Lessons from Lenovo
from
September/October 2006
by John R. Engen
Lee S. Ting works in a world only a handful of Americans ever see—the board of a Chinese company. The WR Hambrecht & Co. banker became a director of Lenovo Group Ltd., China’s biggest manufacturer of personal computers, in 2003. The following year Lenovo paid $1.25 billion for IBM’s personal-computer business. In an interview published by Corporate Board Member in 2005, Ting described some of the Chinese board deliberations that preceded that deal.
Last December the board replaced the merged company’s first CEO, IBM veteran Stephen Ward, with former Dell executive William J. Amelio. Lenovo is moving away from the IBM brand faster than expected, and five more Americans have joined its board. Ting, 63, spoke with Corporate Board Member’s John R. Engen about these changes, China’s evolving role as a global player, and how foreign companies can penetrate the Chinese market. Excerpts:
What was the Lenovo board’s biggest challenge in the IBM acquisition?
We spent a lot of time thinking about how to make it work––how to integrate and create a global company, not just a Chinese one. It was very critical that the 10,000 people who came from the IBM side feel comfortable with the change, and Steve Ward was very important to us for that reason. He came from IBM, and having a leader who was part of that team during the initial transition phase made things go much more smoothly. We also shifted the executive headquarters to New York—it has since been relocated to Raleigh, North Carolina—with our chairman, Yang Yuanqing, spending roughly half his time at headquarters.
The board surprised a lot of people when it changed CEOs. What was the rationale for the move?
As a global company, we’re competing front and center against companies like Dell and Hewlett-Packard. Board members felt that in order to accelerate the growth of the company, we needed someone with different skills.
What sort of skills?
Let me put it this way: The IBM PC unit was part of a large company. When you grow up in that kind of structure, you become accustomed to a lot of big-company processes, and it’s not that easy to change styles. In the end, we concluded we needed someone more entrepreneurial, someone who was closer to the customer, if you will.
You’ve also started to promote the Lenovo brand more aggressively, instead of the IBM brand. What was the thinking there?
The Chinese by nature want to move very fast, and we felt it would give us much more control not to be depending on someone else. So we decided to accelerate the transition from a branding viewpoint. Leading up to the 2008 Olympics in Beijing, we’ll be emphasizing Lenovo more and more. IBM will continue to be a key sales channel for Lenovo PCs into the corporate sector, but Lenovo ThinkPad will be the product name.
Lenovo’s board has gone through some changes too. Tell me about those.
When I joined the board, it was totally Chinese; I was the only American. So the way they thought and communicated was very different. I found I had to adapt myself into their mode of things, more of a Chinese style, to get my inputs heard.
What is Chinese style?
On an American board, there’s a lot of debate back and forth during meetings. With the Chinese, most of the discussion about strategic alternatives actually happens outside the board meeting, during dinners and lunches. You might make comments and suggestions [at the board meeting], but you don’t get a lot of feedback and don’t know if management has heard you. It’s only when the decisions are made that you find your ideas have been absorbed.
How are things different today?
Of the 12 board members we have now, six are Americans, including [CEO] Bill Amelio and general partners from three U.S. private equity firms that invested in Lenovo—Texas Pacific Group, General Atlantic, and Newbridge Capital. The whole board operates more as an international board. Most of those new people don’t even speak Chinese, so everything is in English. Today we have only one board member who doesn’t speak English.
That sounds like a big change.
Everything’s a little more structured now. We have a strategy committee and other committees, and things operate more like a proper board of a global company. And the old board members have accepted the new style.
For U.S. companies considering China, how are things different now than they were a few years ago?
The business climate is improving with regard to legal structure and protections. Intellectual-property laws are improving, because China now has domestic companies that are producing IP themselves—they have a selfish reason to make sure those protections work. You also have larger groups of returnees [from the West], like some of the people I’m working with. These are Chinese people who traditional U.S. investors feel comfortable backing.
Are they with American companies?
It’s often hard to define. I’m on the board of one company, EPIN Technologies, that’s incorporated offshore with foreign investors and has a wholly owned Chinese subsidiary. The team got their training in the U.S., so they have the technology and know-how and the ability to attract investment. In China they call those people “sea turtles,” because they’re returning to their home. I find it a strange description, because we associate turtles with being slow, but these people are very fast.
What does the company do?
It has a business model that isn’t common in the U.S.: providing media screens and broadband access for passengers on the rail system. A common server platform is installed on each train to access the Internet via the cellular-phone network. The server feeds content to viewing screens around the train and allows passengers to access their computers wirelessly. Advertising money from the screens is the primary revenue source, and people who want access to the Internet buy prepaid cards at the station.
It’s a new technology that’s suited well to China. Investing in China is all about recognizing the large numbers of people who pass through given points and taking advantage of it.
What are the biggest challenges for a technology company selling its wares in China today?
