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Part III: Obstacle
Article 4
From guard shack to global giant
How did Lenovo become the world’s biggest computer company?
[Paraphrase 7]
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, marveled 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 centers—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 rumored 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 center 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 ThinkPad) 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 reorganization: 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 protégé 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, which 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 honored 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 center for innovation.”
[1791 words]
Source: Economist
http://www.economist.com/news/business/21569398-how-did-lenovo-become-worlds-biggest-computer-company-guard-shack-global-giant |
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发表于 2014-2-13 23:01:58
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