By Juro Osawa and Lorraine Luk
China's Lenovo Group Ltd., once known as Legend, grew from a
tiny government-funded venture in the 1980s to a global powerhouse
that last year became the No. 1 personal-computer maker in the
world.
With its proposed $2.91 billion purchase of Google Inc.'s
unprofitable Motorola Mobility handset business, Lenovo is making a
risky bet it can replicate that success in smartphones.
"This will be a good start to challenge the big players in
smartphones," said Chief Executive Yang Yuanqing in an interview
after the company announced the deal. "We want to become a global
player."
The deal represents one of the boldest steps yet in the
evolution of Lenovo, which started out in a tiny, one-story
bungalow in Beijing, distributing foreign-made computers to Chinese
homes. The company so far has built its successes largely on a
ruthless ability to cut costs by manufacturing its PCs in-house,
while building a reputation as a solid, reliable brand abroad.
Lenovo's acquisition of International Business Machines Corp.'s PC
business in 2005 helped establish the company's credibility
globally, though many of its biggest sales inroads have been with
businesses or in emerging markets.
But the Motorola purchase pushes Lenovo farther into the world
of smartphones, with their picky, brand-conscious buyers. It puts
the Chinese maker up against industry leaders Apple Inc. and
Samsung Electronics Co., two of the world's most recognized
consumer brands. Neither Lenovo nor Motorola was on the list of top
100 brands in consultancy Interbrand's Best Global Brands 2013
survey, while Apple ranked No. 1 and Samsung came in at No. 8.
And Lenovo will be taking up its battle in the U.S., far from
its stomping grounds in China, where it still enjoys a home-company
advantage. China made up 41% of its $18.56 billion in sales for the
six months ended Sept. 30, the latest figures available.
The task is made tougher by Motorola's red ink: The handset
firm's net loss widened to $928 million last year from $616 million
in 2012, according to Lenovo. Concerns the deal will hurt Lenovo's
profitability led investors to dump the stock during Asian trading
Thursday, with shares falling 8.2% to HK$10.06 (US$1.30). The drop
leaves Lenovo's market value at about US$13.5 billion.
The turnaround effort is further complicated by Lenovo's other
major deal, announced last week, to buy IBM's low-end server
business for $2.3 billion. Lenovo's management capacities will be
stretched as the company simultaneously integrates two big
businesses in very different areas, analysts say.
"I'm surprised Lenovo is getting into something this risky,"
Sanford C. Bernstein analyst Alberto Moel said of the Motorola
deal. "Lenovo is biting off more than it can chew."
Mr. Yang notes that Lenovo has a track record of proving the
skeptics wrong. It has beaten better-known technology firms to take
market share, maturing and globalizing as it goes.
When Lenovo bought IBM's PC unit for $1.25 billion, the business
also was struggling. At the time, critics said Lenovo wouldn't be
able to manage the acquisition, since it was much larger than the
Chinese firm's own PC business. "Some people said it was like a
snake swallowing an elephant," Mr. Yang recalled.
When Lenovo bought IBM's PC business, Mr. Yang spoke little
English, according to other Lenovo employees. To force himself to
study it, Mr. Yang made English Lenovo's official language and
moved with his family to North Carolina to work closely with IBM's
PC executives. His English has improved dramatically since and Mr.
Yang conducts analyst conference calls and foreign media interviews
entirely in English.
Lenovo also has been honing its international marketing chops
during the past few years, launching campaigns featuring sports
stars and celebrities. In 2012, the company signed a three-year
sponsorship deal with the U.S. National Football League that
allowed it to use NFL trademarks in its marketing. Lenovo also
hired National Basketball Association star Kobe Bryant for its
smartphone ads in Asia and enlisted Hollywood actor Ashton Kutcher
in its latest marketing push in the U.S.
In many ways, Lenovo is a model of what the Chinese government
says it ultimately wants from the country's companies. China wants
its firms to buy or nurture brands abroad, as the country looks for
ways to diversify its economy beyond cheap manufacturing and to
invest its cash hoard abroad. As its labor costs rise and
traditional growth sources ebb, China wants to move up the value
chain and make sophisticated, high-margin goods to boost its
economy and create better jobs.
Lenovo has been a pioneer in China's push for homegrown consumer
electronics brands to make and sell their own products and services
rather than playing supporting roles for foreign labels.
And though Lenovo still has government funding, through a major
shareholder of its biggest investor, it differs significantly from
the massive state-owned enterprises--or SOEs--that dominate the
country's banking, resources and transportation industries.
The company started out as New Technology Developer Inc., a
small tech venture founded with seed money of just $25,000 from the
state-owned Chinese Academy of Sciences. It was incorporated in
1988 as Legend Hong Kong and listed on the Hong Kong Stock Exchange
in 1994.
In the early days, Legend distributed PCs made by foreign
companies to businesses and households in China, even helping with
installations. When Mr. Yang joined the company in 1988 as an
intern, he delivered computers by bicycle.
After Legend started selling PCs under its own brand in 1990, it
expanded quickly in the domestic market with products that appealed
to millions of Chinese consumers who weren't familiar with
technology. Its Internet PC, for example, came with a simple button
that users could press to instantly connect to the Internet.
In 2003, Legend changed its name to Lenovo, combining "Le" from
Legend and "novo," the Latin word for new.
Those roots are still visible in Lenovo's shareholding
structure: the Chinese Academy of Sciences holds a 36% stake in
Legend Holdings Ltd., which is Lenovo's largest shareholder with a
32.5% stake. Mr. Yang and other directors hold 7.3% of Lenovo, and
the rest of the shares are traded publicly. Under the terms of
Lenovo's $500 million loan deal with a group of banks, the loan
agreement goes into default if Legend's holdings slip below 20% or
if it loses its place as Lenovo's largest shareholder.
At the same time, Lenovo has more in common with Western rivals
than with Chinese companies run by Beijing. Its loan agreement
comes from a consortium of Chinese and foreign banks, while big
SOEs rely on cheap credit from China's state-owned lenders and big
policy banks.
Lenovo has dual headquarters in North Carolina and Beijing. Its
executive ranks include several foreigners, and an American--former
Dell executive Bill Amelio--was once CEO. At SOEs, leaders are
often high-level Communist Party officials who party leaders
occasionally shift to other companies.
Mr. Yang said in a recent interview that he doesn't consider
Lenovo a Chinese company, citing the diversity of its management
team and shareholders.
Lenovo still stands to benefit from Beijing's policies. Foreign
business groups complain that Chinese government procurement rules
favor domestic players like Lenovo in a market worth 1.4 trillion
yuan in 2012, or $231 billion at current exchange rates. China
hasn't signed on to the World Trade Organization's guidelines
pertaining government procurement, though Chinese officials say
they are in active talks with the WTO.
Lenovo in years past also benefited from government rules
preventing foreign computer makers from setting up distribution
systems in China, according to a study last year by the Center for
Strategic & International Studies, a U.S. think tank that
focuses on security issues. That allowed Lenovo to build sales
channels around the country to sell computers made by other
manufacturers before it went into the computer manufacturing
business itself.
Carlos Tejada contributed to this article.
Write to Juro Osawa at juro.osawa@wsj.com and Lorraine Luk at
lorraine.luk@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires