Lenovo Goes Global
China’s most recognizable brand has plans to overtake
Apple and Samsung.
In the beginning, it was cultural and managerial
chaos. When Chinese computer company Lenovo dispatched a team to New York in
2004 to discuss acquiring the personal computer division of IBM, only one
member of the team—the company’s chief financial officer—spoke English. Lenovo
was an offshoot of a Chinese government research institute, and none of the
leadership team had operated outside Chinese-speaking Asia. Yet they were
dealing with executives from IBM, a sophisticated multinational active in 160
markets. Gina Qiao, who was a member of the Lenovo team representing human
resources, recalls that she was completely baffled by IBM’s compensation and
pension system. Nothing like it existed in China.
Once Lenovo acquired the much larger but unprofitable
PC division on May 1, 2005, for US$1.75 billion, the two sides discovered that
they truly didn’t understand each other. Lenovo executives decided that English
would be the official language of the new company and started learning it. But
the challenges went beyond vocabulary. Words could be translated from one
language to another, but underlying assumptions couldn’t. “We had two rivers of
culture,” recalls Qiao.
For example, the two sides did not know how to
disagree with each other. When the U.S. executives spoke in a meeting, the
Chinese often said, “Shi, shi, shi,” which means “yes, yes, yes.”
The U.S. group took this as a sign of agreement, but
the Chinese were really just saying, “We hear you; please continue.” It was
only after the meeting that the Chinese explained privately that they didn’t
agree. They were trying to be polite, but the way they expressed disagreement
after the fact infuriated the other side.
Another problem: Western managers expected their
direct reports to push back and sometimes challenge their superiors’ decisions,
but the Chinese tendency was to merely execute what a “great boss”
had decreed. “In China, we have to respect the leaders,” Qiao explains.
“If you ask me to do something, I just do it. If you make that decision, you
know more information. You are above me. You are smarter than me.”
The Chinese decided they wanted a Western executive to
be the chief executive officer of the combined company, so CEO Yang Yuanqing
stepped into a non-executive chairman’s role. The first Western chief
executive, Steve Ward, an IBM veteran, didn’t last long. Then William J.
Amelio, a former Dell Inc. executive who had run that company’s operations in
Asia, stepped in as CEO later in 2005, bringing many Dell people with him.
Amelio tried to impose the Dell way of operating the
company. He commissioned a consulting firm to hammer out a common strategy
document, but it was 15 pages long and too complex. Amelio managed to expand
annual sales from $13 billion to $15 billion. But after global financial shocks
knocked the company into a money-losing quarter, Amelio stepped down. On his
way out, he publicly complained about the company’s “yes, yes, yes” culture.
Yang returned as CEO in February 2009.
Around 2010, the company finally began to click. The
worst of the cultural differences were getting resolved, and the Chinese had
spent the period of upheaval learning about the capabilities needed within a
multinational company. “They came to the United States ready to learn and
absorb expertise,” says Yu Zhou, a
professor at Vassar College and author of The Inside
Story of China’s High-Tech Industry: Making Silicon Valley in Beijing (Rowman & Littlefield, 2008).
Today, Lenovo has emerged as China’s first true
multinational, surpassing Hewlett-Packard Company and Dell to become the
world’s largest maker of PCs. Sales have grown to $39 billion as of the fiscal
year ending in March 2014, more than twice the level of 2008, thanks partly to
several acquisitions. Its most recent deals, announced within the space of a
week in early 2014, were the purchase of IBM’s low-end server business in China
for $2.3 billion and the handset division of Google (once part of Motorola) for
nearly $3 billion.
Lenovo’s experience thus has
broad implications for the future of China’s economy and its outreach into the world. Cash-rich Chinese companies are
currently engaged in a wave of mergers and acquisitions around the world, in
entertainment, agriculture, real estate, energy, and automobiles. If they
stumble and fail to absorb technology and management expertise, China may still
become the world’s largest economy—but not a particularly sophisticated one.
