An unknown PC giant, Lenovo flexes its muscles (Chinese companies set on becoming global powers)

Although virtually unknown in the United States, Lenovo--said to be in talks to buy IBM's personal computer business--is China's largest PC maker and the world's fastest-growing one.

And it is emblematic of the ambitions of emergent Chinese industrial giants to create global brand names and capture market share beyond their own borders. Formerly relegated to a low profile as the cheap assemblers for the rest of the industrialized world, Chinese companies now have their sights set on becoming global powers in their own right.

The Lenovo Group, partly owned by the Chinese government, had sales of over $3 billion last year and is currently ranked eighth globally among PC makers. It is the overall leader in Asia outside Japan, where NEC and other Japanese companies dominate. (IBM's Japan unit is in the top five there, though, adding to IBM's allure for Lenovo.)

Based in Beijing and listed on the Hong Kong Stock Exchange, Lenovo has made its mark by producing a line of low-cost PCs, some selling here in China for as little as $360. With huge sales to Chinese government agencies and schools, and immune from the tariffs levied against foreign brands like Dell, Hewlett-Packard and--so far--IBM, Levono now controls about 27 percent of the Chinese PC market, which is about to pass Japan to become the world's second-largest personal computer market after the United States.

But the company is experiencing growing pains as it tries to hold onto market share at home while also venturing into Western markets.

The company's stock price recently plummeted after Lenovo reported worse-than-expected earnings, citing a price war in China with Dell, Hewlett-Packard and IBM.

Lenovo may not end up acquiring IBM's PC business, as at least one other potential buyer is also in negotiations. And other bidders may emerge.

But if Lenovo succeeds, acquiring the IBM unit would ease some of the competitive pressure domestically. Recognizing that profitable growth within China may be increasingly hard to come by as outsiders flock to the world's potentially biggest consumer market, Lenovo also knows it needs to expand its global share of the market beyond its current 2.6 percent. Acquiring the IBM business, now ranked third globally, would raise that share to 8.6 percent--still third, but a bit closer to Dell (18 percent) and Hewlett-Packard (16.1 percent).

As part of its global campaign, the company earlier this year shed its longstanding name, Legend, in favor of the current one, then promptly entered the global brand sweepstakes by signing on as a sponsor of the 2006 Winter Olympics in Turin and the 2008 Olympic Games in Beijing.

To what extent, and for how long, Lenovo or another buyer of IBM's PC business would be able to make use of the IBM name would be a crucial question in any negotiations. But the company has made it known that it is open to deals.

"Acquisition is one of the possibilities," Mary Ma, Lenovo's chief financial officer, said in an interview last year.

Founded in 1984 by a group of Chinese scientists with government financing, the company then known as Legend started out as a distributor of computers and printers, selling IBM, AST and HP models in China.

In the late 1980s, however, as an exemplar of a trend that would play out in many Chinese industries, the company moved higher up the food chain by beginning to design its own personal computers. By 1997, it had passed IBM to become the largest seller of personal computers in China.

But competing globally on its own, especially against Dell's vaunted manufacturing efficiencies, could be a stretch for Lenovo. An American venture capitalist who recently toured the Lenovo factory in Shanghai said that he had been surprised that it lacked the bustling, just-in-time urgency that he had observed on a similar tour of a Dell assembly line in Round Rock, Texas.

At the Lenovo site, pallets of computers were stacked high to the ceiling, according to the investor, who insisted on not being identified, and he said the production line was moving slowly compared with Dell's.

Moreover, with China's economy growing rapidly, increasingly affluent and brand-conscious people are turning to Dell, IBM and Hewlett-Packard computers. Executives at Lenovo are intent on competing with those better-known brands, saying Lenovo is not interested in simply being known as the lower-cost supplier. IBM's product line would automatically push Lenovo up the cachet curve.

Most crucial to Lenovo's worldwide aspirations, analysts say, would be IBM's ThinkPad line of portable computers, which even among American customers has a much more devoted following than many of the other products in IBM's line.

"This is their steppingstone to a global market," said James Mulvenon, a China researcher who is deputy director of the Center for Intelligence Research and Analysis, a Washington research center.

Otherwise, he said, Lenovo faces the same brand-recognition problem that has plagued the Taiwan computer maker Acer, which ranks fifth globally, but is an also-ran in the United States market. "This a story about a Chinese company adopting an American brand," Mr. Mulvenon said.

Keith Bradsher, in Hong Kong, and John Markoff, in San Francisco, contributed reporting for this article.

The Lenovo Group, partly owned by the Chinese government, had sales of over $3 billion last year and is currently ranked eighth globally among PC makers.

"Free trade" with China, eh?

