LENOVO SHOWS HOW CHINA IS ABLE TO TAKE ON THE WORLD
When
Lenovo chairman Yang Yuanqing meets investors and analysts in Hong Kong today to unveil results from China's largest computer maker, he will be glad not to be in the shoes of Li Dongsheng, his counterpart at consumer electronics group TCL.
Lenovo and TCL have won international fame as pioneers of corporate China's efforts to “go global” by buying well-known international brands. Television giant TCL went to France and acquired the TV and DVD-player operations of Thomson and mobile phone business of Alcatel. Lenovo last year bought IBM's iconic PC unit.
For TCL, pioneering glory quickly led to a dramatic fall from grace. A joint venture with Alcatel unravelled last year and it announced last week that it would shut most of its TV operations in Europe because of escalating losses. Its setbacks have underlined the challenges faced by Chinese companies trying to marry low-cost manufacturing at home with established global brands.
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But while analysts say TCL was simply unprepared to take on the job of managing Thomson's international operations, Lenovo is emerging as a positive example of how Chinese companies can digest acquisitions.
“Lenovo was a lot more ready than TCL when it did the IBM deal,” says Joseph Ho, analyst at Daiwa Institute of Research. “Its management is more open-minded and determined.”
Even before the $1.75bn purchase of the IBM unit, completed in May last year, which made it the world's third-largest PC maker, Lenovo had been seen as one of China's best-run companies. Foreign consultants had helped it adopt world-class management techniques.
After the deal, it quickly sealed a strategic tie-up with US private equity groups to give it access to inter-national industry expertise so it could challenge industry leaders Dell and Hewlett-Packard. Foreign managers have been given high-profile roles. The executive headquarters have been moved to Raleigh, North Carolina. And English has become the main language of executive discussion.
The clear game-plan has been to establish Lenovo as a global consumer brand, expanding the market reach of IBM's ThinkPad laptops and ThinkCentre PCs.
But despite such efforts, the acquisition has resulted in an 85 per cent profit drop in the year to March 31.
When Lenovo last released financial results in August, William Amelio, chief executive, did his best not to raise expectations, declaring that “we still have much to do”. He added: “This will not be easy and it will take time. But I am confident in our ability to execute our action plan to transform this company.”
Lenovo does appear to be turning the corner, however.
This year it launched a $100m programme to revamp the IBM unit, including a 5 per cent cut in the workforce. It has invested heavily in sales and distribution channels in the US, where IBM had focused on selling to big corporations.
In August, Lenovo reported its first market share increase since the acquisition. It is expected to post a second consecutive quarterly profit today, after losing money in last year's fourth quarter.
Analysts say much of Lenovo's recent success stems from Mr Yang's decision to replace former chief executive Steve Ward with Mr Amelio, Dell's former head in Asia. “It was an instrumental move. Steve Ward was an IBM person and his presence was not helping,” says Charles Guo, an analyst at JPMorgan.
Lenovo's effort to turn round the IBM unit is supported by strong performance at home. Lenovo's strong sales in China “give it some breathing space and cash flow to sustain losses in overseas markets”, says Randy Zhou, analyst at Bank of China International.
But Lenovo faces tricky challenges, and analysts say there is still no guarantee it can avoid TCL's fate.
Like TVs, PCs are an unforgiving business. Strong global price competition is expected to slow the rise in Levono's operating margin, which at 1.7 per cent in the quarter to June was far lower than the 3.73 per cent it enjoyed in the year before the acquisition.
Mr Guo says Lenovo suffers from weak brand awareness in the US
