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19 Oct 2012
Week in China

When Yang Yuanqing's bonus was $3 million greater this year than last, he didn't splurge the difference on a villa in Italy or a cellar full of French wine. Instead, the chairman and chief executive at computer maker Lenovo shared the additional payout with company employees, dividing it among almost 10,000 lower-level staff. From receptionists to factory workers, they all got Rmb2,000, or $314, apiece.

Now they have another reason to celebrate: Lenovo has officially topped the global PC rankings, passing long-time leader Hewlett-Packard to become the world's top computer seller. Not bad for a company that was founded by 11 engineering boffins in 1984 as a means to supplement their meagre academic stipends.

Newly released data from research group Gartner shows that Lenovo sold 15.7% of the world's PCs in the third quarter, passing HP, which clocked in at 15.5%. Gartner says Lenovo has made significant market share gains over the past two years because "in addition to acquiring other vendors, it has also taken an aggressive position on pricing, especially in the professional market." Back home, the Chinese press struck a celebratory tone. "The news carries significant symbolism: Lenovo will soon become the undisputed leader in the PC industry. And its success proves that Chinese enterprises can win in global markets,"
wrote Jiefang Daily.

What's the big deal?

Lenovo's feat would have been considered far-fetched just seven years ago, when it first stepped onto the global stage with its landmark purchase of IBM's ailing personal computer division. Some suggested that it was biting off more than it could chew. But in announcing the deal, Lenovo executives spoke excitedly about creating the first truly global Chinese company. Bill Amelio, a veteran at Dell, was appointed as boss, sending a message to staff and customers alike of the new determination to internationalise. The company even relocated its headquarters from Beijing to North Carolina and switched its official language from Chinese to English.


Lenovo will soon become the undisputed leader in the PC industry. And its success proves that Chinese enterprises can win in global markets.

But sluggish demand in the US and Europe hit Lenovo hard. Even though IBM was traditionally strong in corporate sales - a strength that Lenovo inherited and has since maintained - it was relatively weak compared to rivals like HP and Acer in the consumer segment. That meant that the recession left Lenovo especially vulnerable, as companies cut back aggressively on new spending on PCs but few consumers knew anything about the new arrival from China. As demand dropped in the wake of the credit crunch, Lenovo was left dangerously exposed, lacking the brand presence that it had established at home. Liu Chuanzhi, one of the company's co-founders, agreed: "Once we left China, we were good for nothing... We were just a Chinese company," he admitted to the Financial Times in 2010.

In fact, sales fell by almost 9% to $14.9 billion in 2009 compared with the same period the previous year. The company reported $226 million in annual losses, blaming integration issues with its new global business. The acquisition went from a success story about a Chinese company swallowing up one of the world's leading brands to a cautionary tale about trying to expand too far and too quickly. Lenovo replaced Amelio with Yang, and Liu was called back in as chairman.

Liu to the rescue?

With Liu back at the helm, Lenovo returned to its roots. His timing was good: the Chinese government had earmarked some of the Rmb4 trillion stimulus to subsidise sales of computers in rural areas. Lenovo marched its sales force out into the more rural Chinese provinces, introducing more than a dozen entry-level models priced below Rmb3,500 ($560) to cater to the market. Today, China accounts for 39% of Lenovo's total revenue.

But it hadn't given up on the US and European markets. Instead Lenovo started to undercut larger rivals like Dell and HP with lower prices, in an effort to grab market share.

Profitability has suffered - operating margins were approximately 2.3% - much lower than the industry average of 3.7% in the June quarter this year, says Hong Kong Economic Journal. But Lenovo's inventory turnover is the best of the three companies, at about 2.25 times, more than double that of HP and Dell.


Once we left China, we were good for nothing... We were just a Chinese company.

The company has also extended its reach to emerging markets like Brazil, Mexico and Turkey. Last month Lenovo announced the acquisition of CCE, a Brazilian consumer electronics company. Although the deal is a small one, with a value of about $150 million, it is expected to give Lenovo a stronger foothold in one of the fastest-growing large PC markets. Previously Brazil had been the only major market where Lenovo's market share was still hovering below 5%.

Lenovo has also invested heavily in brand building, an area in which many Chinese firms have struggled to excel. It hired David Roman, formerly an executive at HP and Apple, to become chief marketing officer. US consumers got to know the brand better thanks to ads run during hit shows like Glee and NFL games.

But what does the future hold?

The risk is that Lenovo has risen to the top of an industry that is no longer as attractive as it once was, with shrinking margins and ever-shorter product cycles. PC makers also have to compete with the glitzier growth of newer product lines, like the rise of tablets and smartphones.

"PCs are going through a severe slump... the hard question of what the 'it' product is for PCs remains unanswered," says Jay Chou, IDC senior research analyst.

IDC's Worldwide Quarterly PC Tracker also suggests that PC shipments shrank by 8.6% in the most recent quarter compared to last year, the biggest contraction in the industry's history.

Some have even declared that the era of the personal computer is over. "PCs are set to embark on a long-term decline that will ultimately see them go the same way as record players and VCRs as they get replaced by more nimble mobile devices. Over the shorter term, Lenovo will also have to show it has the power to stay at the top before it can claim true bragging rights as the world's biggest PC seller," reckons Doug Young, who writes a business blog.

Lenovo's chairman Liu knows that too. "If Lenovo only sticks to the PC it is no different from courting death... it will hit a ceiling at some point. The 'PC-plus' strategy [which incorporates other product lines like mobile and internet devices] is what's going to help Lenovo expand into what is still a borderless territory," Liu told 21CN Business Herald.

That also explains why Lenovo has been stepping up the development of smartphones, tablets and internet-ready televisions to widen its product offerings. This year it unveiled its first internet-connected television, the K91 Smart TV, which is now available for sale in China.

Perhaps it biggest challenge: taking on both Apple and Samsung in smartphones and tablets...

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