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Jan 12th 2013 | BEIJING | from the print edition
LENOVO started humbly. Its founders established the Chinese technology firm in
1984 with $25,000 and held early meetings in a guard shack. It did well selling
personal computers in China, but stumbled abroad. Its acquisition of IBM s PC
business in 2005 led, according to one insider, to nearly complete organ
rejection .
Gobbling up an entity double its size was never going to be easy. But cultural
differences made it trickier. IBMers chafed at Chinese practices such as
mandatory exercise breaks and public shaming of latecomers to meetings. Chinese
staff, said a Lenovo executive at the time, marvelled that: Americans like to
talk; Chinese people like to listen. At first we wondered why they kept talking
when they had nothing to say. Two Western chief executives failed to turn
things around. By 2008, as the financial crisis raged, Lenovo was bleeding red
ink.
Given all this, its recent success is startling. In the third quarter of last
year, Gartner, a consultancy, declared Lenovo the world s biggest seller of
PCs, ahead of Hewlett-Packard (HP). Even if HP briefly recaptures the lead in
the fourth quarter, the trend seems clear: Lenovo is on a roll (see chart 1).
It is number one in five of the seven biggest PC markets, including Japan and
Germany. Its mobile division is poised to leapfrog Samsung to grab the top spot
in China, the world s biggest smartphone market. This week it made a splash at
the International Consumer Electronics Show in Las Vegas with what PC World
called bullish bravado and a seemingly bottomless trunk of enticing new
products.
Lenovo s rebound raises several questions. How did the firm recover from
disaster? Is its new strategy sustainable? And does its rise signal the
emergence of China s first world-class brand?
Lenovo s recovery owes much to a risky strategy, dubbed Protect and Attack ,
embraced by the firm s current boss. After taking over in 2009, Yang Yuanqing
moved swiftly. Keen to trim the bloat he inherited from IBM, Mr Yang cut a
tenth of the workforce. He then acted to protect its two huge profit centres
corporate PC sales and the China market even as he attacked new markets with
new products.
When Lenovo bought IBM s corporate PC business, it was rumoured to be a
money-loser. Some whispered that Chinese ineptitude would sink IBM s
well-regarded Think PC brand. Not so: shipments have doubled since the deal,
and operating margins are thought to be above 5%.
An even bigger profit centre is Lenovo s China business, which accounts for
some 45% of total revenues. Amar Babu, who runs Lenovo s Indian business,
thinks the firm s strategy in China offers lessons for other emerging markets.
It has a vast distribution network, which aims to put a PC shop within 50km (30
miles) of nearly every consumer. It has cultivated close relationships with its
distributors, who are granted exclusive territorial rights.
Conquering India
Mr Babu has copied this approach in India, tweaking it slightly. In China, the
exclusivity for retail distributors is two-way: the firm sells only to them,
and they sell only Lenovo kit. But because the brand was still unproven in
India, retailers refused to grant the firm exclusivity, so Mr Babu agreed to
one-way exclusivity. His firm will sell only to a given retailer in a region,
but allows them to sell rival products.
In this way, Lenovo cultivates loyal brand ambassadors, who also give timely
feedback on which products and features consumers like. That allows designers
to speed up product-development cycles. The firm s first smartphone flopped,
but paved the way for a flurry of hits.
Buoyed by success in corporate PCs and China, Lenovo has spent heavily to
expand its share of the global PC market, especially in emerging markets. The
brand is universally known in China; not so elsewhere. Spending on promotion,
branding and marketing rose by $248m in the year ending in March 2012 (though
the firm will not reveal the full amount).
Acquisitions help, too. In 2011 Lenovo bought Medion, a European electronics
firm, for $738m, which doubled its share of the German PC market. The same year
it spent $450m to enter a joint venture with NEC that made it the largest PC
firm in Japan. In 2012 it paid $148m to buy CCE, Brazil s biggest computer
firm. It is also opening factories in markets, including America, where it is
surging.
To focus on PCs, Mr Yang s predecessor sold Lenovo s smartphone arm for $100m
in 2008. Mr Yang bought it back for twice as much the next year. He believes
that PCs and other devices will converge, so knowledge of one area will breed
expertise in the other. He may be right. Smartphone sales are red hot in China,
and Lenovo is now selling mobiles and tablets in several emerging markets.
Fourteen quarters in a row, Lenovo has grown faster than the overall PC
industry, which shrank by 8% last quarter. A year and a half ago, the firm held
double-digit PC market shares in a dozen countries; today, it does so in 34.
Alas, there is a tiny problem with Protect and Attack: the attack part is
largely unprofitable. In most markets outside China, Lenovo s mobile phones,
tablets and consumer PCs (as opposed to corporate sales of ThinkPads) lose
money.
