Talking Point

The new litmus test

‘Development models’ debated as Lenovo barred from STAR Market IPO

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Two founders, two R&D visions: Liu Chuanzhi of Lenovo and Ren Zhengfei of Huawei were both born in 1944

Just a few years ago Liu Chuanzhi was warmly regarded in his home nation as one of the “Godfathers of Capitalism” in modern China (see WiC291). Lenovo, the computer maker he helped to found, was an early icon of China’s global tech ambitions. The Chinese firm’s 2005 acquisition of IBM’s PC unit was considered a landmark deal and got international attention.

At around the same time Huawei was in talks with Motorola, which had enquired about purchasing the Shenzhen-based telecoms equipment maker for $7.3 billion, according to the Financial Times. But unlike Lenovo’s bid for the high-profile PC division of IBM, the deal didn’t go through.

Just over a decade-and-a-half later and Lenovo and Huawei have changed places on the tech ladder rather markedly. Now it’s Huawei which is more widely viewed as a national hero, as well as the player in pole position to lead China’s bid in the global tech race. Conversely Lenovo has found itself on the receiving end of a range of more derogatory labels that have accused it of being a “comprador” and a “Han traitor”. And perhaps the ultimate insult came this month, when Lenovo was prevented from going public on the STAR Market, Shanghai’s Nasdaq-like bourse. Why? The allegation was that its horizons are too narrow and that it doesn’t spend enough on research and development (R&D) to justify a place on the tech-heavy board.

Lenovo’s Shanghai surprise…

A 50% spike in Lenovo’s share price in the first half of the year had sent it to six-year highs in Hong Kong. That rally was partly triggered by an announcement in January that the world’s biggest personal computer maker was applying for a secondary listing on the STAR Market.

Some analysts saw this as an overdue homecoming for an iconic national brand. In the late 1990s Lenovo (then known as Legend) was one of the star Chinese stocks in Hong Kong, although investors have since switched more of their attentions to newer counters such as Tencent and Xiaomi with the passing of the PC era.

Xiaomi – a direct, and far bigger, rival of Lenovo in the smartphone market – was worth HK$570 billion ($73 billion) as of this week, or 15 times its earnings. By comparison, Lenovo is trading at just HK$96 billion, with a single-digit price-to-earning (PE) ratio.

A successful IPO on China’s most fashionable tech bourse, where Lenovo planned to sell 10% of its enlarged equity capital for about Rmb10 billion ($1.5 billion), would have narrowed some of that valuation gap – the median PE of STAR-listed firms is more than 50. However, just eight days after filing its listing prospectus with STAR officials, Lenovo said the IPO plan was being withdrawn.

The shocking news saw its Hong Kong shares plunge by 18% at one point on October 9, and wipe out all of its year-to-date gains.

So why was Lenovo’s STAR Market debut snubbed?

Lenovo issued a stock exchange circular that gave a rather bland take on the setback. It explained the decision was made “having thoroughly considered the relevant capital market conditions…”

This official ‘explanation’ didn’t cut it with Chinese media outlets or the massed ranks of financial news bloggers, who were soon going all out to assess just why Lenovo hadn’t been deemed ‘high-tech’ enough to be eligible for a STAR Market listing.

One of the most eye-catching figures to jump out of the reports has been the company’s efforts in R&D. According to, a portal affiliated to Xinhua news agency, Lenovo reported nearly Rmb350 billion in sales last year but spent less than Rmb10 billion on R&D, or just 2.5% of its revenues. The portal also pointed out that STAR Market regulators typically require a ratio of at least 5% of sales to go on R&D spending, and said officials had given this shortfall as the reason why Lenovo’s IPO was blocked.

In another embarrassing comparison, remarked that Huawei’s R&D expenses have amounted to roughly 15% of its revenue for years (more to come on Lenovo and Huawei’s diverging development paths).

In the current climate Chinese regulators also want STAR listing candidates to spend the bulk of the proceeds of their IPO fundraisings on R&D as well. Lenovo did not tick this particular box either. It had budgeted for 35% of the money raised to go into working capital, a deployment of funds that would help pair back a gearing ratio that stood at nearly 90% by the end of 2020, analysts said.

