Untitled - the ultimate blog

Lenovo bets on China
Where the heart is
Aug 13th 2009 | HONG KONG
From The Economist print edition
China’s biggest computer-maker returns to its roots
IT WAS once seen as a model for Chinese firms eager to take on the world, but is now considered more of
a cautionary tale. When Lenovo bought IBM’s ailing personal-computer (PC) division for $1.75 billion in
2005, it transformed itself from the biggest maker of PCs in China into the third-biggest PC-maker in the
world and one of the most ubiquitous Chinese brands. But earlier this month the firm reported its third
quarterly loss in a row, of $16m. It had lost a total of $361m in the previous two quarters. It is also losing
market share: Taiwan’s Acer has surpassed it to become the world’s third-biggest computer-maker.
Success in China, it seems, is no guarantee of success abroad.
Sluggish demand in America and Europe has hit Lenovo hard. Its sales in those markets fell by 17% in the
most recent quarter compared with the same period last year. By contrast, Lenovo powered ahead in its
home market. It shipped 15% more PCs than it did a year ago in mainland China, which accounted for
48% of its sales. Although the firm had pinned its hopes on international growth, it was China’s effort to
boost domestic consumption through a massive fiscal stimulus that prevented a worse outcome.
In addition to the global economic downturn, the botched integration of IBM’s PC business has been
weighing on Lenovo’s results. In announcing the deal, Lenovo executives spoke excitedly about creating
the first truly global Chinese company. Its chairman at the time, Yang Yuanqing, moved with his family to
America. Lenovo also appointed William Amelio, a veteran of Dell, a rival PC-maker, as its new boss.
Putting a Westerner in charge, the firm reckoned, would send a bold message to staff and customers alike
of its determination to internationalise.
Mr Amelio did manage to stanch the losses inherited from IBM, thanks in part to the booming world
economy. But the good times ended in mid-2008 amid the credit crunch and the subsequent pullback in
business spending. Lenovo is now paying a heavy price for failing to address its new division’s reliance on
Western companies.
Perhaps distracted by the takeover, it was unprepared for the PC market’s shift to consumers, says Bryan
Ma of IDC, a research firm. With losses mounting, Lenovo in January announced a restructuring plan to
cut costs by $300m by March 2010. It said executives would face pay cuts and 2,500 employees (11% of
its workforce) would lose their jobs. In February Mr Yang replaced Mr Amelio and Lenovo’s founder, Liu
Chuanzhi, became chairman again. On August 10th the Chinese Academy of Sciences, which owns 65% of
Lenovo’s parent, Legend Holdings, revealed that it was looking to sell almost half its shareholding to a
Chinese buyer to help improve the company’s governance.
Lenovo is returning to its roots. The reappointment of Mr Liu, who oversaw the firm’s transition from a
local distributor of foreign PCs to the biggest domestic manufacturer, is a clear sign that Lenovo believes
its best chance of revival lies in fast-growing China. What is more, the Chinese government has
earmarked some of the 4 trillion yuan ($585 billion) stimulus to subsidise the purchase of computers by
people in rural areas. Lenovo is introducing more than a dozen models priced below 3,500 yuan to cater to
this market. Investors heartily approve: Lenovo’s shares are up 76% this year.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
-98-