However, if Lenovo’s success can be duplicated by
others, its emerging multinationals could one day compete toe-to-toe against
the world’s incumbents. “Lenovo is the test case of whether the Chinese can
acquire foreign or U.S. technology at an innovative company and really make the
best of it—or will they lose the capability?” says Oded Shenkar, a business
professor at Ohio State University and an expert on Chinese companies.
The
Networked Enterprise
Lenovo is publicly listed in Hong Kong, ensuring that
it operates with a degree of transparency that many other Chinese companies do
not have. Its board has international representatives and operates on the basis
of global management principles. The company’s top management committee
consists of nine people (including Qiao) from six different countries, who all
have extensive international experience with the company’s products, markets,
and functions. Below them is a leadership team of 100 “high potential”
executives, representing 17 countries. Because its footprint is so big, the
company has developed human resources practices that apply uniformly regardless
of market (including China). Pay scales have been standardized as well; there
is little difference in working for Lenovo in China or Switzerland or the
United States.
Lenovo also has evolved its decision-making process.
Instead of demanding fealty based on titles and seniority, the current approach
combines the best of the Chinese long-term focus on strategy with the West’s
intense focus on meeting quarterly targets. “People think Chinese companies are
autocratic and have a chairman or CEO who makes decisions—everybody salutes him
and marches out,” says William O. Grabe, a former IBM executive turned private
equity maven who helped broker and finance Lenovo’s purchase of IBM’s personal
computer unit. (Grabe’s New York–based firm, General Atlantic, remains an
investor, and he currently sits on the board.) “That couldn’t be further from
the truth at Lenovo.” It may help that CEO Yang Yuanqing, who is known as “YY”
internally, is a relatively young 49 and reflects a new generational attitude
toward the traditional Chinese top-down management style.
In another key respect, Lenovo has distinguished
itself from other Chinese companies; it has created a brand name that is
recognizable in markets around the world. No other Chinese company that
competes internationally (including Huawei and ZTE in telecommunications, BYD
and Geely in autos, and Haier in appliances) has been willing to spend hundreds
of millions of dollars annually to achieve that. In addition, unlike many other
rising Chinese companies, Lenovo is not competing solely on the basis of low
manufacturing costs. Its products, such as the ThinkPad laptop and Yoga
four-position ultrabook, offer cutting-edge design and command premium
positioning in their respective categories.
Internally, Lenovo executives say they have created a
new type of global enterprise that is network oriented, rather than hierarchy
oriented. Some outsiders agree. “They have done an exceptional job in melding
East and West into a new organizational approach,” says Dave Ulrich, a business
professor at the University of Michigan who has coached Lenovo executives.
In several respects, that approach has already allowed
Lenovo to leapfrog some Western multinationals. For example, it runs a few
lines of business and functions from North Carolina, the location of the former
IBM PC headquarters. The company considers this, along with Beijing, one of two
dual headquarters. Lenovo has created this structure at a time when many
established multinationals are wrestling with how to decentralize and place
local decision-making power in important markets. Some incumbent players find
it difficult to recognize and redeploy innovation that occurs outside the home
country, yet Lenovo is able to harvest new ideas from the United States, Japan,
and China.
The company’s ultimate goal now is to compete against
two of the world’s most innovative companies in the Internet era: Apple and
Samsung Electronics, which dominate the markets for smartphones and handheld
connected devices. That will be a true test of Lenovo’s ambitions.
When Yang returned to the CEO job in January 2009, he
articulated a “protect and attack” strategy that encapsulated how the company
would build on its strong base in the Chinese PC market and in the corporate
and education sectors in the United States—thanks to IBM’s ThinkPad—while going
after new geographies and new product areas, such as smartphones and related
devices. “The ‘protect and attack’ strategy got all 30,000 employees on the
same page,” recalls Gerry P. Smith, who had formerly run Dell’s display
business in Singapore before joining Lenovo in 2006. This was a crucial moment
in breaking down silos within Lenovo and helping it build a consistent
methodology around the world. Yang also built critical capabilities in three
major areas that all multinationals must excel in: supply chain
management, technology development, and marketing.
