCOME AN INAUSPICIOUS START
Lenovo is a company that seems to have succeeded in spite of, rather than because of, China’s system of central economic planning. Far from being a favoured national champion, it was from the beginning an upstart. Its dominant 30 per cent share of the Chinese personal computer market was earned the hard way – by outmanoeuvring both foreign competitors and better-connected Chinese rivals.
“Lenovo did a better job of conducting reconnaissance into the future, anticipating likely threats and opportunities and acting more quickly and effectively,” writes Don Sull, associate professor at London Business School, in his recent book Made in China.
The company was founded in 1984 when scientists working for the Chinese Academy of Sciences were given $25,000 of seed capital to look for commercial applications for the research of the state-controlled organisation. The academy held a majority stake for most of Lenovo’s existence. Following the deal with IBM, it holds a 27 per cent stake, raising questions about the degree of government influence. Lenovo executives are adamant that there is none.
“We looked into this very carefully. It is a passive stake,” says Steve Ward, the former IBM executive who is chief executive of the enlarged Lenovo.
Historically, Lenovo’s relatively weak links with government were a barrier to its success. When the company applied in the late 1980s for a licence to produce PCs in China, it was refused. The blessing was bestowed instead on Great Wall, a rival with better connections at the Ministry for Electronics Industries. To get round the problem, Legend, as the company was known, opened a Hong Kong subsidiary.
Nor did the Chinese Academy of Sciences shareholding help in 1993, when a sharp cut in the tariffs led to an influx of imported PCs which threatened to swamp the nascent Chinese industry. Great Wall temporarily pulled out of the market. Legend was kept afloat only by another side of its business: distributing PCs and peripherals for foreign manufacturers, including IBM and Hewlett-Packard.
The crisis called for radical action. Liu Chuanzhi, Legend’s founder and chairman until last year, called on one of his brightest young managers to turn the PC business around. Yang Yuanqing, a 29-year-old computer scientist who had joined the company four years earlier, proved to be an effective, if sometimes abrasive, executive.
“Yang’s colleagues thought himself both strict with others and immodest about himself. For sure, he was honest and straightforward to the point of being blunt. Sometimes people were afraid to enter his office. Yang would eventually have to learn a more co-operative management style but for the moment there was no time,” write Shan Feng and Janet Elfring in The Legend Behind Lenovo, an unofficial corporate history.
Mr Yang, now chairman, fixed the PC business by centralising decision-making in the office of the general manager – himself. He took full control of strategy, procurement, manufacturing and marketing. As a management philosophy it broke every rule in the book. Remarkably, it worked.
He recalls: “I could make quick decisions because I could look through all the functions. I knew the supply chain very well. I knew which components were in short supply. I knew when new [micro]processors were available. We could change our products, change our prices, respond quickly.”
This agility was allied with a willingness to make long-term investments. In 1997, Legend became the first Chinese company to implement an enterprise resource planning system from SAP, the German software company. Mr Yang was determined to run the company from a technology platform at least equal to its global rivals.
By the late 1990s, Legend was the best-selling PC brand in China. In 1999, it took 20 per cent of the Chinese market. This year its share is likely to be around 30 per cent. The combination of operational efficiency and PCs designed specifically for the Chinese market has proved difficult for competitors to beat.
In 2001, the distribution side of the business was spun off as Digital China, under the management of Guo Wei, another of Mr Liu’s young protégés, while Mr Yang was appointed chief executive of the PC arm. The corporate brand was changed in 2003 from Legend to Lenovo, a name created by branding consultants, in preparation for international expansion. ‘Made In China: What Western Managers Can Learn From Trailblazing Chinese Entrepreneurs’, by Donald N Sull, published by Harvard Business School Press.
‘The Legend Behind Lenovo: The Chinese IT Company That Dares To Succeed’, by Shan Feng and Janet Elfring, published in Hong Kong by Asia 2000
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