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Lenovo and IBM: Snake swallows elephant
January 20, 2011, Thursday
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EDITOR'S note: This is the first of two parts of a Wharton Business School article on the legendary Chinese IT giant Lenovo, the first Chinese enterprise to take over an American company.
FIVE years ago, Liu Chuanzhi sent shock waves through the global business community when Lenovo, the computer manufacturer he founded and chaired, announced it would buy IBM's legendary PC unit for US$1.75 billion.
The deal made Lenovo the third largest PC maker in the world, and marked the first time that a Chinese company had taken over an American one.
After the acquisition, Liu gave up the chairmanship - but remained a director - to make way for the new Sino-American leadership team. Merging the two companies proved difficult, however.
As Lenovo's consumer products failed to gain traction, an internal battle over the company's combined managerial culture brewed.
Its share price languished and then dropped - going from US$22.50 in October 2007 to US$5.50 in December of the following year. When the financial crisis hit at the end of 2008, the company reported a loss of nearly US$97 million for its fiscal third quarter.
Last year, the board took action. Yang Yuanqing, who had been at the helm befores the IBM deal, was renamed chief executive officer after CEO William Amelio, an American, resigned; Liu resumed the chairmanship. Lenovo also launched a new business strategy.
The changes appear to be working: the company returned to profitability in the second half of 2009, and Businessweek named Liu one of "China's Most Powerful People."
Knowledge@Wharton recently met Liu at the World Entrepreneurship Forum in France, to talk about the company's history, what it was like to be the first Chinese CEO ever to take over a US company, and how he and the new management team are rebuilding the Lenovo brand. An edited version of that conversation follows.
Q: Tell us about the early days of Lenovo.
A: We started the company with 11 researchers in November of 1984 with 200,000 yuan (US$30,384 today) in funding from the Computer Institute of the Chinese Academy of Sciences. At the time, that amount of money was equivalent to about US$30,000.
Q: What were the obstacles?
A: The first challenge was that we were researchers who knew nothing about how to run a business!
Funding was an issue too - at that time a computer cost about US$10,000, so we could only afford three computers.
But the biggest challenge was the planned economy. We needed to import components, but the state wouldn't cooperate so we had to buy from the black market.
Q: You were the first-ever Chinese CEO to take over an American company. What was that like?
A: It was very shocking news at the time. People likened it to a snake swallowing an elephant.
Most people were negative about it. They thought we were courageous, but they also thought we'd fail. I remember that after the acquisition I gave a speech at a Chinese business school for a group of Executive MBAS. I asked the audience how many people felt confident about the acquisition, and only two people raised their hands. I looked and saw that they both were Lenovo employees.
Q: How did you integrate IBM's PC operations into Lenovo?
A: The first thing we wanted to integrate into the company was the laptop computer brand ThinkPad. The second thing we wanted to absorb was the technology. The third thing we needed to integrate were the global resources: the sales channel, the distributions channel and the employees.
Q: What were some of the biggest challenges you faced when you merged the two companies?
A: We had three serious risks.
No. 1: After the acquisition, would clients buy from the new owner?
No. 2: Would employees continue to work for the new owner?
No. 3: Would there be potential conflicts in management between the Chinese management and the Western management?
Q: Were there management conflicts?
A: I have to say that it was difficult to some extent. Most of the problems lay in senior management. When it came time to make a major decision, the CEO at the time would discuss it with only the head of the function that the decision directly affected. The others on the management team were then asked to vote yes at the end. They were left out of the discussions, so they had to agree.
In its previous status - after the acquisition and right up to the crisis - the company didn't care about the principle of delivering on your commitment. The top management had a budget year to year, but every quarter when they couldn't deliver, they revised downward their expectations. The board witnessed a lot of cases of the management failing to deliver.
Q: What happened when the financial crisis hit?
A: When the financial downturn came in the fourth quarter of 2008, we had big losses. The last three months of that year swere very, very dark days. At that point, the board took decisive measures. The former chairman, Yang Yuangqing, became the CEO, and I became the chairman once again.
Q: How is the new power structure of Lenovo aligned?
A: We have built a top leadership team consisting of four Chinese and four Westerners, including three Americans, and one European. These people represent the whole spectrum of the company. It's a blending of talents from East and West.