Supply
Chain: The Best of All Worlds
The problem with Lenovo’s supply chain was that it was
not well integrated, partly because it had resulted from a merger between two
dissimilar companies. When Smith arrived, he says, he found “different
distributors in different regions of the world, with different customers and different
business models.” Employees had 150 key performance indicators (KPIs) they
needed to meet, leading to lengthy internal delays when they responded to
orders for specialized products. The supply chain also was not built to
accommodate the volumes that the company began to achieve. Deliveries were
often unacceptably late.
Part of the challenge in fixing the situation was that
Smith’s team numbered some 15,000 employees, about half the company at that
time. The reason he oversaw such a high percentage of the company’s workforce
was that, with Yang’s concurrence, Smith applied a more comprehensive
definition of the supply chain compared with the prevailing logic in Western
companies. His mandate included procurement of parts, manufacturing, logistics,
sales channels, and even the customers’ “out of the box” experience as they
opened the packaging and began operating the devices.
To turn things around, Smith added veterans from Dell,
DHL, Flextronics, and HP and slashed the number of KPIs to five, creating a
much more flexible organization. He subjected his top 50 managers to intensive
training in business skills, such as how to make a presentation and how to read
a P&L statement. “They’re now the younger element of our management team,”
he says. “I always believe that in an organization built to win, it’s not the
generals you have to get to. You have to get to the captains and the
lieutenants who are leading the charge up the hill.”
Smith also adapted Workout, the group-based
improvement technique that General Electric originally developed, in which all
key decision makers on a tough issue are brought into a room—and left there
until they agree on a solution. In some cases, he was able to double the
productivity of a manufacturing line.
The result was a cohesive, much more focused supply
chain culture that combined the best ideas from the different nationalities and
company backgrounds of the team. “When you live overseas for a while,” says
Smith, “you recognize that there’s the U.S. way of doing things, and then
there’s a more global approach. The beauty of our culture is that we all moved
to a new common ground.”
In 2010, Lenovo did not make research company
Gartner’s annual ranking of the world’s top 50 supply chains, but by 2013, it
ranked 20th, ahead of such companies as Nestlé SA and Ford Motor Company. More
broadly, the philosophy surrounding the supply chain has become an advantage
for Lenovo, because the company stressed vertical integration (at a time when
competitors were outsourcing) and manufacturing near target markets (when
competitors were still shipping large numbers of machines across the Pacific).
When Smith first took over Lenovo’s supply chain, he heard demands from Wall
Street to change course. “There was a lot of external pressure saying, ‘You
guys need to outsource. You need to follow HP and Dell’s strategy,’” he
recalls. “I was actually accosted at a Hong Kong analyst meeting. They
basically laughed at me and asked, ‘What are you doing? You actually own
factories in China?’”
But Smith had a more realistic understanding of the
total costs “per box” than the analysts because he included manufacturing,
logistics, excess materials, overhead, and labor in the total. “Analysts look
only at manufacturing cost, but that’s not the real cost,” he says. “The cost
is the total end-to-end delivery cost of a product.”
At Smith’s urging, Yang agreed to zig while others
were zagging, to vertically integrate the procurement of some parts, while
still relying on partners for others (such as Intel for semiconductors and
Microsoft for operating software). The key was to achieve enough scale so that
the company could drive down prices, giving it a structural cost advantage over
its competitors.
That overarching philosophy is one reason that Lenovo
began experimenting in 2013 with reestablishing electronics assembly in the
United States, an activity that had disappeared long before. In a cavernous,
242,000-square-foot testing and distribution facility in Whitsett, N.C., about
an hour north of Raleigh, the company is using U.S. workers to assemble
ThinkPads. Customers include the World Bank, the New York City Department of
Education, the United Nations, and the U.S. Air Force.