Profit is the long-term goal, says Mr Yang, but it helps to have a large
revenue base. He vows to keep investing, regardless of returns, until the firm
reaches a roughly 10% share in each of the target markets. Only with such scale
is long-term profitability possible, he insists. Wong Wai Ming, the firm s
chief financial officer, is confident Lenovo will eventually double its pretax
profit margin of 2%.
The long game
In 2009 Mr Yang persuaded the board to give him four years to show results. If
allowed to invest, he promised to turn a $226m annual loss into a profit; in
fact, the firm posted a profit of $164m last quarter. He vowed to lift annual
revenues, then around $15 billion, past $20 billion; they are now $30 billion
(see chart 2). He also said he would raise Lenovo s global market share from 7%
to double digits; it is now close to 16%.
Lenovo does not simply churn out cheap goods. It is spending heavily on
branding, distribution, manufacturing and product development. And alongside
its cheap gizmos are many mid-range and some premium gadgets, such as the Yoga,
a laptop that cleverly converts into a tablet.
On January 6th the firm announced a reorganisation: Lenovo Business Group will
make things for cost-conscious consumers, while the new Think Business Group
will chase the premium segment. Mr Yang wants the Think brand to compete with
Apple; he plans to open fancy showrooms like Apple s.
Lenovo s culture is different from that of other Chinese firms. A state
think-tank, the Chinese Academy of Sciences, provided the original $25,000 seed
capital, and still owns an indirect stake. But those in the know say Lenovo is
run as a private firm, with little or no official interference.
Some credit must go to Liu Chuanzhi, the chairman of Legend Holdings, a Chinese
investment firm from which Lenovo was spun out. Legend still holds a stake, but
Lenovo shares trade freely in Hong Kong. Mr Liu, one of those who schemed in
the guard shack, has long dreamed that Legend Computer (as Lenovo was known
until 2004) would become a global star.
The firm is strikingly unChinese in some ways. English is the official
language. Many senior executives are foreign. Top brass and important meetings
rotate between two headquarters, in Beijing and Morrisville, North Carolina
(where IBM s PC division was based), and Lenovo s research hub in Japan. Only
after giving two foreigners a try did Mr Liu push for a Chinese chief
executive: his prot g Mr Yang.
Mr Yang, who spoke little English at the time of the IBM deal, moved his family
to North Carolina to immerse himself in American ways. Foreigners at Chinese
firms often seem like fish out of water, but at Lenovo they look like they
belong. One American executive at the firm praises Mr Yang for instilling a
bottom-up performance culture , instead of the traditional Chinese corporate
game of waiting to see what the emperor wants .
Still, the firm has some way to go. It is far too reliant on one market, China.
Global investors will not tolerate its meagre profits for ever; some are
already grousing. And its global marketing push, which targets go-getting
youngsters, is a work in progress.
Its slogan in English is not bad: Lenovo: for those who do . The firm
sponsored the Beijing Olympics, is an official partner of America s National
Football League and has commissioned adverts by a director of James Bond films.
Still, David Roman, a former HP and Apple executive who is Lenovo s chief
marketing officer, admits that none of the successful Chinese firms has yet
got a global brand, including us .
Lenovo uses the hypercompetitive Chinese market as a test bed for products and
strategies that are later rolled out globally. That is both a strength and a
weakness. If Lenovo is to cement its market-share gains elsewhere, it must go
beyond merely copying what works in China.
Bad timing makes this problem more daunting. Lenovo has managed to get to the
top of the PC mountain at precisely the moment when the mountain appears to be
crumbling. Industry sales are shrinking as PCs are made obsolete by other
devices. HP has even mooted quitting the business altogether. Some say Lenovo s
costly global expansion will end in tears.
Mr Yang disagrees. Indeed, he shows an unfashionable faith in PCs, which are
still 85% of Lenovo s revenues. They will keep evolving, he insists, citing the
Yoga. Inventive firms can still profit from them. He gushes about a PC+
approach, now being tried in China, that adds mobiles, tablets and smart
televisions to PCs and connects them all with a local cloud.
He also thinks Lenovo has a secret weapon. It has kept a lot of manufacturing
in-house (why outsource to Foxconn when you already pay Chinese wages?). Mr
Yang believes this in-house expertise gives his firm an edge in product
development. But Lenovo must exploit that edge better than it has done so far
if it is to compete with a technology powerhouse like Samsung and build a
global brand anything like Apple s.
If Lenovo is to become China s first world-class brand, it must come up with
products that consumers are passionate about. In December, as he was honoured
as Economic Figure of the Year by China s national broadcaster, Mr Yang
described the task ahead for his firm and country: My dream is that one day
China will be more than a world factory it will be a global centre for
innovation.
from the print edition | Business