He was supposed to be China’s first global capitalist, carrying the country’s reputation before him into international markets. So when Yang Yuanqing oversaw the $1.2 billion acquisition of IBM’s PC division in 2005, it was regarded as something of a signal moment in China’s transition to a developed economy.
He did so with official blessing too, according to Businessweek. Premier Wen Jiabao turned up at the company’s Beijing offices to tell Yang and his team that they carried “the hopes of China” on their shoulders.
Fast-forward to this week, and Lenovo’s goals are more about a refocusing of strategy and a shoring up of its position closer to home.
In fact, there is an ongoing sense of corporate regrouping, all the more necessary when the initial results of the globalisation strategy look so unimpressive; the two consecutive quarters of losses (including a $264 million net loss for the most recent period ending in March this year), a slippage from third to fourth position in global sales volumes, and the departure of various senior executives.
On the face of it, at least, perhaps the expectations made of Yang and his colleagues were too high. So what has gone wrong?
Lenovo’s supporters will point to the miserable trading conditions of the last year and a half. In particular, a business environment of depressed sales to corporate customers, which HSBC says make up 65% of the company’s revenues. When corporate IT spending gets slashed, shipments from Lenovo factories fall with it.
Of course, this was not how it was supposed to turn out. When the acquisition of the IBM PC business was originally announced, the logic looked a lot more compelling. The idea was to use IBM distribution to take the Lenovo brand global, selling products made through its own low-cost supply chain.
Lenovo already enjoyed booming Chinese sales, which it expected to increase. This would support further economies of scale, allowing the company to launch competitively priced products into a range of new international markets. But mainland firms have generally struggled to create value from their international M&A efforts, says Thomas Luedi at McKinsey, who has looked at Chinese cross-border activity between 1997 and 2005.
In part this is because most firms are still developing their deal making skills. All organisations need to go through learning phases, and the Chinese experience has been no different. Consolidation at home has usually been mandated by the government, making it a somewhat different M&A experience.
This shows up in the financial outcomes of many of the deals that have gone through. Luedi estimates that most Chinese acquirers tend to overpay internationally and that the capital markets then discount the value of the combined entities. The sample size is small but it also seems that most transactions involving Chinese companies in the period performed less well than those involving only Western firms.
Nonetheless, previous transactions involving Chinese firms have tended to be for one of three reasons: access to raw materials, enhancement of operating capabilities and entry into new markets.
Lenovo fits into the third category but results have not lived up to the expectations. Analysts put this down to different factors. One is that there were problems in integrating Lenovo and its newly acquired assets, for which Bill Amelio, formerly at Dell, was given responsibility. Reports in the Wall Street Journal last year indicated ongoing tensions, over everything from pay differentials between Chinese and overseas staff to cultural confusion on conference calls. The Chinese struggled with the sporting metaphors employed by their US colleagues, for instance, or just grew frustrated at their volubility. “The Americans would just talk and talk,” said Qiao Jian, a vice president of human resources. “Then they’d say ‘How come you don’t want to add value to this meeting?’”
Fu Chengyu, CEO and chairman of Chinese oil heavyweight CNOOC, told the Hong Kong Economic Times last week that he preferred to acquire assets rather than companies, as most Chinese firms continue to struggle to manage people across borders.
But Amelio, who left the firm in February this year, seems to be carrying the can for Lenovo’s brutal post-deal experience. Liu Chuanzhi, the company founder, returned as chairman and Yang re-assumed the CEO role.
Critics counter that this should be less about Amelio personally and more about Lenovo’s underlying strategy.
Firstly, it might have done better to scale back on some of its early ambitions, growing in a smaller number of countries, rather than leaping directly into a genuinely global business.
This is something that the company now seems to recognise too, with recent announcements that it will refocus on Greater China, as well as larger, emerging markets like Russia, India and Brazil.
But David Wolf at Seeking Alpha finds different fault. He believes that Lenovo made a number of key marketing mistakes, which undermined the value of the businesses that it did buy in 2005.
The largest of the errors was to ditch the IBM brand from products sold outside of China within a few months of the deal going through. Although the long-term rationale makes sense – Lenovo wants to establish itself as a standalone brand overseas – Wolf reckons that the company was too hasty. Why relinquish the five years of access that the deal permitted to a brand valued at $53 billion? And certainly, why be surprised when sales begin to erode amongst buyers (especially corporate ones) long used to looking for the IBM stamp on their PC?
One answer is that the Lenovo leadership underestimated the value of the IBM brand worldwide. Another is that it was too keen to transition to a Lenovo-only positioning. Perhaps it underestimated too that many businesses outside of China are still cautious about investing in big ticket Chinese products.
Lenovo might also argue that its declining international market share (global shipments down from 8% to 7% in the last quarter, according to HSBC) is less about branding and more about product.
In particular, the reliance on corporate sales has meant it has been slower to lock onto new consumer trends, like netbooks. This year it seems to have done some catching up in this segment, and it will be hoping that its geographical refocus will help it regain more ground too.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.