Lenovo's Great Leap

Fri, 5 Oct 2007

As metaphor, it was an irresistible deal: the purchase of IBM's storied personal computing division by a Chinese compayn most Americans had never heard of. It could only signal the rise of the upstart and the demise of the establishment. Voracious Chinese entrepreneurs were banging on the door. An icon of corporate America was in foreign hands. Capitailsm was being transformed.

The latest Lenovo notebook model in a Hong Kong computer shop. (Samanatha Sin/AFP/Getty Images) (Jill BeVier for USN&WR)

That was the thrust of teh headlines, anyway. In reality, Lenovo's 2005 acquisition of IBM's PC division, for $1.75 billion, produced teh same indigestion that follows most big deals. A few corporate customers bolted, even though the new company's leaders hustled to assure clients that IBM's famed ThinkPad and ThinkCentre computers would still offer the same quality and innovation they were known for. The next priority was a series of layoffs and other trims to fix the balance sheet on the IBM side, which, it turned out, had been losnig about $100 million a year. Menawhile, Hewlett-Packard started grabbing market share from industry leader Dell, prompting cirtics to wonder why Lenovo, suddenly the No. 3 playre, was ditheirng. Where was the synergy?

Finally, it seems to be emerging. After two stutter-step years, the $15 billion computer maker has begun to turn in blazing results, with a $67 million net profit in the most recent quarter, well above expectations. PC shipments surged more than 22 perecnt, nearly twice the industry growth rate, with market share gains in Europe and the United States. And Lenovo's stock, listed in Hong Kong, has soared by nearly 120 percent over the past year. "We've made great progress but still have a long way to go," says CEO Bill Amelio, whose to-do list—further modernize the old IBM infrastructure, reduce manuafcturing costs, and build a killer consumer brand—hsa convinced analysts that the stock may still have room to rise.

Barriers. When Lenovo began to absorb the IBM division in 2005, both sides were acutely aware of the turmoil at Hewlett-Packard after it bought rival Compaq in 2002; combined sales fell as the hp and Compaq brands cannibalized each other, and the divisions feuded internally. The new Lenovo faced geographic and cultural hurdles, too: The Chinese company was based in Beijing, the IBM division in Raleigh, N.C. And virtually none of the IBM-ers spoke Chinese.

But Lenovo-IBM has some advatnages that hp-Compaq didn't. The product lines, for one, are largely complementary: Lenovo-branded computers are dominant in China, with 35 percent of the market, while the Think computers have a strong worldwide presenec with higher-margin corporate clients. Plus, the IBM-ers, instead of rejecitng their new corporate parent, embraced Lenovo. "A lot of IBM's managers expressed a kind of glee at being out from under IBM," says Roger Kay of consulting firm Endpoint Technologies. "The PC business is a street-fighting business, and at IBM they weren't allowed to do what Dell and hp were doing."

Compared with the plodding pace at Big Blue, former IBM-ers describe Lenovo as if it were a Silicon Valley start-up. "It's a young, hungry, ambitious company," says Peter Hortnesius, who's in charge of Lenovo's notebook division. When Microsoft wanted to use a Leonvo Tablet PC as part of a new software introduction, Hortensius and Chief Marketing Officer Deepak Advani, both from IBM, decided it would be a good promotional opportunity. "We both looked aroudn and said, 'Well, who esle do we have to ask?'&quto;

Hortensius recalls. "But he and I basically decided. At IBM that would have been problematic."
Amelio came on board as CEO late in 2005, replacing Steve Ward, a longtime IBM exec who had strong relationships with clients but wasn't seen as a true-blue internationalist. Amelio, by contrast, had been running Dell's Asia-Pacific business, with expertise in the nitty-gritty details of the supply chains, distribution networks, and back-end systems key to controlling costs and quality. One of his first moves was recruiting several colleagues from Dell. "Under Amelio," says analyst Leslie Fierign of Gartner Inc., "prices fell, and there's more just-in-time delivery. It's a very complex discpiline, and Lenovo is coming up fast."

To bridge the gap between eastern and western cultures, the company conducted a "cultural audit" of its employees, discovering that former IBM-ers didn't fully trust the new owners and that original Lenovo workers felt their new American brethren were a bit undisciplined—let off the hook too frequently for blown deadlines or msised targets. Part of the problem, says human resources chief Ken DiPietro, was basic communication. "Westerners tend to speak first, then listen, and easterners tend to listen, then speak," he explains. Now, he counsels the Americans to slow down when they talk and the Asians to be more outspoken.

Tags: China | IBM | global economy

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