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Taught by Professor Hu Songhua

My research project: “Can Lenovo success story become a business model to follow for the Chinese high-tech companies?”

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Lenovo is one of the most successful and famous Chinese companies around the globe. My

deep interest to Chinese high-tech business drew me to this issue: I wanted to figure out

whether Lenovo could become a business model to follow for the Chinese high-tech

industry.

It is related to the topic tackled on Wednesday, March 25th by Professor Hu Songhua, about

Chinese enterprises in the world market.

This subject covers two main courses among those I selected for studying at Sun Yat Sen

University which are “Management of Technology and Innovation” and “International

Business Management”.

Thus, lessons learned from this lectures as well as some material and cases analysis provided

by respective professors have been a precious source of information for this research

project.

Also, I used some Internet websites, specialized magazines and others books related to this

subject matter as academic and reliable sources of information.

This study is aimed at analyzing the key elements which are necessary for a Chinese

company to achieve better chance of success within technology industry, and to a great

extent in the international market, all activities taken together.

So, in my first part, I will identify Lenovo key success factors and also describe its main

strengths.

Then, in my second part, I will explain why it could become a role model for companies

across China, and generally speaking, what are the skills required for a Chinese high-tech

company to increase sales volume or market share in both domestic and foreign markets.

Based on the synthesis of these parts, some commentaries and recommendations will be

proposed in the conclusion.

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I) Lenovo key success factors

The roots of Lenovo were formed in 1984 when 11 computer scientists led by Liu Chuanzhi

invested a total of 200,000 Yuan to set up shop in a small bungalow in Beijing. The state-

owned1 enterprise was firstly named Legend and was known merely as an OEM2 company of

other foreign computer brands such as IBM and Hewlett Packard. It built an efficient

distribution networks and helped to generate a powerful capital. It also allowed them to

upgrade manufacturing capability by acquiring production lines and the technology at a

relatively low cost. Therefore, in 1990, they started manufacturing and marketing their first

home computer under their own brand name.

In the first two decades of its business they managed to seize the largest personal computer

market share in China. Ted Dean, joint managing director of Beijing-based consultancy BDA

China3, stated that the rise of Lenovo is “one of the biggest and earliest success stories of the

Chinese IT industry”. However, Lenovo brand name was still relatively unknown outside

China.

On December 8, 2004, Lenovo Group acquired IBM’s personal computing division. This news

surprised many business people. This deal was valued at $1.75 billion in cash, stock and

assumed liabilities. It was the signals of the arrival of Lenovo group as a global player in IT

industry. In other words, “this purchase provided the firm with an unprecedented global

presence and access to new technologies and designs” (official Website of Lenovo).

Indeed, Fang Zingdong, chairman of blogchina.com and a famous IT critic in Beijing, called it

"a magnificent acquisition […] the new Lenovo becomes a major global player in the PC

industry overnight instead of struggling for generations." Lenovo is getting "IBM's first-rate

products, technology, brands, market, channels and management" he declared.

Indeed, it is now the third largest computer producer in the world.

1 A former spin-off of the Chinese Academy of Sciences new technology unit

2 An original equipment manufacturer, or OEM is typically a company that uses a component made by a second

company in its own product, or sells the product of the second company under its own brand 3 BDA is an advisory firm serving companies seeking to participate or invest in Asia's most dynamic economies

and growth sectors

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See below a short summary of Lenovo’s milestones which can help to understand clearly the

rise of this company (source: official website of Lenovo):

1984 – Established Legend Group in Beijing. It mainly operated the trading business

1987 – Developed a Chinese input character system Lianxiang

1988 – Established HK Quantum for planning to enter international market.

– Acted as a distributor for some international brands such as IBM, AST and HP in China

1990 – Designed, manufactured and distributed its own branded computer

1993 – Became the distributor of Apple

1994 – Listed on The Hong Kong Stock Exchange – Started to develop distribution channel

and retail store

1995 – Established Science port in China and launched their first Legend Branded server

1996 – Finished networking construction in China; cooperated with Motorola to develop a

modem in the China market – Merged its business in Hong Kong and PRC

1997 – Became a business partner with Cisco, a U.S brand

1998 – Invested in Kam Shan Software Company

1999 – Became the top PC vendor in Asia Pacific Region – Launched “one-touch-to-the-net”

feature to the China market.

