New chapter in Chinese legend

Chinese tech giant Lenovo, formerly Legend, grabbed global attention when it bought IBM’s PC division. Now it is focusing on new markets, especially in the Middle East

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By  Peter Branton Published  October 23, 2005

|~|Getty-lenovobody.jpg|~|Lenovo arrived on the world stage when it announced the purchase of IBM’s PC division. Yang Yuanqing, left, and Liu Chuanzhi, right, are instrumental in its success. |~|Perhaps the best guide as to just how good Yang Yuanqing is at his job is that if things had gone as intended he probably wouldn’t be doing it today. When IBM and Lenovo originally looked at merging their PC businesses, Yang’s role was to be a non-executive chairman, helping out with strategy but not taking a day-to-day management role. However, as the story goes, he so impressed Steve Ward — the CEO of the new organisation — during a brainstorming session about how to improve productivity that Ward asked him that same day to take charge of running the new company’s supply chain. “If you look at what Yang did with Lenovo’s supply chain in China, you understand that it is his strength, and it will be a strength in the new company,” says Milko Van Duijl, Lenovo’s general manager for Europe, the Middle East and Africa. Not that Yang is just interested in improving supply-chain management processes: “The PC industry has already become an efficiency industry so you cannot just survive with that,” he says. “Our goal though is to do more than survive, we want to be the leader of this industry, so we have to look at how we can differentiate ourselves. Key to that will be innovation; we still think PCs can do a lot of things to expand their functionality, so we still have a lot of room to innovate,” he claims. As president and CEO of Lenovo in China, Yang had already built the company into the world’s ninth largest PC firm, even before it bought out IBM’s PC business for US$1.25billion last year. That deal catapulted Lenovo up the rankings, making it the world’s third-largest PC firm, after HP and Dell. Getting past the big boys is going to take some doing, but Yang clearly believes it is an achievable task. “We want to have twice the average industry growth, that’s our target,” he states. “With the old IBM PC business, they only focused on large enterprise customers, they were not strong in the SMB segment, and they were not strong in the consumer segment at all. They were only addressing 50% of the total PC market. We have very strong consumer and SMB products, we also have a very strong business model for these segments, so we are very confident that we can get more growth from these segments. That is our strength.” When Yang claims that he wants to make Lenovo the number one company in the PC market, he is only repeating what plenty of other senior executives at plenty of other firms have said in the past. The competition is tough, and likely to get even tougher in the future, with the PC becoming increasingly a commodity item. With most other firms, Dell has been able to win out thanks to its efficiency: it has the lowest operating expenses of the major players — half the industry average. Lenovo however can cla- im to be competing at similar cost levels, with low labour co- sts in its core Chinese market. Will that change as it absorbs IBM’s higher-cost execs and working methods? That is clearly what competitors are hoping for, but the deal also gives Lenovo some impressive economies of scale, which should allow it to negotiate more favourable terms from suppliers — such as Intel. “We’re not a new company, we were a US$10billion company from the IBM days and Lenovo was already a US$13billion company, so together you’re talking about a US$13billion firm with a lot of experience,” says Van Duijl. It is important to remember that IBM has kept a fairly substantial stake — 13.4% — in the combined company, and is supplying it with some very experienced senior executives, such as Ward himself, who previously headed up IBM’s PC operation. The executive team comprises staff from both IBM and Lenovo and the firm’s worldwide headquarters are located near IBM’s in New York. Lenovo has rights to use the IBM brand on its notebook and desktop PCs for five years, although it plans to phase out usage of the Big Blue brand and focus more on the ThinkPad marks and its own Lenovo brand. For now, IBM customers should expect the products to maintain the same look and feel, the company claims. Lenovo will be the preferred supplier of PCs to IBM, which in turn will be the preferred supplier of services and financing to Lenovo. Lenovo executives see all this as providing a blend of the best of both worlds, although competitors have been quick to point out that it may prove very difficult to integrate two very different company cultures in the real world. ||**||Business model|~|milkobody.jpg|~|Milko Van Duijl believes Lenovo can quadruple its business in the Middle East.|~|Lenovo’s business model is based on a combination of what it calls transaction and relationship customers, which require different sales channels and different disciplines to target each. Relationship customers can be categorised as the large, enterprise-style accounts, which IBM was always strong in. In this region, customers include Arab Bank in Jordan, the Middle East Bank of Kuwait and the Saudi Minister of Interior. However, transaction customers are generally those SMB and consumer customers that Big Blue struggled to reach in the past. Lenovo will have some different strategies in place to reach them, Yang claims. “For transaction customers, the key is you have to quickly respond to market change,” says Yang. “The supply situation changes and the pricing changes, there can be component shortages or whatever. So you need to respond quickly to these changes: change your product portfolio, change your pricing, change your marketing activity,” he adds. Of course, targeting those transaction customers also requires the right product