Taught by Professor Hu Songhua

My research project:

“Can Lenovo success story become a business model to follow

for the Chinese high-tech companies?”

1
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.

2
 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

3
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.

4
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.

5
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

6
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.

10
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

7
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)

8
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

9
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

10
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

11
 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.

22
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

12
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.

13
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.

14
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

15