2000 – Included as one of the constituent stocks of the Hang Seng Index and the

London Hang Seng Reference Index – Named as “the best managed company in the PRC” by

several investment relations magazines.

2001 – Appointed Yang Yuanqing as President and CEO of Legend. – Got a joint venture with

America Online, Inc. (AOL) to develop consumer interactive service business in China.

2003 – Birth of a new logo “Lenovo”. – Established Technology Advancement Center with

Intel in Beijing.

2004 – Joined the Olympic Partner program of the International Olympic Committee.

– Changed its English name from “Legend Group Limited” to “Lenovo Group Limited”.

2005 – Lenovo completed the acquisition of IBM's Personal Computing Division.

2006 – Lenovo technology flawlessly supported the 2006 Olympic Winter Games in Torino in

Italy.

2008 – Designed Beijing 2008 Olympic Torch Relay Components.

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Lenovo's transformation from a small trading company into the biggest player in China's PC

market is the upshot of a smart and long-term strategic planning.

First, Lenovo benefited early from central government determination to foster a strong IT

sector within China. Indeed, most of the companies were state-owned enterprises.

Government played an important role on business strategy and human resource

arrangement. “They developed the business based on the needs of the country as a whole.

For example, banks in China were assigned different tasks. Some dealt with international

issues, some dealt with local company issues, and others mainly focused on agricultural

business”4. Lenovo still benefits from this support and can for instance, assign some research

projects to its state academia owner.

Yet Lenovo’s success is not linked to the protection of the government. It is not the typical

state-owned company. Previously, Legend Holdings was 100% owned by Chinese State

Academy of Sciences, and in 2002 they gave 35% to senior management and the founder. It

was a very clever move to have management participates in ownership.

What’s more; the Academy of Sciences was originally designed to create startups and allow

them to fail as they would in any capitalist society. Most of them did. "The Academy of

Sciences spawned a lot of companies and Lenovo is the only significant survivor," says

Marshall Meyer5.

As a result, Lenovo’s management is very opening, international and also likely to change

according to the market conditions. This is one of the key success factors of Lenovo.

Secondly, Liu Chuanzhi’s6 unique leadership talent has been an extraordinary asset for

Lenovo. On the one hand, he guided the Chinese home-grown company on the path to

global success, and on the other hand, “he pushed boundaries while staying just the right

4 From Ling Zhijun, tr. Martha Avery The Lenovo Affair: The Growth of China's Computer Giant and Its Takeover

of IBM-PC 5 He is a Wharton management professor who has studied Chinese companies and traveled extensively in the

country 6 Liu Chuanzhi (柳传志) was a founder of Lenovo, and still remains the paramount leader of the firm.

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side of the ideological line”7. It means that he adopted advanced Western management

techniques within the organization (launching incentive schemes and sharing options to

motivate Lenovo's staff). In addition, he carefully sidestepped what he considered as

ineffective government’s rules (for example: government's 300% tax on bonus payments).

Even though, Mr. Liu had no experience of running a private company, no idea about

modern computers and a formal education that had been cut short by the Cultural

Revolution he has been able in some extent to change the way China does business. Mr. Liu

is “undoubtedly the architect of Lenovo8”.

Thirdly, by working closely with prominent IT international companies (at the time when

Lenovo was an OEM) they enriched their knowledge about new technologies. It was also an

important tutorial on organizational structure, marketing and strategic procedures. Thanks

to these skills they introduced a new concept in China: the brand-building and moreover

they became the first Chinese company to create advertisements that did more than just

promote its name and price. They were market oriented and it greatly benefits its

development in later stages.

To this end, Lenovo use the occasion of worldwide event such as Olympic Games to

advertise its brand-name and products. As an example, they designed the “Cloud of

Promise” Olympic Torch which was carried around the world in the Olympic Torch Relay

preceding the Beijing 2008 Olympic Games. Thus, Lenovo’s banners all over the Olympic

stadiums and their logos on live TV transmissions greatly increased their global exposure.

These elements and key success factors enabled Lenovo to expand its business quickly. Also,

Lenovo understood that an efficient organizational management would be a great advantage

for the company9.

