Chinese Character

A living legend

Is Hong Kong IPO the closing chapter for China’s ‘godfather of capitalism’?

Lenovo Group Chairman Liu Chuanzhi poses for a photo in Beijing

Liu Chuanzhi: started out at the Chinese Academy of Sciences

Go to the business section of most bookstores in China, and you are likely to find three familiar faces on the shelves.

One is Li Ka-shing, Hong Kong’s wealthiest man and a role model for many of the Chinese entrepreneurs of the 1980s and 1990s.

The second is Alibaba’s Jack Ma, more the epitome of China’s internet age. (In December last year, Bloomberg calculated that Ma had dethroned Li as the richest man in Asia.)

The third face is Liu Chuanzhi. His net worth is nowhere near that of the other two men. But the 71 year-old is warmly regarded as one of the godfathers of capitalism in modern China, as well as a major pioneer in its information technology industry.

Numerous books have been published about Liu’s business strategy and management style, although last month’s Hong Kong IPO of Legend Holdings – the investment conglomerate that controls Lenovo, the company that made Liu famous – looks like being the concluding chapter of his extraordinary career.

Liu was born in Jiangsu province in 1944, putting him in the same age bracket as former Chinese president Hu Jintao. His father Liu Gu came from a wealthy family and worked as a banker in Shanghai, then the financial hub of Asia. Unlike the many Shanghai capitalists who fell from grace after 1949, Liu senior would prosper because he had worked secretly for the Communists before Mao Zedong came to power. The result was that Liu Chuanzhi hailed from a family that combined business acumen with political nous – or as BusinessWeek once wrote, he was born “with a red-and-silver spoon in his mouth”.

Nonetheless, a large part of Liu’s early career saw him sidetracked by the Cultural Revolution. He was sent to rural outposts, turning up at a farm in Guangdong in 1968, the year that Intel was founded. In 1970 he was transferred to the Chinese Academy of Sciences (CAS) as a computer science researcher.

Liu has rarely spoken about his experiences of the Cultural Revolution, beyond the grim recollection that his high school language teacher was shot for the ‘crime’ of having formerly worked at the Soviet Union’s embassy. “The younger generations nowadays only know about a freer and more open society. They have no idea what it was like 20 or 30 years earlier,” Liu told Lenovo staff in 2004 as the company celebrated its 20th anniversary.

Liu says he got his first inkling of the drastic changes that China was about to undergo in 1978. The clue was an article in the People’s Daily about how to raise a cow. Rather than preach politically about self-sufficiency, the piece talked more about how farmers could profit.

“During the Cultural Revolution all newspaper articles were about class struggle. Even raising chickens and growing vegetables in your backyard was considered to constitute a ‘capitalist tail’, which had to be cut off,” Liu recalled.

Liu’s intuition was right: China was on the verge of realising the economic reforms of the Deng Xiaoping era. But how could he grab his own opportunity to profit from it? He was stuck with an uninspiring job at CAS recording magnetic data. His monthly salary was Rmb100.

In fact it took Liu a further six years to leave CAS, when he and 10 other engineers borrowed Rmb200,000 from the Academy (about $25,000 at the time) and started New Technology Development (or NTD), the forerunner of Legend.

“I had no other options left. I was 40 when I started my own business. It was the last chance for me to do something,” Liu told an interviewer with state broadcaster CCTV.

His new employer was one of the early guoyouminying – the “state-owned, people-managed” firms set up by a number of research institutes and universities in Beijing at the time. Although ownership of these new enterprises was retained by their mother institutes, their executive teams had unprecedented autonomy. “When I discussed terms and conditions, I requested the authority to make decisions myself. I didn’t want the government to decide who would work for me,” Liu told McKinsey, the strategy consultancy, as part of its case study on Lenovo. “In addition, I had financial decisionmaking power. I could determine the wages and bonuses of our employees, and I didn’t have to do so according to what the government told me.”

It was 1984: the same year that Steve Jobs introduced Apple’s breakthrough personal computer, the Macintosh.

Liu and his colleagues started out without a clear idea of what their new company should be doing. They moved into an old guardhouse on the fringes of the Academy and for a while they rode around the Zhongguancun district of the capital on bicycle carts, selling refrigerators, roller skates and digital watches.

“Why would we work so hard for that?” he asked rhetorically in an interview with the Financial Times. “Because the people of my generation, we were suppressed like crazy in class struggle. But now we could finally start doing some real work.”

In 1987 Liu had his first success with the Han card, commercialising a research project that had begun at CAS. The card allowed IBM computers to recognise Chinese characters and included a feature not dissimilar to predictive text, allowing users to form phrases by typing in just a few characters.

It was called Lianxiang, which remains Lenovo’s Chinese name today.

Liu kept the company going by importing personal computers, installing the Chinese language feature, and selling them.