Workers in the United States still cost more per hour
to employ than their Chinese counterparts. But the gap is narrowing, and it
requires smaller teams of U.S. employees to do the work: just 22 per line,
compared with 60 in China. One reason is that Lenovo’s U.S. workers are
cross-trained and can perform different functions, whereas Chinese workers are
typically trained to perform just one. When transportation costs are added in,
the gap becomes even smaller. “The costs are starting to equal out,” says
operations manager Jeffrey Benes. Looking around at the ThinkPads moving down
the assembly line, he adds: “This is ground zero for onshoring.”
Smith argues that the trend could deepen. “For some
customers, it gives us a huge advantage to bring more local manufacturing into
the fray,” he says. “You could see Lenovo going even more local over time.”
Thus a Chinese-based company is ahead of Apple in figuring out how to make
products in the United States. Apple relies on third-party outsourcing in
China, and although it has announced it will spend $100 million to launch some
type of assembly function in the United States, it has yet to do so.
Technology
Development: The Innovation Triangle
Yang engineered another crucial shift beginning in
2010, by recognizing the emergence of smartphones, tablets, and similar
devices. In Lenovo’s view, this was another benefit of vertical integration—it
kept its design in-house, whereas HP and Dell had both outsourced many of their
design functions to Taiwan-based firms. (“They outsourced their brains,” says
Smith.) By contrast, Lenovo was able to see how consumer technology was
evolving, away from desktops and toward smaller and more mobile devices.
Yang called this the “PC Plus” sector. In line with
his “protect and attack” strategy, the company would protect the PC sector but
attack the PC Plus sector. His ability to articulate a strategy was once again
key in refocusing management and increasing spending on key technologies.
The result has been a blitz of innovative new laptops,
tablets, phones, and other products. The company has developed 18-hour
batteries for tablets, along with rapid-charge batteries for laptops that can
be recharged up to 80 percent in 35 minutes. Some models have spill-proof
keyboards that can survive being doused with 16 ounces of liquid. In the
industry’s ongoing pursuit of thinner, lighter, and faster products, the
company has also come up with super-light, carbon-fiber laptop bodies; for
example, its X1 Carbon ThinkPad, with a 14-inch screen, weighs less than three
pounds. That product uses the owner’s fingerprint to wake up the system. No passwords
are necessary.
The company also was early to recognize the emergence
of “convertible” products that could be used in different ways. Several
versions of the Yoga Ultrabook, for example, can function as a conventional
laptop, a tablet (by flipping the screen over), a viewing screen to watch
videos (by flipping the screen backward), and a demonstration panel (by folding
the device into a tent shape and standing it upright, so that, for example,
someone could refer to a recipe while cooking).
The Yoga illustrates how the company can leverage what
it calls its “innovation triangle,” which refers to its R&D and engineering
activities in three locations—China, Japan, and the United States. For
instance, when creating the Yoga, designers struggled over what to do with the
keyboard when the device was turned upside down on a hard surface. That could
create false keystrokes or damage the keyboard itself. It was the company’s
Japanese engineers, who have been the creative center of the ThinkPad since IBM
developed it, who came up with a solution. They devised an ingenious way to
automatically retract the keys of the keyboard into the Yoga’s body so that
they would no longer be exposed to possible damage.
This ability to tap into different geographies for
technological solutions is key. “If you have only one central point of
innovation, you start adopting the market characteristics of the region where
that development occurs,” says Smith. “It’s great to have development in
multiple areas, because you get a different global perspective.”
Because of such innovations, Lenovo has grabbed 40
percent of the U.S. market for laptops that sell at $900 or more, such as the
X1 Carbon ThinkPad. The company won 55 awards at the 2013 Consumer Electronics
Show in Las Vegas, a competition that it has dominated for the past three
years. And it is now working on new products such as its IdeaCentre Horizon, a
27-inch monitor that lies flat and becomes an interactive table for games and
group activities. It retails at around $1,600. Through products like these,
Lenovo has begun to compete on the basis of innovation, not just price.