7 Lenovo: The making of a legend? - Mary Hennock - BBC News business reporter

8 From Shenzhen Daily - December 24, 2004

9 Legend - Li Tao - Taiwan Jiu Ding International - 2002

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At the early stages, Lenovo’s organizational structure was characterized by a centralized

hierarchy and bureaucratic culture. Staff in Lenovo was well organized, disciplined and

submissive. In fact, such culture was appropriate for a traditional computer producer. But

after 2001 and the IT bubble burst a new path was necessary: a turning point in the

organizational management. Creativeness and innovative factors became the driving force

for a brand to succeed in an increasingly competitive IT market.

After 2001, Lenovo’s organization became more decentralized and they decided to activate

collaborative work in order to reduce the heavy hierarchy10 (and by the way, increase

creativity). Small self-governed unit were set up. It gave managers a sense of running their

own business.

Furthermore, they requested staff to share information and experiences (e.g.: immediate

and efficient information flow within the organization) in order to have better

responsiveness to the customers' needs (e.g.: flexibility and adaptability).

Nonetheless, the organizational success factors are not only management and synergy.

Lenovo has a strong supply-chain control11. Supply chain management is one of its

tremendous assets. It reduces its costs, improves its profit margin, and offers a better return

on investments.

We described here some of the most relevant key success factors of Lenovo. That is to say:

- A combination of the advantages of a state owned company with those of a self-

participating management mainly market oriented.

- A unique leadership talent.

- Ability to upgrade manufacturing and marketing (advertisement) skills by working

closely with international foreign companies (through a learning process).

- Flexible organizational management which promotes creativity and innovation.

- Low price strategy (before 2001) to increase sales volume (e.g.: economy of scales)

and achieve a certain size to be well positioned to enter the global market.

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The Legend Behind Lenovo – Shan Feng, Janet Elfrlng - 2004 11

This is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers

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Last but not the least, Lenovo through its acquisition of IBM PC division managed to model a

successful marriage of East and West12. Instead of getting into a culture war, both

companies integrated their different, but complementary, business skills and experiences.

And, Lenovo’s chairman, Mr. Liu, is visibly optimistic about his company's future as he says:

"Lenovo of China is going to be Lenovo of the world".

II) What need Chinese high-tech industry to go global

Obviously, Lenovo’s success story is a role model to follow for Chinese companies (not only

IT firms; all sectors taken together should employ the same audacity and ambition). But not

every company can become as successful as Lenovo. It is more intricate and risky than it

seems. It requires a long-term commitment, a well-defined strategy and many others skills

that I already tackled based on Lenovo’s example.

Nowadays, numerous experts agree on Chinese high-tech and electronics companies’ bright

future. In fact, they are outgrowing the domestic market, improving their productivity and

lucratively defending domestic markets against foreign challengers.

Moreover, China has the raw material required to push its high-tech ambitions: that is to

say: smart, driven and educated workforce (Chinese universities granted 465,000 science

and engineering degrees last year--approaching the total for the U.S13). Over and above,

China needs IT technology to keep growing. Indeed, China has the fastest growing economy

in the world (and probably in human history) over the past two decades, averaging about

9.0% per year14. But, China does not want to remain a vast manufacturing base for Western

enterprises. They need to shift from an export economy to one that will emphasize internal

growth.

12

Lenovo & IBM - Lou, Yan - China Fang Zhi Publishing - 2005 13

From Forbes online - China's High-Tech Companies Go Global – July 8, 2008 14

From International Monetary Fund (imf.org)

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That’s why, the government is currently trying to upgrade its low cost manufacturing base

and move upstream into R&D and design. Li Lanqing15 stated in a speech at the second

session of the China-Germany Hi-Tech Dialog Forum in 2002, that the development of hi-

tech industries should be given top priority in key areas of the national economy in the next

five to ten years. Li added: "In some key areas relating to the overall development of the

national economy, we must pay special attention to the development of hi-tech industries

and […] try to realize surging growth of these areas."

So, huge investments are made to build plant infrastructure able to produce technological

products (e.g.: computer chips, electronics, etc.). R&D spending in China - all sectors taken

together - has been growing at an annual rate of about 17%, and is far higher than the 4% to

5% annual growth rates reported for the US, Japan and the European Union over the past

decades16.

In sum, China is willing to make the transition from a low cost manufacturing center to an

economy that encourages innovation and creativity.

However, the country will have to face many upcoming challenges:

First of all, they have to curb widespread piracy, a step that is essential for innovation to

flourish.

