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IBM deal puts Lenovo on global stage

The IBM-Lenovo deal is a dramatic sign of the ongoing transformation of the still nominally communist China into an increasingly outward-looking nation integrating itself into the world economy.
/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true"><p>The Washington Post</p></a

When it began two decades ago, the company now known as Lenovo Group Ltd. was little more than a glorified delivery service, a venture launched by academic researchers in Beijing who earned cash by distributing personal computers built by prominent brands in faraway countries.

Now, the company has captured one of the most glittering names in capitalism with its $1.75 billion deal to acquire International Business Machines Corp.'s personal computer business -- a deal that boosts Lenovo's plans to turn itself into a global company with a recognized brand.

The deal is a dramatic sign of the ongoing transformation of the still nominally communist People's Republic of China into an increasingly outward-looking nation integrating itself into the world economy. The purchase twins one of the classic names in U.S. business with a society that officially reveres Chairman Mao and Karl Marx, even as its daily life increasingly revolves around Bill Gates and Warren Buffett.

Lenovo's move "will encourage other Chinese companies to go overseas," said Fang Xingdong, an information technology expert at Tsinghua University in Beijing.

Company born amid 1980s reforms
Formerly known as Legend Computer, Lenovo has long been at the top of the list of Chinese companies with the potential to become global brands. It came to life in 1984, when China's market-embracing policies were just beginning to create new opportunities for entrepreneurs. Chinese academics were increasingly engaged in what was known as xia hai, or "jumping into the sea," leveraging their connections to university research centers and engineering know-how to create businesses.

The driving force behind the company, Liu Chuanzhi, was raised in coastal Jiangsu province, northwest of Shanghai. He graduated with a degree in radar communications from the Xian Military Communications Engineering College of China in 1966, just as China entered the frenetic and violent years of the Cultural Revolution. In that time of persecution, his education made him suspect. He and his classmates were sent to the southern province of Guangdong to do farm work, according to Lenovo's Web site.

Four years later, Liu was recalled to the rarefied world of research, securing a post at the elite China Academy of Sciences in Beijing. He remained there until the early 1980s, when the new policies of Deng Xiaoping blessed the previously heretical concept of making money.

Liu and 10 other researchers launched the company with $25,000 in capital from the academy, according to Lenovo's Web site. At first, the firm simply bought and distributed IBM computers and Hewlett-Packard printers. In 1990, the company began designing and manufacturing its own line of computers under the Legend brand. Four years later, it sold shares on the Hong Kong stock exchange, though the academy maintained majority control.

After the Lenovo-IBM deal closes, Yang Yuanqing -- now Lenovo's vice chairman, president and chief executive -- will succeed Liu as chairman.

Well-connected politically
The rise of Lenovo is one of the great growth stories in the world's most populous country and is touted as a sign of China's emerging economic prowess. Using the country's vast pool of cheap labor, the company pressed production costs ever lower, luring customers with no-frills home computers that sell for as little as $350. For seven years it has been China's biggest computer seller, capturing more than one-fourth of the market and 12 percent of the larger Asian market, excluding Japan, according to the technology research firm IDC. Sales last year were about $3 billion.

During its ascendance, the company has been aided by its status as an offshoot of a well-connected institution. Liu used his military university background and Communist Party connections to gain a seat on the National People's Congress, making him one of the rare entrepreneurs to penetrate the inner sanctum of Chinese power. The president of the science academy, Jiang Mianheng, is the son of China's former president, Jiang Zemin.

Despite the rise of an emerging private sector, connections to the party and state power remain critically important in the Chinese economy. State-owned companies are still the largest customers for many goods, and the relationship between buyer and seller is often more important than price and quality in determining what products are sold.

But despite Lenovo's position as one of the darlings of the Chinese business world, analysts say the company slipped markedly recently.

"In its core computer business, earnings growth has been flat the last two years," said Joe Zhang, China analyst at UBS Securities Asia Ltd. in Hong Kong. "Lenovo faces competition on the high end from Dell and HP and on the low end from everyone else. It's squeezed in the middle. The management has run out of new ideas. It's a deteriorating business."

One giant leap
Some say China's rise as a manufacturing power has been driven largely by skill in cutting costs and a relentless commitment to low prices. But persevering in the face of foreign competition is likely to require innovation and research -- something thrifty Chinese companies have generally been reluctant to invest in heavily.

Unlike Japan and Korea, whose markets were largely shut off to foreigners as governments nurtured fledgling powerhouses such as Samsung and Sony, China's market is increasingly open to outside capital. That means multinational giants are free to tap the same labor as their Chinese competitors, though the outsiders must pay duties that don't always apply to locals.

Lenovo's leaders have acknowledged that their global reach is largely motivated by the realization that their position at home is vulnerable.

"We are losing our brand advantage in China's domestic market," Liu said in recent interview in the Beijing-based Xinjing newspaper. "We seek to build an internationally recognized brand, which will require plenty of courage and capital."

In going after IBM's personal computer business, Lenovo appeared to be trying to make that strategy work in one giant leap. IBM gives it a proven distribution channel in markets around the world. Where Lenovo now has less than 3 percent of the global market for personal computers, owning IBM's operation -- the world's No. 3 PC maker -- roughly triples that share.

But the technology world is littered with examples of seemingly strategic acquisitions that went awry. Many are skeptical that a cost-conscious Chinese company will have the stomach to pump billions of dollars into resuscitating what for IBM has been a source of grief and eroding profits.

"Lenovo has no experience outside of the China market," said Fang, the Tsinghua University expert. "This is a huge problem for Lenovo, and I doubt whether they can overcome this difficulty."

Still, even the talk of such a deal has accomplished one goal of the Chinese company: A lot more people around the world have now heard of Lenovo.

Special correspondent Jason Cai contributed to this report from Shanghai.