Marketing
to “Those Who Do”
Lenovo was a sponsor of the 2008 Olympic Games in
Beijing, which helped Yang and the company get their first lesson in marketing.
“It was China’s introduction to the world,” says chief marketing officer David
Roman, an Australian who previously worked for HP. “The Olympics showed the
value of making a big statement, and YY loves making big statements.”
Yang brought Roman into the company in 2010 because he
wanted to escape the trap of competing on the basis of price alone. Yang wanted
a brand that would allow him to charge higher prices. “You can’t become a
premium player unless you have a brand, and YY was very conscious of that,” Roman
says.
The company launched many of the usual marketing
efforts. It struck a three-year deal as the official PC sponsor of the National
Football League. And it turned to basketball star Kobe Bryant to be the face of
its smartphone products in Asia. But as the company shifted into trendier
mobile products, it realized it needed to do more. “As we moved into
smartphones and tablets, we had to be driven by our relationship with our
audience of consumers,” says Roman. “We had to become a relevant and interesting
global consumer brand. A lot of our focus has been on becoming relevant to the
youth audience, which is consistent around the world. They listen to the same
music and watch the same videos.”
Soon after he arrived, Roman conducted a competition
among the world’s advertising agencies to win the Lenovo account. Saatchi &
Saatchi’s New York office won for coming up with the slogan “For Those Who Do.”
It was conceived of as a way to demonstrate that people who buy Lenovo products
are risk takers and achievers. Banners with outtakes from the campaign can be
seen throughout the company’s complex in North Carolina. “Get Off Your Mental
Ass,” reads one. Another proclaims: “Impossible Is Only a Figment of Your
Un-Imagination.”
The campaign launched in 2011
and included such innovative features as a short film titled The Pursuit, which depicted a mysterious young woman using the IdeaPad Yoga 13 to
stay ahead of her evil pursuers. The film was shot by Martin Campbell, who
works on action movies and James Bond films. (He directed GoldenEye and the remake of Casino Royale.) The campaign showcased how Lenovo’s “convertible” products fold,
twist, and separate in useful ways. Although some of this marketing may seem
standard for a global consumer goods manufacturer, Lenovo was the first company
from China to adopt such an approach—and to invest accordingly.
More recently, Lenovo announced a collaboration with
Ashton Kutcher to promote the new Yoga Tablet. (Outside his acting career,
Kutcher has made VC investments in tech companies such as Skype, Airbnb, and
Foursquare.) In late 2013, Lenovo signed Kutcher to a multiyear deal as product
engineer, wherein he will help Lenovo design products that appeal to his
contemporaries; financial terms were not disclosed.
Like other companies, Lenovo doesn’t disclose how much
it spends overall on marketing and advertising. It does receive some support
from Microsoft and Intel, whose products it relies on. Roman says the company
spends roughly in line with the industry average of 1.5 percent of sales, which
would be about $500 million a year, dwarfing the known spending of any other
Chinese company. The investment appears to have worked. In March 2011, the
company’s “unaided brand awareness” among U.S. PC buyers was 4.3 percent, and
only nine companies were ahead of it. Early in 2014, its research showed that
Lenovo was at 26.3 percent awareness and ranked fourth in the minds of U.S.
shoppers.
Taking
on the World
The momentum that Yang’s strategic bets created
allowed Lenovo to undertake a rapid-fire series of acquisitions starting in
2011. The company bought NEC’s PC operations in Japan and is now the PC market
leader in Japan, with its name-branded products widely displayed in consumer
electronics stores in Tokyo. Lenovo bought a controlling interest in Medion, a
German PC maker, and used that to establish itself as the top German PC brand
as well. In Brazil, which is a tricky market because of government controls,
Lenovo bought CCE, the leading maker of PCs and mobile devices, in 2012. The
company expects to use that acquisition to dominate there too, not only in PCs
but also in mobile devices.