Distribution and logistics are challenging. The U.S. has large retail chains, like Best Buy. In China, the retail sector is regional. So you have to assemble and deal with a much larger number of channels and customers to reach the whole country. That’s why a lot of multinationals aren’t in second- or third-tier cities. Domestic ground transportation is very regional too. They’re building a lot of highways, but they don’t have as good a road system. So it’s more difficult to move things around—everything is more complex and more costly to manage.
Lenovo was the first Chinese company to make a big Western acquisition. Others have followed suit. Is that trend likely to pick up speed?
Overall, I’m seeing more interest in foreign mergers and acquisitions. When you have companies like Lenovo that are market leaders with strong capacity and good brand reputations
at home, it’s only natural for them to look beyond China for growth. What they’ll be buying first is brand, and then distribution channels. Eventually they’ll buy product-development capabilities.
For example, there’s a software-outsourcing development company I work with in China. They’ve built strong back-end capabilities, but they depend on third parties for distribution. That’s obviously not as strategically secure as if they owned the [distribution] company. So they’re looking at buying a consulting front end in the U.S., for client and distribution reasons.
Does the Chinese government have any say in Lenovo’s strategy?
Certainly not at the board level. I’ve never seen any of that. The biggest shareholder is Legend Holdings, which is primarily owned by the Academy of Sciences. The academy is part of the government, but it’s not a ministry and it’s never really had an agenda. It’s more like a U.S. university spinning off some technology. It owns about 42% but doesn’t have a seat on the board. They don’t get involved at all, operationally or strategically. When you talk to Lenovo’s CEO, he’ll say he doesn’t have any dialogue with them.
Now if your company has been spun off from a ministry, like information technology or energy, that’s a little bit different. They have certain policy agendas they still want to pursue.
Does Lenovo have any advantages when it’s competing in China?
As a Chinese company, it knows how to navigate the process. But it has no specific advantages because of the ownership, and the government doesn’t have a “buy China” clause when it purchases things.
Lenovo’s domestic market share has risen to 35%, from 27% in 2004. You must have some advantage.
We provide products that better meet local needs. The insides of the computer are pretty standardized, but Lenovo designs user interfaces that are easier for local consumers to use.
In what way?
U.S. companies say they localize their interfaces, but what they really do is take the English version and translate the messages into Chinese. It’s not coming from the Chinese point of view. Lenovo has designed its computer from the ground up with a Chinese perspective, which provides an advantage. Theoretically, that should be a problem when we try to bring it outside China. That’s part of why we acquired IBM’s business.
And from a product-design perspective, Lenovo designs the computer to look like a true consumer product, not an industrial one. A lot of Chinese people put their computer in the living room, because the houses are small and they’re proud to have one. It’s a status symbol. Lenovo understands that, so instead of a black or beige box, it designs computers in different colors to be attractive.
Lenovo recently announced it would preload Microsoft operating systems on its PCs in China. Why wasn’t that done before?
To make it work, Microsoft had to price the operating system for China a little bit differently, a little bit lower. It surprised me that it took them so long to come to that conclusion, because a lot of users were buying pirated versions. Lenovo purposely makes a PC for the Chinese consumer that’s at a lower price point than elsewhere. You’d think the software would have to do the same thing. Microsoft finally came around. If they had done it earlier, they would have gotten 50% of their normal price, versus the nothing they got.
What has Lenovo learned from the IBM deal?
It’s only been a year since the transaction closed, so not all the lessons have come out yet. But we have learned that integrating two very different cultures—both corporate and ethnic—is more work than was expected. There have been some disagreements about which side’s approach should be used. But those things happen in every merger. Lenovo has made a strong effort not to say, “We’re the acquiring company; do it our way.”
What is Lenovo’s strategy for the U.S. market?
We want to build on the Think brand [including ThinkPad laptops] acquired in the IBM deal, which is very strong and valuable. We get to use the IBM brand for four more years, but the Think brand belongs to Lenovo. So there’s a lot of focus on investing in innovation to ensure that it continues to be viewed as top of the class. And we’re also beginning to introduce the Lenovo brand in the U.S.
If the Chinese yuan appreciates against the dollar, would it cause a problem for Lenovo?
Not really. Most of the PCs in the world today are made in China, so all our competitors would be affected in the same way.
A study by Institutional Shareholder Services found that good domestic corporate governance was a higher priority for Chinese investors than for those in more developed economies. Have you found that?
Yes. There have always been issues of transparency and disclosure with Chinese companies. But it’s not just China. In the rest of Asia, you often find public companies controlled by single shareholders, whether it’s the original family or a holding company or the government. As those companies begin to restructure and dilute their dominant shareholders’ stakes, they need better governance to protect minority shareholders. Government officials in these countries know they need to clean that up. Otherwise their markets will suffer.
