The Liaoning, named after a northern province, is the pride of the Chinese navy. The country’s first aircraft carrier, it was purchased from the Ukrainians ostensibly for refurbishment as a casino in Macau. That was way back in 1998. But getting it into service has been slow-going and it wasn’t fully commissioned until 2012. This month the vessel finished a 37-day trip during which it tried out its combat systems and “attained the anticipated objectives,” reports Xinhua. But the mission wasn’t without incident. Early in the trial run, one of the Chinese ships accompanying the Liaoning nearly collided with the missile cruiser USS Cowpens. American Defence Secretary Chuck Hagel later complained that the Chinese had been “unhelpful” and “irresponsible” during the stand-off, although they shot back that the encounter was handled “in accordance with strict protocol”.
Near-misses aside, the National Business Daily says the Liaoning’s progress is an excellent analogy for Lenovo Group’s $2.3 billion purchase of IBM’s low-end server business: a Chinese firm, late to market, buys foreign technology as a platform to launch its own products. And as the newspaper also points out, this isn’t the only time that Lenovo has implemented its “Liaoning aircraft carrier” strategy. This week, the company announced a larger deal, agreeing to acquire Motorola’s mobile phone business for $2.9 billion from Google. Both transactions are also in keeping with Lenovo’s 2004 purchase of IBM’s personal computer business, which put it on the map as a global player.
Lenovo admits that it wants its latest acquisition at IBM to have a similar springboard effect. “This deal moves forward our aspiration in the server market by five years,” Peter Hortensius, president of Lenovo’s Think Business Group told the Financial Times. Lenovo already controls 10% of China’s server market, but has just a 2% market share worldwide, reports the FT. Gartner, the technology research firm, says that Lenovo shipped just under 58,000 server units in the third quarter of 2013, putting it ninth in the global rankings. By absorbing the IBM business, Lenovo should jump into the top three by the end of this year, challenging the leading players Hewlett Packard and Dell.
That is if the deal gets done, with reports that the transaction (rather like our favourite Chinese aircraft carrier) is likely to come under close scrutiny from the Americans.
An official who worked previously at the Committee on Foreign Investments (CFIUS), the body that would look at the purchase, told the Wall Street Journal that he expected the deal would be cleared only with conditions designed to protect national security. What’s particularly sensitive is that IBM servers are used in government data centres across the US. And although Lenovo’s first purchase at IBM passed security review, the Journal points out that the mood has changed since 2004, with Washington concerned by Chinese firms’ control of communications infrastructure (though Huawei is the firm that gets folks on Capitol Hill most agitated).
Perhaps in recognition of the risks of a security review, Lenovo has agreed to pay a a higher-than-standard break fee of up to 9% of the purchase price, or about $200 million.
The national security concerns run both ways for IBM, the Wall Street Journal says, as its server business has been struggling in China, with revenues falling 23% in the fourth quarter from a year earlier. Orders at state-owned firms have been stalling, with the suspicion that the Snowden revelations have dissuaded buyers of American products. If that’s so, Lenovo’s ownership could boost business among Chinese clients.
The Motorola deal will also have to be cleared by the regulators, but if it is approved it could give Lenovo’s phone business serious momentum. The company is already a major force in its domestic market, along with other firms like Huawei and ZTE, but the purchase of an established international brand could help to improve handset sales overseas. “Using Motorola, just as Lenovo used the IBM ThinkPad brand, to gain quick credibility and access to desirable markets and build critical mass makes a lot of sense,” Frank Gillett of Forrester Research told Reuters.
The purchase would make Lenovo the world’s third largest smartphone maker behind Samsung and Apple, the BBC also reported.
Lenovo seems to be getting Motorola for a knock-down price. Google paid $12.5 billion for Motorola a couple of years ago in what was the internet giant’s biggest-ever acquisition, reports the New York Times. (Some context: the search giant will keep the majority of Motorola’s patents, which are generally seen as the main driver for Google buying the company in the first place. Google also previously sold off Motorola’s cable box business for $2.5 billion.)
Lenovo gets the Motorola brand and its portfolio of smartphones like the Moto X and Moto G. But the question is whether the business is cheap for a reason, especially as Google has lost money since buying it. In the third quarter of 2013, the most recent earnings report available, the unit reported a $248 million operating loss. Yet Lenovo’s boss Yang Yuanqing is optimistic about the prospects for the new combination, citing five main reasons: it will turn Lenovo into a major smartphone company in the US immediately, giving it relationships with over 50 wireless carriers worldwide; Motorola is already a respected brand; the deal includes important patents and licences; it will help in targeting new markets with a more diverse smartphone lineup; and it delivers Motorola’s experience and expertise in mature smartphone markets.
Even before the IBM deal had been formally announced, there was praise that Lenovo still had the confidence to make such a gutsy acquisition. The FT’s Lex column even asked whether the Chinese company could become the next Samsung. On a size basis comparing the two companies is “still a bit ridiculous”, it admitted, as the Korean company is more than 10 times bigger than Lenovo. But the newspaper argues that the Chinese firm has “momentum on its side”.
The subsequent announcement of the Motorola bid went some way to proving the point, with Lenovo steaming forward like the carrier Liaoning, and showing little sign of slowing down.
© 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.