Most cross-border mergers such as these fail because
the acquiring company imposes its culture and management practices, driving out
or smothering key innovators at the acquired company. But Lenovo’s steep
learning curve in the United States gave it the cultural and managerial
experience needed to leave local management teams in place while working behind
the scenes to improve supply chains, spur innovation, and reduce costs. “We’re
buying local focus,” says Smith, the former supply chain head, who was promoted
to run Lenovo’s Americas business. “But we’re also using the scale and cost
advantages and the cultural advantages of Lenovo.”
The company works hard to integrate the management of
each acquired company into a larger whole. A small M&A team is in charge of
tracking how well the integrations are going. Once a year, the company invites
the management of its acquired companies to come to a meeting of its top 100
high-potential executives. There, in meetings conducted in English, Lenovo
explains the company’s global strategy and how the new executives fit in. So
far, the strategy has worked well, with only a handful of departures by
acquired executives.
The net result is that Lenovo is expanding its lead in
PCs globally, with a 17.7 percent share in the first quarter of 2014, at the
same time that it gains global market share in mobile devices. In results
announced late in 2013, the company ranked third globally in overall sales of
PCs, smartphones, and tablets.
Meanwhile, Lenovo’s revenue in the first quarter of
2014 was $9.8 billion, a 13 percent increase over the same quarter in 2012, and
profit grew even faster, increasing 30 percent year over year.
“We’re growing like crazy, but we’re not sacrificing
profitability to grow,” says Smith. The fact that the company is gaining ground
in PCs is key because the overall market, although huge at about $200 billion a
year, is stagnant. Lenovo is thus defending its 37 percent of the PC market in
China, as well as its strong position in ThinkPads in the U.S. government and
education sectors.
It was ambitious enough to go up against HP and Dell
in the United States; it will be a greater challenge still to take on Apple and
Samsung. For a period of time, it appeared that Lenovo would seek to compete
against Apple and Samsung only in emerging markets, but its acquisition of
Motorola Mobility from Google is a clear signal that it aims to compete
aggressively in the U.S. mobile phone market as well. “This will be a good
start to challenge the big players in smartphones,” Yang told the Wall Street Journal in January
2014. The acquisition will make Lenovo the third-biggest U.S. player in
smartphones by the end of 2014.
Lenovo will continue to sell smartphones in the United
States under its own brand name, but it will also sell Motorola phones that use
Google’s Android mobile operating system, making Lenovo a key Google ally.
Motorola Mobility is losing money, and many analysts are skeptical that Lenovo
can turn it around, but Yang dismisses those worries, pointing out that his
company was able to achieve the near-impossible goal of absorbing IBM’s PC
division years ago.
The same week that Lenovo made the IBM server and
Motorola acquisitions, it announced a reorganization that hinted at the company’s
ambitions. In the new structure, Lenovo will have four main business groups:
PCs, mobile, enterprise, and cloud computing. Gerry Smith will take on added
duties: running the enterprise group and managing the integration of IBM’s
server business. The announcement that the company would also have a division
concentrating solely on mobile devices sends a clear signal that Lenovo is
seeking to greatly expand into the turf dominated by Apple and Samsung.
It’s impossible to predict how long it will take Lenovo
to absorb its latest acquisitions, or to know whether the company might stumble
for a period of time. But by buying the money-losing divisions of major
companies, Lenovo has clearly arrived as a global competitor in some of the IT
industry’s hottest sectors. In doing so, it serves as a model for other Chinese
companies. “At the moment, Lenovo is unique,” says Vassar’s Zhou. Chinese
companies, as a whole, are still preoccupied with their vast home market and
have not started globalizing in earnest.
If growth continues to slow in China, however, and its
companies begin to look outward, Zhou argues that they will copy Lenovo, rather
than going through the agony of spending years learning how to manage global
enterprises. “Lenovo’s success is going to inspire other companies because it
shows it can actually work,” she says. “It will be easier for other Chinese
companies to learn from Lenovo than from anyone else.” In that sense, Lenovo’s
success offers a definitive answer to the question of whether Chinese companies
can compete globally. If they seek to mesh cultures, and focus on winning
capabilities, they clearly can.
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