Ronald Reagan once quipped of his administration: “Our right hand doesn’t know what our far right hand is doing.” The former president was poking fun at periods of confusion in his White House. But it’s also a strangely apt description of the travails that overtook Lenovo after it acquired IBM’s personal computer business in 2005.
That deal, of course, was an early indicator of China’s increasing presence on the international stage. But it was also an example of a management integration exercise that went badly wrong. Stories in business magazines told of confusion between the firm’s new American executives and its Chinese ones. With one hand not entirely sure of the what the other was up to, there was slippage in Lenovo’s market share. This subsequently led to losses.
After the $1.25 billion acquisition, Lenovo had hired Bill Amelio from Dell to be CEO and moved its headquarters to New York. But in 2009 after performance soured, Amelio was ousted and 10% of the workforce was laid off. As WiC has earlier reported Lenovo’s founder returned in Steve Jobs fashion to run the company and revive the flagging brand. Brought out of retirement, Liu Chuanzhi took charge of a company that had slipped to fourth in the global PC business – overtaken by rival Acer across the Taiwan Strait.
After refocusing on China’s growing domestic market and bringing it back to profit, Liu has also been eyeing potential acquisitions that would vault his firm back into the top three. That deal emerged last week, albeit structured as a joint venture was signed with NEC to capture a bigger share of Japan’s PC industry. The agreement sees NEC inject its PC business into a new JV, of which Lenovo gets 51%, and additionally pays NEC $175 million, with the Japanese consumer electronics giant holding the minority stake.
According to Japan’s Nikkei newspaper the deal is part of a new five year business plan that Liu outlined to staff at a recent in-house meeting. The Lenovo chairman told staff that overtaking Taiwan’s Acer to return to the number three spot is his firm’s top strategic priority.
In the PC industry, only the top three can prosper, Gartner’s hardware analyst Yi Lei told 21CN Business Herald. “The acquisition of NEC is crucial to Lenovo to improve its rankings,” says Liu.
Four markets dominate PC sales. The US (where HP and Dell have the upper hand), Europe (Acer on top), China (Lenovo the clear leader) and Japan. 21CN describes the latter as the “one rudderless market” where none of the big four dominate. The addition of NEC’s 12% market share could see Lenovo become the dominant player and increase its global market share from its current 9.7%.
Business logic aside, there will be some WiC readers who will be puzzled that the Japanese agreed to Lenovo’s advances. As we discussed last year, the two nations got into a frosty dispute over sovereignty of a group of islands (see WiC78). China responded by embargoing rare earths sales to Japanese manufacturers (see WiC81).
But in this deal, politics and pride seem to have been put on the backburner. “Lenovo is the right partner at the right time for NEC, and we believe we are creating a strategic relationship that will benefit NEC and our customers for many years to come,” says the Japanese firm’s president, Nobuhiro Endo.
Indeed, as we pointed out in last week’s Talking Point, the transaction also suggests that Chinese private sector firms (like Lenovo) can find it easier than state-owned ones to complete foreign acquisitions.
Helpfully, Lenovo already has a major R&D presence in Yokohama. One of the key aspects of the new arrangement is for a pooling of research expertise to build better mobile devices, particularly tablets, to take on the iPad.
But Gartner’s Ye warns that few have had success integrating Japanese companies. And given the cultural problems that ensued with the IBM deal that’s a sound warning. As Liu is well aware, Chinese firms have virtually no experience of buying their counterparts in Japan. Perhaps that’s why the deal was structured as a JV – in order to foster more of a spirit of cooperation and greater upside for both sets of management.
That’s an M&A lesson Liu may have learned from the IBM purchase.
© ChinTell Ltd. All rights reserved.
Exclusively 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.