mix. Van Duijl admits that Lenovo doesn’t yet have the right products to appeal to consumers, but says they will be coming soon, with the vendor taking a phased approach to the market. “We are absolutely going into the consumer market and we are bringing out products that allow us to do that, but that’s not going to be this year,” he says. Next year is going to be a very big one for Lenovo, with the vendor beginning a massive marketing campaign based around its sponsorship of the Olympic Games. First up is the 2006 Winter Olympics in Torino, with the campaign culminating in the 2008 Games in Beijing. The Games will, Lenovo believes, create worldwide brand recognition for its products and reap rewards on a global scale. While Yang wants to build Lenovo into a global brand, he believes the company can steal a march on its US rivals by focusing on emerging markets outside the US and Europe, with the Middle East being one of its key targets. That, as much as anything else, explains why he chose to attend the Gitex trade exhibition in Dubai in September: he wanted to show how important the region is to Lenovo. “Our key strategy is to focus on these emerging markets, so it is very important to focus on how we can help these markets to get more growth,” he explains. “We understand how to develop emerging markets because of our experience in China so we understand how to duplicate this success in other emerging markets, one of which is the Middle East,” he adds. “There are a number of ways to grow a business,” adds Van Duijl. “One is to bring out new products to enter new segments and new price points, the other is to exploit growth markets where we are either under-represented or not represented at all and that will be an engine for growth for the future." "Clearly in the Middle East there are some countries where we have never been active, there are other countries where we believe the growth is phenomenal, and we believe can grow even further and for a prolonged period. That’s where we see growth for us, we can quadruple our business here,” he claims. As said earlier, Yang is looking at a lot more than just supply chain efficiencies and econ- omies of scale to achieve that business growth, the company is staking its reputation on innovation as well. Marrying the two is easier said than done: Dell has famously kept its costs low by avoiding messy experimentation and doing the basics well. However, Yang believes there is a lot more that can be done with the PC format. What kind of things? “Security is key,” he states. “I think more and more people care about security now. Communication — more and more people want to be connected to the network, have better ways of sharing information. All of these areas are where we can improve,” he says. ||**||New products|~|YangYbody.jpg|~|Yang Yuanqing is aiming for twice the industry growth for Lenovo.|~|That innovation won’t just cover PCs and notebooks either: like other PC makers, Lenovo’s ambitions don’t just end at the desktop. The company already sells a number of different consumer products in its native China, including mobile phones and digital projectors. These may be brought to other markets, including the Middle East. Lenovo recently announced a new line of ThinkPad notebooks, the Z60 series. While previous ThinkPad models such as notebooks in the ‘X’ and ‘T’ ranges have been more business and corporate minded, the Z60 series ThinkPads will be consumer focused. Furthermore, Lenovo is poi-sed to launch a new series of cheaper and more colourful ThinkCentre desktop computers intended to extend the brand to the small business buyers neglected by IBM. Prices for models in the new E-series desktops are expected to start at less than US$400 without a monitor, about US$100 less than the current cheapest ThinkCentres. The new range of laptops come with wider screens, built-in wireless data access and are being offered with covers made of ‘brushed titanium’, a break from IBM’s tradition of selling them only in its trademark black. Off the record, a senior executive for one of the region’s leading PC firms said that his management had already told him to “watch out” for Lenovo. “We are wary, but it is too soon to say what will happen,” he said. “It is all well and good pushing a lot of heavy metal into the market, but you have to sustain that push, and that can be a lot harder to do than people think. You may start with a big marketing campaign, but then you have to keep those levels of expenditure up and if the sales figures don’t match up then companies always end up cutting their marketing budget,” he stated. Indeed, it is stated wisdom of the IT industry that around 70% of all mergers and acquisitions fail to deliver on their goals, so the odds are heavy for Lenovo to succeed. However, the venture has won cautious support from industry analysts. “Suppliers and competitors will both feel the pressure from this new venture,” analyst firm Gartner wrote last year, when the merger was announced. “Competitors will have to accept that the Chinese market will become even harder to crack, while international markets will now have a player with a cost structure that can compete with Dell’s,” it noted. In an advisory following the completion of the merger, Gartner pointed out that the strengths of the old IBM PC business and of Lenovo were mostly complementary: “These factors and the absence of overlap will make the consolidation easier to manage than most,” it advised. If the venture does succeed it will be in no small part down to the contribution of Yang himself – and also to how well it approaches emerging markets, such as this region. “As you know, in emerging markets, the white box manufacturers dominate the market, especially the transaction customer market,” he says. “According to mature market practice, including China, the situation should become more dominated by the branded multi-nationals, so this is our opportunity, this is where we will grow,” Yang states. ||**||

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