And as Emily Miao17, an intellectual property attorney, said during a lecture about Chinese

piracy in 2006: “They're not a producer of intellectual property; they're a copier of IP.” She

noted that in 2004, for example, a little over 1,700 international patent applications were

filed by the Chinese. “That's very low compared to other countries” she said. “It means that

there's not much technological innovation coming out of China today”.

So, Chinese government needs to play a major role in both enforcement and education of

the public.

Robert Holleyman, president and CEO of the anti-software piracy trade group, is convinced

that IP and copyrights protection is directly related to innovation and creativity. He argued

15

Former Chinese First Vice-Premier (1998 – 2003) 16

Figures from Chinese education and research network (edu.cn) 17

E. Miao, Ph.D., Intellectual Property Attorney and Partner at McDonnell Boehnen Hulbert & Berghoff LLP

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that “China which cut piracy by 10 percent within three years benefited with a resultant 3.5

times growth in software profits in 2006. And that was still at a rate of 82 percent piracy,

showing the country has vast opportunity for growth by way of cutting piracy rates”.

Secondly, the traditional business model in China and Asia (outside of Japan and Korea) is

based on trading (e.g.: buying and selling) and speculation, but not on business or

innovation. The “Chinese” culture and economic environment has not been conducive to

promoting high-tech industry. As an example, the History told us that Archimedes’ principle

formed the foundation of later development in physics and engineering in the West, while in

China, the same principle was discovered by a five year old boy but it only remained a

children’s story over ages: no scientific or technological community were developed.

Thus, it is very important to transform cultural habits to allow China to take up the challenge

of implementing sustainable and enhanced innovation policy adapted for the high-tech

sector.

Now, I will analyze the situation and make some recommendations but this time based on a

micro perspective:

Generally speaking, new product development (NPD) is costly and the risk of failure is very

high. It requires large investments in research (R&D), development, design, engineering,

production and marketing. The staff has to get itself involved at a hundred percent with the

corporate long term strategy because innovation entails a long term commitment and

consistent organizational effort18.

So, change the organizational management is often the best starting point for Chinese high-

tech firm, in particular for heavy and centralized structures (like state-owned ones).

The leadership of the manager is a required quality in order to provide a consistent direction

and strategic steps over a long period of development which is needed for this kind of

technology. Regardless, the organization has to remain flexible to adjust to the market

evolution or customers’ needs. A high degree of organizational stability and stable technique

18

From Business Week online - October 28, 2002 - High Tech in China

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teams with good connection to the top management team is a condition which can help to

lead the company to a certain success.

What’s more; Chinese firms have good manufacturing skill but with limited research

capability. As a consequence, its software industry is still far behind India's, not to mention

Silicon Valley, and its underdeveloped pharmaceutical sector hasn't come up with a single

blockbuster drug19.

And, Chinese firms are usually considered as technology followers. OEM is the most popular

business within those companies. But it is a risky business because the buyers can easily find

other places with even lower cost of production. So, this business may only be led for a short

period and then, then, thanks to the accumulated capital and a significant turnover they

would be able to afford advanced researches on precise devices such as CPU and software

operating systems. And later, they should have the ability to develop high quality computers

or electronics appliances with unique designs (like NEC, Sony and Samsung, or even Lenovo

now).

Once a strong domestic position is achieved within China market, high-tech firms must push

into overseas prospection to secure a continued overall growth. Indeed, globalization is

often the only option for Chinese companies when there is a very small growing space left in

the domestic market20.

They may use different means to expand in the world markets:

- Establish joint-venture. “A joint venture (often abbreviated JV) is an entity formed

between two or more parties to undertake economic activity together. The parties

agree to create a new entity by both contributing equity, and they then share in the

revenues, expenses, and control of the enterprise21”. This mode of entry was used by

19

The Inside Story of China's High-Tech Industry: Making Silicon Valley in Beijing - Yu Zhou - 2007 20

From Wharton.universia.net – January, 2005 - The IBM/Lenovo Deal 21

From Encyclopedia Britannica online

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TCL, a Chinese electronics giant which established a joint venture in 2003 with

French-based Thomson to create the world's No. 1 TV maker.

- Direct or indirect takeover deal (also called M&A22). As Lenovo did successfully with

International Business Machines Corp's PC business five years ago. This acquisition

created a global rival for leading firms like Dell Inc and Hewlett Packard Inc.

- Self-innovation. This is maybe the most audacious and striving process to globalize.

