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."
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 missed 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.
Global presence. Despite having hubs in China, America, Singapore, France, Japan, and India, Lenovo has no official corporate headquarters. Amelio, the American CEO, lives in Singapore. Chairman Yang Yuanqing, who is Chinese, lives in Raleigh. The company convenes its executives every four to six weeks in cities around the world: San Francisco, Hong Kong, Paris, and perhaps even Phnom Penh, Cambodia, later this year. "At an established company," Amelio says, "there's usually a lot of bureaucracy associated with headquarters. With a roving headquarters there's not as much of that, and you're closer to your customers."
Such multinational innovations have earned plaudits, but Lenovo still faces daunting challenges. "The purchase could have been a case study in disaster, and there were very few glitches," says Fiering. "But they haven't done a very good job with marketing, or with explaining the benefits of the liaison." While Job 1 was protecting the crown jewels—the Think brand sold mostly to corporate customers—Lenovo still has a tiny footprint among ordinary consumers outside China. IBM abandoned the consumer market in 1999, one reason Lenovo's worldwide market share is just 7.3 percent—and even lower in the United States, where it doesn't even offer a line of computers aimed at home users.
Lenovo's next move is to work down the chain from corporate customers to smaller businesses, entrepreneurs, and casual Web surfers. Instead of fighting bottom-feeder price wars with heavyweights Dell and hp, the company hopes to leverage the strength of the Think brand to launch a new lineup of PCs with a Lenovo label that will sell on quality and performance rather than price. The new lineup—the company's most important launch since the 2005 corporate marriage—will include generous tech support and features that make the machines feel more like consumer electronics, and maybe even Think innovations like the "airbags" and "roll bars" designed to protect delicate components. New models are scheduled to debut early next year, with plans to sell them at retailers like Circuit City and Best Buy.
Lenovo has a temporary crutch to help it gain marketplace traction. The terms of the 2005 deal allow the company to use IBM's name and logo to market its products until 2010—a deadline the company hopes to beat. With the agreement of customers, the company has removed the IBM logo from some of its ThinkPad notebooks and other corporate products, replacing it with the Lenovo name. But other customers still find comfort in the IBM endorsement, so Lenovo leaves it on. "We will leverage the IBM brand as long as we need to," says Advani, the marketing chief, "but we expect to take off the logo sooner rather than later."
Olympic gamble. If Lenovo can persuade consumers to pay a premium for its machines, it will be a nifty trick for a company that has far less brand recognition—and marketing money—than Dell or hp. Enter the 2008 Olympics. By spending upwards of $50 million to be a top-tier sponsor of the Beijing games, Lenovo hopes to gain worldwide exposure that will translate into PC sales. While the price is high, Amelio and other execs feel the return is greater than what they'd get from TV commercials or more conventional marketing. Placing such a big bet on the Olympics—and the fortunes of China in general—is risky, especially with human-rights activists targeting the Games as an opportunity to highlight China's association with questionable governments, especially that of Sudan. But Lenovo's American execs are unabashedly bullish on China. Advani raves about innovations that have come from the company's Chinese engineers, like a reset button on computers used in schools that automatically returns the desktop to a predetermined state after a lot of different users have moved icons around or changed settings. Amelio praises the "deep level of talent" he has found in China. And the company's Project Sea Turtle—named after the term for ethnic Chinese who migrate abroad for jobs or education, then return home—is aimed at luring talented Chinese expatriates to a home-grown company. So far, the project has nabbed several dozen hires.
Even if the Olympics gambit succeeds, Lenovo sees itself as closer to the first, single step than the 1,000th mile. Amelio downplays talk of someday challenging his old employer Dell ("the other company," as he calls it), focusing instead on improving Lenovo's efficiency and profitability and making gradual market share gains. "They've evolved beyond what they had from IBM," says analyst Kay. "The question is whether they can propel themselves someplace good." And someday, perhaps, transform capitalism.