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4.0 out of 5 stars
Understanding how business is done in China..., July 30, 2006
This review is from: The Lenovo Affair: The Growth of China's Computer Giant and Its Takeover of IBM-PC (Hardcover)
When Lenovo bought the IBM PC division, I think many Americans saw it as an ominous sign of increasing dominance by a foreign juggernaut. In reality, Lenovo has just as many problems as any other international firm. The story is laid out pretty well in the book The Lenovo Affair - The growth of China's computer giant and its takeover of IBM-PC by Ling Zhijun (translated by Martha Avery).
The book covers the history of Lenovo, or Lianxiang as it is known in China, and its founder Liu Chuanzhi. The history goes back to 1984 when a small group of people from the academy got permission to start a business enterprise. This is the first major mind-shift you'll undergo as you read the story, as the Chinese culture and government make for vastly different rules in the business world. During their formative years, there was a tight connection between the academy and the business, so much so that workers in both areas could go back and forth between the two groups, drawing salaries from both. While it may sound like the government backing would guarantee success, the reality is that you have far more expectations and political gamesmanship to account for. And if you fall out of favor with the ruling party, your demise is pretty much assured.
As the years unfolded, up to and through the internet bubble, Lenovo earned the reputation of a company having nine lives. On numerous occasions, personality issues could have torn the company apart (and nearly did). Supply and cost considerations, along with foreign competition, almost caused the company to go bankrupt a number of times. The same business forces at work in the West (profit margins, competition, labor costs, etc.) also affect Chinese companies. You realize that the mere fact of being a Chinese company with government support doesn't automatically pave the way to success. The chapter on the IBM purchase is almost dealt with as an after-thought in the book. There's not much ink devoted to that particular event, but the rest of the book does a good job in setting the stage for what something like that means to a company like Lenovo.
This isn't a particularly easy read for a westerner. My unfamiliarity with Chinese names made it hard to follow the cast of characters. I'm sure the translation factor also comes into play in terms of readability. But it's a book I'd recommend for a number of reasons. You'll see how China's communist, war-driven history flavors business strategy at all levels. Companies looking to operate in China will start to understand how the culture is so very much different than ours, and how ignoring that fact dooms you to failure before you even start. But most of all, you'll see that it *is* possible to compete with companies like Lenovo, because they are just as human and prone to misjudgements as any other business...
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3.0 out of 5 stars
Overly Detailed, Lacks Strategic Focus, July 28, 2010
This review is from: The Lenovo Affair: The Growth of China's Computer Giant and Its Takeover of IBM-PC (Hardcover)
"The Lenovo Affair" tells the story of China's Lenovo Group - a Chinese-based multi-national computer technology firm that develops and manufactures desktops, laptops, servers, software, etc., originally known as Legend Computer. Lenovo is best known for its 2004 acquisition of IBM's PC division in 2004 for $1.75 billion - only 20 years after the firm was founded; it now is the world's fourth-largest PC vendor, and the largest in China. That acquisition dealt a powerful blow to the hopes of many western businesses to scoop up large shares of the Chinese market, and boosted Chinese nationalism. Key to its accomplishment was co-founder Liu Chuanzhi's ability to align the nationalist mood of China with support from the government for his company's long-term goals.
The company was founded in October, 1984 - Liu Chuanzhi promised to create $250,000 in annual revenues when he asked his employer, the Chinese Academy of Science (CAS), for permission. Liu and others were frustrated by the lack of opportunity to commercialize computers they worked on at the CAS. At the time, they had no business plan, and only the promise of $25,000 in financial backing from CAS. Initial business was largely distributing IBM and other products, as well as a hardware/software combination that allowed use of Chinese characters. No banks would loan them money - in those days anyone involved in 'business' had a bad reputation. The founders' first meeting was held in a CAS guard shack, and their first decision was to sweep the floor. In 1988 the firm was listed on the Hong-Kong exchange, and in 1991 the founders used their accumulated bonuses for the prior 7 years to buy a 35% share of the firm; after the acquisition, IBM obtained an 18.9% stake in Lenovo; CAS had 50.4%. Twenty years later, pre-acquisition, Lenovo had 9,000 employees and $3 billion in revenues vs. IBM PC's 10,000 and $13 billion. At the time, management decided that globalization would be a more productive growth direction than competing for added market share in China.
IBM PC's gross profit margin was around 24%, vs. Lenovo's 14%. However, Lenovo had a 5% net income whereas IBM was not profitable because The reason was quite simple: costs and expenses were higher because of higher overhead allocations. Assembly cost in the US was $24 compared with $4 in China.
Fortunately, three days after that first meeting, China's leadership distributed a document stating "Rampant egalitarianism is destroying the productive capacity of society." Continuing, "We want to encourage more and more people to move towards wealth." "The Lenovo Affair" continues, often in too great detail that lacks strategic perspective, and sometimes using confusing English, telling how Lenovo emerged as the leading Chinese computer firm out of some 200+, taking actions that certainly would have landed its leadership in jail if in the U.S. (eg. paying bribes to officials - standard practice in China, working around tariffs, a lack of licenses, high taxes on worker bonuses, travel restrictions to/from Hong Kong, government-imposed pay limits), and almost did so in China. Repeatedly challenged by actions taken by its overly autonomous divisions, patent lawsuits, allegations of mis-spending government funds, CAS funding cutbacks - ironically intended to make R&D more commercially oriented, government favoritism directed towards its 'Great Wall' competitor and others, foreign firms attempting to take the Chinese computer market, and those employees and Chinese leaders wanting Lenovo to build its own CPU as part of an 'all-China' push, Liu Chuanzhi either personally created the results required to succeed, or selected talented others who innovated in ways (cost-cutting, improving sales presence while lowering costs) that boosted the firm. RMB devaluation, moving production from Hong Kong to Shenzhen also helped. Both the Chinese government and Lenovo's management were learning as they want - for example, many of the original government requirements were eventually dropped.
Near the end of "The Lenovo Affair," readers learn that Dell was becoming a strong competitor, even pricing below Lenovo. Unfortunately, the outcome of this new competition is not provided. Business Week, 2/4/2010 helps fill the gap. Lenovo's market share in China has risen to 33.5%, accounting for almost half its total revenue; world-wide it has a 9% market share. In the U.S., however, market share has fallen from 7% at the time of the IBM acquisition to 4%. Analysts believe that is due to weakness in the corporate sector.
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