When it comes to a major decision, they look at the macro environment, and the details of the company. Yes, decision-making does take longer this way, but for critical issues, this kind of strategy is the best one.
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
FIVE years ago, Liu Chuanzhi sent shock waves through the global business community when Lenovo, the computer manufacturer he founded and chaired, announced it would buy IBM's legendary PC unit for US$1.75 billion.
The deal made Lenovo the third largest PC maker in the world, and marked the first time that a Chinese company had taken over an American one.
After the acquisition, Liu gave up the chairmanship - but remained a director - to make way for the new Sino-American leadership team. Merging the two companies proved difficult, however.
As Lenovo's consumer products failed to gain traction, an internal battle over the company's combined managerial culture brewed.
Its share price languished and then dropped - going from US$22.50 in October 2007 to US$5.50 in December of the following year. When the financial crisis hit at the end of 2008, the company reported a loss of nearly US$97 million for its fiscal third quarter.
Last year, the board took action. Yang Yuanqing, who had been at the helm befores the IBM deal, was renamed chief executive officer after CEO William Amelio, an American, resigned; Liu resumed the chairmanship. Lenovo also launched a new business strategy.
The changes appear to be working: the company returned to profitability in the second half of 2009, and Businessweek named Liu one of "China's Most Powerful People."
Knowledge@Wharton recently met Liu at the World Entrepreneurship Forum in France, to talk about the company's history, what it was like to be the first Chinese CEO ever to take over a US company, and how he and the new management team are rebuilding the Lenovo brand. An edited version of that conversation follows.
Q: Tell us about the early days of Lenovo.
A: We started the company with 11 researchers in November of 1984 with 200,000 yuan (US$30,384 today) in funding from the Computer Institute of the Chinese Academy of Sciences. At the time, that amount of money was equivalent to about US$30,000.
Q: What were the obstacles?
A: The first challenge was that we were researchers who knew nothing about how to run a business!
Funding was an issue too - at that time a computer cost about US$10,000, so we could only afford three computers.
But the biggest challenge was the planned economy. We needed to import components, but the state wouldn't cooperate so we had to buy from the black market.
Q: You were the first-ever Chinese CEO to take over an American company. What was that like?
A: It was very shocking news at the time. People likened it to a snake swallowing an elephant.
Most people were negative about it. They thought we were courageous, but they also thought we'd fail. I remember that after the acquisition I gave a speech at a Chinese business school for a group of Executive MBAS. I asked the audience how many people felt confident about the acquisition, and only two people raised their hands. I looked and saw that they both were Lenovo employees.
Q: How did you integrate IBM's PC operations into Lenovo?
A: The first thing we wanted to integrate into the company was the laptop computer brand ThinkPad. The second thing we wanted to absorb was the technology. The third thing we needed to integrate were the global resources: the sales channel, the distributions channel and the employees.
Q: What were some of the biggest challenges you faced when you merged the two companies?
A: We had three serious risks.
No. 1: After the acquisition, would clients buy from the new owner?
No. 2: Would employees continue to work for the new owner?
No. 3: Would there be potential conflicts in management between the Chinese management and the Western management?
Q: Were there management conflicts?
A: I have to say that it was difficult to some extent. Most of the problems lay in senior management. When it came time to make a major decision, the CEO at the time would discuss it with only the head of the function that the decision directly affected. The others on the management team were then asked to vote yes at the end. They were left out of the discussions, so they had to agree.
In its previous status - after the acquisition and right up to the crisis - the company didn't care about the principle of delivering on your commitment. The top management had a budget year to year, but every quarter when they couldn't deliver, they revised downward their expectations. The board witnessed a lot of cases of the management failing to deliver.
Q: What happened when the financial crisis hit?
A: When the financial downturn came in the fourth quarter of 2008, we had big losses. The last three months of that year swere very, very dark days. At that point, the board took decisive measures. The former chairman, Yang Yuangqing, became the CEO, and I became the chairman once again.
Q: How is the new power structure of Lenovo aligned?
A: We have built a top leadership team consisting of four Chinese and four Westerners, including three Americans, and one European. These people represent the whole spectrum of the company. It's a blending of talents from East and West.
When it comes to a major decision, they look at the macro environment, and the details of the company. Yes, decision-making does take longer this way, but for critical issues, this kind of strategy is the best one.
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
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