Lenovo's Global Gambit

By Michael Schuman / Beijing

George He hasn't gotten used to working with Americans. The chief technology officer of PC maker Lenovo has had to deal with a lot of them since the Chinese company acquired the computer-manufacturing business of U.S. giant IBM last year. On his monthly jaunts to Lenovo's new global headquarters in Raleigh, N.C., He, 43, complains there "aren't so many good Chinese restaurants." But he finds the cocktail parties that precede business dinners even harder to endure.

"We stand there and talk to each other," He says in disbelief. "That's just not our style, the Chinese people." He struggles through the chitchat about wine, college sports and other subjects he finds completely foreign. "Duke? North Carolina? I don't know what it is!" he says, throwing up his hands in frustration.

Catching up on college rivalries is the least of the challenges facing Lenovo's managers. Once little known outside China, Lenovo catapulted to No. 3 in the world PC market (after Dell and Hewlett-Packard) with its $1.75 billion IBM purchase. The acquisition, the most high-profile overseas grab by a Chinese firm, horrified many Americans, who saw a rising China set to gobble up flagship industries in the U.S. After all, IBM virtually invented the PC 25 years ago.

Yet there were sound reasons why Big Blue disgorged that trademark business--not least of which being that it was a lousy one. With its market share in retreat, the unit had lost nearly $1 billion in 3 1/2 years. Much of IBM's sales were in a slow-moving segment of the PC market--large shipments to major companies--and IBM hadn't fully tapped the more robust small-business and consumer markets. As a result, Lenovo's PC shipments have grown more slowly than the industry average for four of the past five quarters. That lopsided business, says William Amelio, Lenovo's CEO, makes him "feel like I'm hopping on one leg."

Amelio, 48, has a plan to plant Lenovo firmly on two feet. The former head of Dell's Asian operations, Amelio took the helm last December, and is launching an ambitious gambit to seize international market share by expanding into every nook of the PC industry. Lenovo is introducing new products, building a complex global-distribution network and splurging on a brand-building campaign. The strategy could turn Lenovo into a far fiercer rival for Dell and HP than stately IBM was, and threatens to intensify the cutthroat competition that is a hallmark of the famously bloodthirsty PC business. "I eat, drink, sleep PCs," promises Amelio. "There is nothing else in my world."

HP and Dell are in his world, and they have well-established sales networks, a full range of products and famous brand names, especially in the U.S. "We joke, 'Lenovo who?' The challenge is that Lenovo doesn't have a brand name in the U.S.," says Samir Bhavnani, director of research at tech-information provider Current Analysis in San Diego. Even worse, Lenovo is being buffeted by the some- times tense relations between the West and China. In May the U.S. State Department said 16,000 PCs it had purchased from Lenovo wouldn't be used for classified work after a Congressman claimed that the Chinese-made computers would threaten national security. Lenovo's chairman, Yang Yuanqing, insists his computers pose no security risk.

The acquisition created a radically altered and geographically scattered management team. Amelio is based in Raleigh with former IBMers; Yang and his team are in China with most of the manufacturing operations. Executives complain of midnight conference calls and perpetual jet lag. "Lenovo is really living in a flat world," says Amelio. Meshing Chinese and American corporate cultures hasn't been easy either. The Chinese are stressed by having to speak English, the company's official language, made harder by rapid-fire talkers like Amelio. "We have to ask him several times to slow down," says He. "He just doesn't stop."

IBM did bring Amelio two great assets: top talent and a top brand name. Former IBMers say they feel liberated after years of being marginalized as the red ink of Big Blue. "It was more fighting for survival at IBM," says Fran O'Sullivan, now a senior vice president at Lenovo. "We didn't talk about growing." After the acquisition, "there was a real entrepreneurial feel again." There were other benefits too: Lenovo got the rights to use the IBM brand name for five years and snatched the premier Think family of computers. ThinkPad notebooks boast some of the best technology in the business, such as sensors that protect the hard drive if the notebook is dropped.