“Lenovo is a big name among Chinese tech firms but its ‘tech purity’ is not high. It lacks original technological knowhow and its R&D spending is too low among its peers,” summed up newspaper 21CN Business Herald., a leading news portal, added that some commentators were now dismissing Lenovo as an “assembly factory” for foreign parts. In support of this claim there was a list of the components that go into a typical Lenovo PC: a Microsoft operating system, an Intel processor, an AMD display card and a Western Digital hard disk.

Lenovo lacks patents relating to any of these key parts, it was said.

In short, Lenovo’s bosses had hoped that a STAR Market IPO would remind investors of an overlooked tech brand. Their expectation was that it would boost its market capitalisation thanks to the enthusiasm for new listings on that trendy bourse. But the move backfired badly: instead of a boost the IPO attempt has drawn unwanted attention to Lenovo’s low R&D spend, and perhaps to the less exciting prospects for its PC business. The rejection (specifically its failure to get an exemption to the R&D hurdle) has highlighted its waning political clout and also amplified criticisms of the formerly favoured firm as well as its founding father Liu Chuanzhi.

Why have Lenovo and Liu become less popular in China?

Lenovo isn’t the only big name to have had its IPO plans snubbed by Shanghai regulators. Ant Group, the fintech arm of internet giant Alibaba, and carmakers Geely and Dongfeng are other notable examples among the more than a dozen STAR Market candidates that have seen their debuts lapse this year, noted the Hong Kong Economic Times.

But the aura of corporate legend surrounding Liu Chuanzhi has brought more scrutiny to Lenovo’s IPO failure from Chinese media commentators, however. One of the angles is that it isn’t even the Liu family’s first disappointment in the capital markets this year – following the debacle of Didi’s IPO in New York in the summer. Didi was co-founded by Liu’s daughter Jean (an ex-Goldman Sachs banker who still serves as the ride-hailing firm’s president). In 2016, prior to the merger between Uber’s China division and Didi, we reported that several members of the Liu family were key figures at the ride-hailing giant (see WiC330). This underscored speculation that Liu’s influence was one of the factors in the central government’s decision not to outlaw ride-hailing apps (whose businesses competed with – and hurt – taxi operators controlled by local city governments which wanted the likes of Uber banned).

Since then the mood music and Liu influence has undergone a shift. When regulators unleashed a fierce crackdown on Didi shortly after its IPO in July, Jean Liu and her co-executives were castigated locally for betraying Chinese interests (see WiC548; there were claims that Didi had pushed ahead with the New York listing without resolving Beijing’s national security concerns over its vast and very sensitive booking and tracking data).

Irate commentators were soon dissing Didi for ‘selling out’ China just so its financial backers and bosses could make a quick gain. This premise was in fact a reprise of similar slurs levelled at Lenovo over the past decade. Once perceived as the pioneer for Chinese tech firms going global, Lenovo’s acquisition of the IBM unit 16 years ago has subsequently been recast by the company’s critics for derailing – among other tech advances – the development of a Chinese computer operating system to rival Microsoft’s Windows. In this context, Lenovo has been branded by more nationalist netizens as “China’s tech Judas”, with Liu senior described as a “comprador” for foreign interests (keeping the likes of Intel and Microsoft entrenched).

The anti-Lenovo sceptics reached their fever pitch of disdain in 2018 when they popularised allegations that the PC firm voted against a 5G standard pursued by Huawei at an international conference (see WiC410), ‘betraying’ China by siding with a group of overseas companies instead.

What a contrast this was: during its earliest days, Lenovo was carefully groomed as a ‘national brand’ and protected by the Chinese government. Orders and contracts from state agencies were crucial to its initial success.

However, as Lenovo expanded overseas – where it now derives 70% of its sales – it has lost its emotive connection with Chinese consumers. Some have even taken to social media, irked that they are paying a higher price for the same Lenovo product versus that in the US. Lenovo has put these price differences down to value-added taxes in China. But the story still fostered a widespread perception that Lenovo, formerly a homegrown brand, had lost its way and was even subsidising American consumers at the expense of Chinese ones.

How does Lenovo differ from Huawei today?

This is a soul-searching topic for Lenovo and raises the question of what the company has contributed to China’s ambitions to become a leader in tech. While Huawei has been praised as a torchbearer for Chinese progress, especially in 5G technology, Lenovo has had its reputation for ‘tech purity’ increasingly trashed.