Through heavy investment on research and development, Chinese firm can use self-

developed products and sold them at one-third or half of the international average

price, to penetrate foreign markets and compete with corporate giants.

Nevertheless, China's brand image conjures up perceptions of cheap, poor value and low

quality23. So they urgently need to invest more in marketing and quality control24 (QC) to

change this scrawny brand image and subsequently promote their high-tech products

globally. Likewise, Chinese companies need to take time to win trust from foreign consumers

by improving quality.

Also, they need to hire international talents. They are vital to “have global vision, ability to

operate global distribution network and deep understanding of local market” as Meng

Fanchen, Siemens Shanghai's general manager, said25.

As a consequence, Chinese companies may face cost increases for brand-building and for

labor costs (as they begin hiring talent outside their own low-wage domestic market). So,

margins are likely to be reduced during the initial phase of globalization. That’s why; a

critical mass must be achieved in homeland market so that companies have enough funds

and strength to endure a short-term decline in margins. But when they will start producing

on a large scale as well as increasing sales volume: the costs stabilize and the margins

subsequently improve.

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Which stands for mergers and acquisitions 23

From Chinadaily.com – July, 2007 - Chinese firms and the globalization 24

Quality control (QC) is a procedure or set of procedures intended to ensure that a manufactured product or performed service adheres to a defined set of quality criteria or meets the requirements of the client 25

From People’s daily online - Sunday, May 14, 2000 - China at Forefront of World's High-Technologies

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To summarize, a talented management, a strong domestic position, an efficient

organizational structure and a comprehensive strategic planning are some elements of a

successful globalization for the high-tech companies.

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Conclusion

This analysis was aimed at studying a successful Chinese company within high-tech industry.

Lenovo (previously called “Legend”) is obviously a model to follow. I listed and explored the

main Lenovo key success factors. This paper is built on many researches, books and

newspapers; all provided an expert point of view and enabled me to appreciate the

complexity of the high-tech sector in China today.

The Chinese, who invented gunpowder, paper, and the compass, intend to regain their tech

primacy. And as Wang Mingwei, head of the Chinese National Center for Drug Screening in

Shanghai, says: “"You can't be economically very powerful but technologically very

backward".

So, the government has sent huge incentives to push Chinese high-tech firms’ global

ambitions.

China is gradually more at the cutting edge with scientific discoveries and patents held by its

own scientists. To give an example, in 2003, China became the third nation after the United

States and the former Soviet Union to put a human in orbit.

But NPD requires complex organizational efforts and specific management. That is what we

illustrated in this study through the example of Lenovo’s successful marriage between West

and East during its takeover deal.

However, it still remains many challenges to face for China and its industries. As a

conclusion, I shall quote President Hu JinTao’s ambitious speech pronounced during a

meeting of China’s scientific elite in June 2008 at the Chinese Academy of Sciences: “We are

ready for a fight” he said “to control the scientific high ground and earn a seat on the world’s

high technology board. We will make some serious efforts to strengthen our nation’s

competence”. This achievement will determine whether China can move from the world's

workshop to becoming a serious and sustainable force in global technology.

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References and bibliography

- Shan Feng, Janet Elfrlng - The Legend Behind Lenovo - Asia 2000 Limited Hong Kong,

2004

- Hsiu-Ling Wu, Chien-Hsun Chen- An Assessment of Outward Foreign Direct

Investment from China’s Transitional Economy - Europe-Asia Studies, Vol. 53, No. 8.

(Dec., 2001)

- Ling, Zhijun - The Lenovo Affair: The Growth of China's Computer Giant and its

Takeover of IBM-PC - Translated by Martha Avery. John Wiley & Sons (Asia) – 2006

- Li, Tao – Legend - Taiwan Jiu Ding International – 2002

- Lou, Yan - Lenovo & IBM - China Fang Zhi Publishing – 2005

- Yu Zhou - The Inside Story of China's High-Tech Industry: Making Silicon Valley in

Beijing - 2007

- Business Week online

- People’s daily online

- Forbes online

- Shenzhen Daily online

- BBC News online

And,

- International Monetary Fund (imf.org)

- Chinese education and research network (edu.cn)

- Encyclopedia Britannica online (britannica.co.uk)

Last but not the least,

- Material and cases from the class International Business Management courses, Prof.

Songhua Hu, PH.D., 2009

- Material and cases from the class Management of technology and Innovation, Prof.

Denis Lee, 2009