Lenovo is almost as entrenched in China as the Great Wall, with more than 9,000 retail stores and other sales outlets, giving it an indisputable advantage over its competition in the world's fastest-growing economy. Lenovo owns 35% of the market, according to tech consulting firm IDC. (Dell, the largest foreign player, is No. 3, with 10%.) Chinese consider Lenovo one of the country's most trustworthy brands and a symbol of Chinese entrepreneurship.

Lenovo was founded in Beijing in 1984 by 11 free-thinking researchers with $25,000 from a science academy. It markets PCs for every possible customer, from the top-of-the-line Pentium speedster to $300 bare-bones desktops. The growth potential for Lenovo in its home market appears limitless. IDC forecasts that PC sales in China will jump 57% from 2006 to 2010, to 36 million units. The U.S. market will reach 68 million units in 2006.

Amelio wants to replicate Lenovo's China business model around the world. Execs have jetted to cities from Paris to Bangalore to teach local managers how things are done in China. The goal: penetrate markets by building close ties to both major resellers and mom-and-pop computer centers to target fast-growing small businesses. Then, back up the sales effort with highly efficient and flexible product-supply systems developed in China. "We have a model that works," says Amelio. "We have to get it rolling everywhere."

The company has already used Chinese know-how to score impressive results in that other great Asian emerging market, India. After being trained in Beijing, Lenovo's India managers increased the number of resellers nearly 40%, to 1,100 so far this year. Chinese-designed PCs were introduced to expand the product line and Bollywood stars hired to pump up the brand. India is also introducing Lenovo's SMS information system, by which distributors send daily sales reports. That allows managers to quickly adjust prices and product mix based on real-time data. Results? Lenovo's India sales jumped 44% in the second quarter of 2006 from the year before, according to IDC. "There was a fundamental shift when we worked with the Chinese team," says Neeraj Sharma, general manager of South Asia for Lenovo. Such gains might be harder to come by in mature markets like the U.S. and Europe. But over the past year, Lenovo has got space at major chains Office Depot and Best Buy.

Amelio is also employing a tactic used by other Asian upstarts, like Korean carmaker Hyundai Motor--value for money. Lenovo is packing its products with goodies and charging less than other PC brands, especially in a new series of computers called Lenovo 3000. Launched in February, the 3000s are an amalgam of Lenovo and IBM design and technology. The desktops are based on a Chinese product that features a one-button fix-it process to restore virus-damaged systems. They also feature ThinkPad-quality keyboards--all at a very reasonable $349. In comparison with other major brands, Lenovo notebooks ranked at the top for value, according to Current Analysis.

The biggest obstacle for Lenovo's U.S. business is an inefficient supply chain. Order a computer from Dell in the U.S., and it usually arrives within 10 days. Order from Lenovo and it could come as quickly. Or you could go on vacation for a couple of weeks, and it may or may not be there when you return. "Outside of China, our supply chain is not world class," Amelio admits. To help fix the problem, he poached Dell's Gerry Smith to run supply-chain management--a Dell specialty.

Another problem: Lenovo doesn't have the financial muscle it needs to wage war with HP and Dell. In its past quarter, Lenovo earned only a $5 million net on revenues of $3.5 billion (after restructuring charges). Amelio has already cut 5% of the workforce and plans to slice $350 million from Lenovo's costs by early 2008, in part by consolidating operations, such as centralizing the global desktop team in China. The cost cuts "may be what I need to stay aggressive on pricing and not destroy my margins," he says.

Lenovo must win market share beyond China to boost profitability. It has only 7.7% of the global market, to Dell's 19.1%. The PC market is slowing too. IDC predicts that global PC-sales growth will dip to 10.8% this year, from 16% in 2005. Lenovo "will be treading water until the market goes into a growth mode," says Richard Shim, senior analyst at IDC.

Still, there may be opportunity. Dell is wounded, reeling from plummeting profits and a major laptop recall. Amelio's aggressive plan might be what Lenovo needs to become a global PC heavyweight. "Amelio is doing exactly what needs to be done," says Joseph Ho, an analyst at Daiwa Institute of Research in Hong Kong. And if Lenovo gets some breathing room, maybe He, the chief technology officer, can focus on learning how to tell a Tar Heel from a Blue Devil.