The next key moment in Liu’s career came in 1988 when NTD was renamed Legend Computer Group and moved its headquarters to Hong Kong. In doing so it found new partners including China’s state patent agency, which was run by Liu’s father. Positioning itself outside China turned out to be an advantage. When it built its first motherboard factory back in mainland China, Legend was able to tap policies designed to attract overseas investment and avoid the red tape that was stifling many of China’s ‘local’ producers. It launched the first of its own PCs in 1990.

Still, at this stage much of Legend’s profits came from its work as a reseller for American and Japanese computer brands. Later, the experience of developing these distribution networks would become one of its key advantages – as was the know-how Legend also picked up from collaborating with these overseas brands.

“When we started to work as a distributor for foreign companies, we discovered that management was something we had to learn,” Liu explained to McKinsey. “So we learned from the foreign companies while gaining an understanding of China’s computer market. Our earliest and best teacher was Hewlett-Packard. It was as HP’s distributor that we learned, rather thoroughly, how to organise sales channels and how to market.”

Because local incomes were still low, the international brands spent less effort than today focusing on the Chinese market, giving Legend more space and time to develop its own customer base.

As its acumen grew, it began to capture more market share and in 1994 it went public in Hong Kong as one of the first Chinese firms to IPO in the city (Tsingtao Brewery was the pioneer two years earlier).

In 2004 Legend changed its name to Lenovo, which was felt to have more global appeal. By now Liu wanted to look overseas as Lenovo already controlled about a third of the Chinese PC market. That same year it made its move, acquiring IBM’s PC division, which included the laptop brand ThinkPad, for $1.75 billion. The deal was one of the earliest acquisitions by a Chinese company of a high-profile brand, and Lenovo’s international outlook has served as a model for other tech firms like Huawei and ZTE, which have also grown aggressively overseas.

“People likened it to a snake swallowing an elephant. Most people were negative about it… I remember that after the acquisition I gave a speech at a Chinese business school for a group of executive MBAs. I asked the audience how many people felt confident about the acquisition, and only two raised their hands. I looked and saw that they both were Lenovo employees,” Liu told the Wharton School at the University of Pennsylvania.

Liu stepped back from Lenovo in 2005, although he returned for a stint as chairman when the integration of the IBM unit did in fact run into difficulties and the company racked up a $97 million loss in the fourth quarter of 2008.

Since then he has turned his focus more to investment, and to developing the non-computer businesses at Legend Holdings – Lenovo’s parent – which include Raycom Real Estate, a Beijing property developer, and Hony Capital, an investment firm with nearly $5 billion under management.

Hony has been active overseas, buying UK restaurant chain Pizza Express for $1.54 billion, and domestically it holds stakes in companies including New China Life Insurance and Zoomlion, a maker of construction machinery. Liu told reporters last month that Legend’s strategy is inspired by General Electric, which has the “unique strength” to cope with difficult times by owning assets in unconnected businesses.

One of Liu’s great strengths, says 21CN Business Herald, is the way that he has exploited China’s state-led model of capitalism, maintaining effective control of Lenovo for years with only a minimal shareholding. Soon after the original company was formed Liu designated a large majority of its shares to CAS, retaining 3% for himself. The Academy was so delighted that it supported Legend’s move to Hong Kong, although it then took seven years for Liu to formalise the shareholding structure, which included a grant of 35% of the equity to his employees.

Liu has also adapted skilfully to the different eras of China’s economic transformation. In the 1990s he built a firm that sought to capitalise on new global demand for computer hardware. But with Legend Holdings he has been betting on newer trends, like urbanisation, the growth of the Chinese middle class, and the emergence of non-bank financing. According to the prospectus for last month’s $1.99 billion offering, Legend will spend about 60% of the funds in six major sectors: information technology, financial services, consumer services, real estate, agriculture, chemicals and energy.

Another of Liu’s skills is an ability to blend with different generations of businessmen, networking across different commercial circles. He is the chairman of the China Entrepreneur Club, for instance, whose membership represents the first generation of Chinese tycoons. (The club says the 46 companies owned by its members had combined revenues of Rmb2 trillion last year.)

He also spends time with an even more elite group of entrepreneurs known as the Taishan Club, named after one of China’s best-known mountains. The 15 or so members of this gathering include the likes of Jack Ma, Robin Li of search engine giant Baidu, and Fosun’s Guo Guangchang.

Legend’s market cap is nearly Rmb100 billion ($16 billion), so Liu’s net worth is less than that of many of the bosses he mixes with. But he still retains unique pulling power. At a dinner this month to celebrate Legend’s listing, the cream of China Inc turned out. “All the most powerful Chinese tycoons were there. And they are all Liu’s friends,” China Entrepreneur reported.

“Don’t call yourself a hero if you don’t know Liu Chuanzhi,” the newspaper added, adapting a popular local idiom.

The speculation is that the IPO could be Liu’s last major act as chairman of Legend Holdings, although he won’t talk about his retirement, saying only that he will step down when the business is on a sustainable growth path.


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