By the way, I am not afraid of "Red" China taking over the world or other such fantasies (and anyone who brings this up I will ignore). I am more concerned about how American companies can compete in a "free trade" business environment when China bank rolls its business enterprises? Japan does this as well. In fact what is arising in the world as a result of the fantasy of "free trade" are not stand alone businesses free to sink or swim without government interference but chains of oligarchies some linked to their nation's govt's.

But if Lenovo succeeds, acquiring the IBM unit would ease some of the competitive pressure domestically.

What I see "freetrade" producing is world wide Zaibatsus and Keiretsu's.

We even are getting this form of conglomeration of businesses in America now.

Ken, your post was a reply to something I never put out there - Where did I say I was against "corporations"?

You answered what you think I wrote - or your stereotype of what you assumed I wrote. For the record I never voted for or will ever vote for Pat Buchanan.

I will end my reply with Dan's words"

"The problem is not Chinese investment in business. It is simply that the Chinese government that does the investing is a brutal totalitarian dictatorship.

The solution is to isolate entities such as this. Don't trade with them."

Dan, I would only add that I don't isolate China because she is a "brutal totalitarian dictatorship". Japan is anything but that but her business practice is anything but "free and fair" as we Americans have been educated to assume business trade should be.

I again pose the question - How do we call what we have in place now true free trade when in China we have co-ownership of business by their govt and in cases of Japan where their business model is that of the oligarchic Keiretsu?

The EU claims to be a free trade zone yet Airbus was founded and is subsidized by the EU.

Also, to be fair - America does the same thing with some of its own connected industries - America sort of subsidizes the aerospace industry and other industries because of our huge military industrial complex that exists through our tax dollars as well as tax breaks and protections for sugar, etc.

I guess my whole point is that I really don't see "free trade" practiced anywhere. What is being practiced is opening markets up - part one of "free trade" practice but the "part two", stand alone businesses free to sink or swim without government interference is not being put into practice except mostly in America.

The end result is the devistation and devolution of the American industrial base and maybe the begining of the end for certain high end techno based service industries.

"and at&t then a monopoly chose what they thought was the best parts of the divestiture, only to waste billions of dollars in take-overs that did them little good. now it's obvious that the former baby bells, with their "last mile" connections to consumers, have bested at&t."

I would only say, AT&T did not wish the divestiture to happen.
We where a tightly controlled monopoly that was allowed so that the United States would always have the best telephone and other type communication services to both provide nation wide services to all Americans, and for many national defense reasons. AT&T also was required to share with the world enormouse amounts of research and development etc..
It was a win win situation. Once Timothy Wirth (demo) in bed with a number of American companies set the plan forth to destroy the company, along with the blessings of Judge Green, it opened the pandoras box so to speak. I wonder how many gentle readers realize to some little degree just how much leading edge technology in many fields was pioneered by Bell Labs and certain other research arms of AT&T, that benifited Americans in so many ways. Bottom line it was a public trust tightly regulated. When it's ability to survive was removed (only allowed to run the long distance services), that spelled doom for the company in many ways.
One has to understand the billions of dollars that where inveseted in the "total system", over a long period of time.
I don't expect anyone with a good knowledge as to how the system was set up to understand that it was not possible to simply build on the long distance part once many little companies such as MCI, Sprint etc., where able to with little capital expenditure buy cheap bulk rate transmission services from AT&T and literally outdo them. Besides not long after the breakup, the rate of new long distant services dropped of considerably. So the net effect was that AT&T could not continue to compete with the newly formed companies that did not have huge amounts of equipment to maintian etc.. It is a long complicated story. To long for any details in a forum such as this. So when AT&T started to delve into business ventures such as credit card services whatever, they did so because they realized they no longer could compete in the new market with companies that did not have to spend hundreds of billions of dollars to install all their own networks, but only invest in new trunks along cooridors of the country that where a sure win.

At any rate, I was one of the couple hundred thousand that finally lost my job, due to many divisions and service cut backs. It got to the point where what used be considered almost sacred areas such as Integrated Circuit Design groups which I was in, had to cut back and consolidate.

So in some respects, what I just wrote can actually be applied to any further discussion on this topic. When should government step in and help a given industry out?
How ethical is it, based on a in my opinion oxymoron concept of a free market. Depends on what you mean by free, and what type market one is talking about. Does farming and dairy fall under what some would call a free market?

