An unknown PC Giant, Lenovo Flexes its Muscles

My very first computer was an Aptiva. Loved that computer.


An unknown PC giant, Lenovo flexes its muscles

Published: December 4, 2004, 5:33 AM PST
By David Barboza
The New York Times

Although virtually unknown in the United States, Lenovo--said to be in talks to buy IBM's personal computer business--is China's largest PC maker and the world's fastest-growing one.

And it is emblematic of the ambitions of emergent Chinese industrial giants to create global brand names and capture market share beyond their own borders. Formerly relegated to a low profile as the cheap assemblers for the rest of the industrialized world, Chinese companies now have their sights set on becoming global powers in their own right.

The Lenovo Group, partly owned by the Chinese government, had sales of over $3 billion last year and is currently ranked eighth globally among PC makers. It is the overall leader in Asia outside Japan, where NEC and other Japanese companies dominate. (IBM's Japan unit is in the top five there, though, adding to IBM's allure for Lenovo.)

Based in Beijing and listed on the Hong Kong Stock Exchange, Lenovo has made its mark by producing a line of low-cost PCs, some selling here in China for as little as $360. With huge sales to Chinese government agencies and schools, and immune from the tariffs levied against foreign brands like Dell, Hewlett-Packard and--so far--IBM, Levono now controls about 27 percent of the Chinese PC market, which is about to pass Japan to become the world's second-largest personal computer market after the United States.

But the company is experiencing growing pains as it tries to hold onto market share at home while also venturing into Western markets.

The company's stock price recently plummeted after Lenovo reported worse-than-expected earnings, citing a price war in China with Dell, Hewlett-Packard and IBM.

Lenovo may not end up acquiring IBM's PC business, as at least one other potential buyer is also in negotiations. And other bidders may emerge.

But if Lenovo succeeds, acquiring the IBM unit would ease some of the competitive pressure domestically. Recognizing that profitable growth within China may be increasingly hard to come by as outsiders flock to the world's potentially biggest consumer market, Lenovo also knows it needs to expand its global share of the market beyond its current 2.6 percent. Acquiring the IBM business, now ranked third globally, would raise that share to 8.6 percent--still third, but a bit closer to Dell (18 percent) and Hewlett-Packard (16.1 percent).

As part of its global campaign, the company earlier this year shed its longstanding name, Legend, in favor of the current one, then promptly entered the global brand sweepstakes by signing on as a sponsor of the 2006 Winter Olympics in Turin and the 2008 Olympic Games in Beijing.

To what extent, and for how long, Lenovo or another buyer of IBM's PC business would be able to make use of the IBM name would be a crucial question in any negotiations. But the company has made it known that it is open to deals.

"Acquisition is one of the possibilities," Mary Ma, Lenovo's chief financial officer, said in an interview last year.

Founded in 1984 by a group of Chinese scientists with government financing, the company then known as Legend started out as a distributor of computers and printers, selling IBM, AST and HP models in China.

In the late 1980s, however, as an exemplar of a trend that would play out in many Chinese industries, the company moved higher up the food chain by beginning to design its own personal computers. By 1997, it had passed IBM to become the largest seller of personal computers in China.

But competing globally on its own, especially against Dell's vaunted manufacturing efficiencies, could be a stretch for Lenovo. An American venture capitalist who recently toured the Lenovo factory in Shanghai said that he had been surprised that it lacked the bustling, just-in-time urgency that he had observed on a similar tour of a Dell assembly line in Round Rock, Texas.

At the Lenovo site, pallets of computers were stacked high to the ceiling, according to the investor, who insisted on not being identified, and he said the production line was moving slowly compared with Dell's.

Moreover, with China's economy growing rapidly, increasingly affluent and brand-conscious people are turning to Dell, IBM and Hewlett-Packard computers. Executives at Lenovo are intent on competing with those better-known brands, saying Lenovo is not interested in simply being known as the lower-cost supplier. IBM's product line would automatically push Lenovo up the cachet curve.

Most crucial to Lenovo's worldwide aspirations, analysts say, would be IBM's ThinkPad line of portable computers, which even among American customers has a much more devoted following than many of the other products in IBM's line.

"This is their steppingstone to a global market," said James Mulvenon, a China researcher who is deputy director of the Center for Intelligence Research and Analysis, a Washington research center.

Otherwise, he said, Lenovo faces the same brand-recognition problem that has plagued the Taiwan computer maker Acer, which ranks fifth globally, but is an also-ran in the United States market. "This a story about a Chinese company adopting an American brand," Mr. Mulvenon said.

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