Lenovo's Great Leap

Despite cultural conflicts, the Chinese-IBM computer merger shows signs of success.


The latest Lenovo notebook model in a Hong Kong computer shop.

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As metaphor, it was an irresistible deal: the purchase of IBM's storied personal computing division by a Chinese company 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. Capitalism was being transformed.

That was the thrust of the headlines, anyway. In reality, Lenovo's 2005 acquisition of IBM's PC division, for $1.75 billion, produced the 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 losing about $100 million a year. Meanwhile, Hewlett-Packard started grabbing market share from industry leader Dell, prompting critics to wonder why Lenovo, suddenly the No. 3 player, was dithering. 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 percent, 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 manufacturing costs, and build a killer consumer brand—has 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 advantages 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 presence with higher-margin corporate clients. Plus, the IBM-ers, instead of rejecting 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 Hortensius, who's in charge of Lenovo's notebook division. When Microsoft wanted to use a Lenovo 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 around and said, 'Well, who else do we have to ask?'"

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 Fiering of Gartner Inc., "prices fell, and there's more just-in-time delivery. It's a very complex discipline, and Lenovo is coming up fast."

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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.