As far as IBM goes. Well that is another story. IBM did a lot of foolish things over a period of many years that broke their back in some ways. The Microsoft joke is truly something when you think how IBM put them into business. I
could say a lot of not so nice things about this company and how they often pulled the wool over the world's eye, with clever tricks but don't feel it is even worth discussing.
Let me just mention one thing to give you an idea though where such talks could lead. Way back when, IBM announced to the world that it was the first to create a 16K RAM.
OK. Bell Labs for internal use at the time already had a fully functional 16K RAM. Guess what. IBM's supposed 16KRAM was comprised of four 4KRAMS put into one package. Ours was one 16KRAM in the package. Now the world had no idea. It lead to large sales of 16RAMs to the world. OK. Their RAMS worked but the point is they where not honest in what they where selling OEMs etc.. Companies where purchasing what they thought was a new generation RAM technology. Of course IBM caught up and then produced a real 16KRAM. But the point is, they where real operators used to getting what they wanted often under the guise that they where always on the leading edge. I could go back further in time when the first fully functional IBM 360 Mainframe went into production. Well Philco Corporation had a far superior in word size machine (64 bit wide word) TRANSACT 2000 NOR Logic system that ran circles around IBM's mainframe. But the world was convinced through very clever marketing that the IBM 360 (36 bit wide word) Mainframe was superior to anything else in the world. OK enough of this stuff.
It will lead no where constructive.
As to the questions posed in this post. The plethora of scenarious one can develop are endless. One thing for sure though, Slicko opened up a can of worms when he signed the trade agreements with China. And his administration sure seems to be less then lilly white in allowing so much formal forbidden technology to be sold to them. Then again, where does one draw the line. We want jobs in America right? So should we refuse our companies from selling high tech stuff to them and allow the French, Germans, Brits and others to sell them the stuff?
Darn if I have any answers to this ongoing and growing problem. I know if this thread continues we shall hear from folks making the point, that well look at what we did with Japan during the 50s throught 70s. Yea, but Japan is not a huge communistic nation that has no plans on abandoning communism. So perhaps I will just shut up and see how this posts develops.

"The same can be said of the public trust formulas that had been worked out for utilities - California's deregulation debacle should have served as a lesson - especially now that their is proof of collusion to fix the market."

Point well taken. Perhaps I should have indicated that I do not condone what AT&T did after it's breakup. But it was a sort of unique case where a huge infrastructure was developed over many years, and required a lot of money to maintain let along build on and improve with the the long distant market becoming stagnant. AT&T keep loosing more market share to smaller more efficient companies that had little overhead from an equipment maintenance standpoint,
as the market flattened out. There simply was not a grown market to work with in the late 80's through 90's, as there previously was. It doomed the company. One can only downsize so much before one can no longer compete. And I believe that is what happened. And when one has to maintain a huge infrastructure of networks, operation centers, research and development arms etc., there simply was not enough new business to hang tough. And of course the startup long distance services again, but much cheap services from AT*T to then compete against them. It was a lose situation.
I don't know why Ken said "wrong" on my short analysis.
Perhaps he shall elaborate a bit as he has time to.

i respect that.

i'm just saying it was a complex process, long in the making.

it was a regulatory nightmare. telecommincations regulation involves the fcc, the u.s. congress, the courts at all levels, the state puc's, and law suits by corporations, etc. beginning in the sixties, regulators increasingly found it difficult to differentiate between phones and computers.

finally, out of desperation, and coincidental to the deregulatory policies of president ronald reagan, the divestiture was the solution. no executive or manager at at&t bell labs denver expressed any reservation that i remember. they thought that they'd got the better part of the bargain--the long lines.

i loved at&t. they paid for my masters of science in telecommunications.

no doubt we would be communicating differently if the divestiture had not occurred--it was ILLEGAL before 1983 to own a telephone. telephones, very excellently made, thank you, were designed and manufactured by the western electric subsidary of at&t.

the japanese made trillions from the divestiture. out of the cabinets of at&t bell labs came the patents which they paid some half billion but made fortunes. the excellent engineers at at&t bell labs were not marketing oriented; they hadn't a clue what to do with the stuff they invented. i remember one ph.d. in electrical engineering in 1977 being perplexed by the fax machine; the only use that he could imagine in the future for it was for asian countries that had ideogram languages. a brilliant engineer, but not a consumer-driven business guy.

yes, today's equipment is shoddy compared to the pre-divesture ma bell equipment, but we can do with it as we please.

just as the managers in the soviet union could not control the economy, likewise, one company, at&t, could not have the foresight to manage the telecommunications revolution that we've witnessed and benefitted from since the divestiture.

"we were among the last to understance that in the age of information sciences the most valuable asset is knowledge, springing from human imagination and creativity, complained soviet premier gorbachev in 1989. we will be paying for our mistake for many years to come".

in sum, the creativity of millions of creative people driven by hundreds of millions of consumers have created something that one company could not have possibly managed.

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