Liu Chuanzhi and Huawei’s founder Ren Zhengfei were both born in 1944. The company that was to become Lenovo was established in 1984 by Liu and a group of computer scientists as a unit of the Chinese Academy of Sciences (CAS) in Beijing. By contrast Ren founded Huawei three years later in a low-rent apartment in Shenzhen, a scrappier city that had been given free rein to experiment with market forces.

The differences were stark: Lenovo was born as an enterprise backed by a key think tank under the State Council. It was also assured of a flow of R&D talent from top colleges in the Chinese capital. Huawei, on the other hand, started out as a private-sector firm, struggling to decide on a core business. After brief stints trading items as varied as dieting pills and gravestones, Ren settled on telephone switches and later began manufacturing them.

In the process Huawei developed as a low-profile maker of telecoms equipment, coming to dominate that market and move up the value chain. But its Beijing-based counterpart set out to establish China’s first computer brand, spending heavily on marketing. Perhaps these diverging paths saw the duo foster different corporate cultures in relation to R&D as well. Huawei started out as a minnow in a telecoms equipment market dominated by established foreign players like Ericsson. Ren’s solution was to invest heavily in developing Huawei’s technical capacities from its earliest days. In doing so, Huawei played a key role in weaning China’s state-owned telecoms carriers off their reliance on foreign equipment.

Lenovo paradoxically looked more content to be an importer and assembler of foreign parts. Apart from the development of the ‘Han card’, an innovation from renowned CAS academician Ni Guangnan which allowed IBM computers to recognise Chinese characters, Lenovo has boasted few tech breakthroughs over the past four decades.

Ni was Lenovo’s chief technology officer (CTO) when the ‘Han card’ started to be successfully deployed. He then began asking for greater investment in R&D, calling for the development of Lenovo’s own processing chips. That led to a major spat with Liu, then Lenovo’s general manager.

Liu, who was effectively the CEO at a time when the title wasn’t widely used in China, would sack Ni in 1995 and focus on growing Lenovo’s market share in the PC market. Back in Shenzhen, that year was a fateful one for Huawei too, as it passed crucial milestones in the development of home-designed GSM telecom equipment.

Is the criticism of Lenovo fair?

The histories of Huawei and Lenovo have been well-documented by Chinese media outlets, with comparisons between the two becoming more pronounced since 2018, when Huawei became the primary target of Washington’s tech sanctions.

Critics of the sanctions have argued that it is only the firms from China with an innovative edge that risk restrictions on their businesses, because they are deemed a competitive threat by Washington. That’s also why Huawei has been lauded as a national champion. There’s also a view that the company has embraced sacrifices – even at the personal level – for the good of the wider nation. (This perspective obviously extends to Ren’s own family, Huawei’s supporters claim, with his daughter Meng Wanzhou only recently released by Canadian authorities after a long period of house arrest on allegations of evading sanctions in her role as Huawei CFO. Locals admire the way Meng has ‘eaten bitterness’ – the local phrase for toughing out adversity).

Lenovo has no such ‘badge of honour’. Several dozen Chinese firms have been placed on Washington’s entity list and subjected to export controls. But Lenovo has never been cited as a threat.

Another comparison of the two firms cites their aspirations in innovation. Since 2018 Huawei has launched its own operating system Harmony, which connects mobile and smart devices across 5G networks. It has also invested heavily in developing its own semiconductor processors – an ambition that Lenovo deemed too costly as long ago as 1995.

Yet Liu’s decision was widely seen as a sensible one back then on commercial grounds. Even if he had sided with Ni and spent heavily on developing a proprietary operating system or processors of its own, there was no guarantee of success at a time when Lenovo was more focused on becoming the world’s leading PC manufacturer.

The decision to chase the more immediate market in personal computer sales (where Lenovo held a nearly 24% global share in the last quarter) would have been in keeping with the then priorities of China’s government too, which was keen to boost exports from domestic manufacturers. Perhaps that’s why Liu was honoured as one of the 100 ‘Reform Pioneers’, during celebrations of the 40th anniversary of China’s economic reforms. (Ren wasn’t mentioned in the same list, although he would tell reporters that he’d asked not to be nominated because he regarded Huawei’s achievements as a “group effort”.)

It’s an open question whether Liu would be included on the same list today, given the government’s new priorities and its emphasis on the innovation-led approach championed by Ren. The blocking of Lenovo’s STAR Market IPO suggests the PC firm’s business model is out of favour. 

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