Lenovo Goes Global

Aug. 15, 2014–This has just been posted by Strategy + Business and will appear in its print edition soon. You also can see it at www.strategy-business.com.

In the beginning, it was cultural and managerial chaos. When Chinese
computer company Lenovo dispatched a team to New York in 2004 to discuss
acquiring the personal computer division of IBM, only one member of the
team—the company’s chief financial officer—spoke English. Lenovo was an
offshoot of a Chinese government research institute, and none of the
leadership team had operated outside Chinese-speaking Asia. Yet they
were dealing with executives from IBM, a sophisticated multinational
active in 160 markets. Gina Qiao, who was a member of the Lenovo team
representing human resources, recalls that she was completely baffled by
IBM’s compensation and pension system. Nothing like it existed in
China.

Once Lenovo acquired the much larger but unprofitable PC division on
May 1, 2005, for US$1.75 billion, the two sides discovered that they
truly didn’t understand each other. Lenovo executives decided that
English would be the official language of the new company and started
learning it. But the challenges went beyond vocabulary. Words could be
translated from one language to another, but underlying assumptions
couldn’t. “We had two rivers of culture,” recalls Qiao.

For example, the two sides did not know how to disagree with each
other. When the U.S. executives spoke in a meeting, the Chinese often
said, “Shi, shi, shi,” which means “yes, yes, yes.”

The U.S. group took this as a sign of agreement, but the Chinese were
really just saying, “We hear you; please continue.” It was only after
the meeting that the Chinese explained privately that they didn’t agree.
They were trying to be polite, but the way they expressed disagreement
after the fact infuriated the other side.

Another problem: Western managers expected their direct reports to push
back and sometimes challenge their superiors’ decisions, but the
Chinese tendency was to merely execute what a “great boss” had decreed.
“In China, we have to respect the leaders,” Qiao explains. “If you ask
me to do something, I just do it. If you make that decision, you know
more information. You are above me. You are smarter than me.”

The Chinese decided they wanted a Western executive to be the chief
executive officer of the combined company, so CEO Yang Yuanqing stepped
into a non-executive chairman’s role. The first Western chief executive,
Steve Ward, an IBM veteran, didn’t last long. Then William J. Amelio, a
former Dell Inc. executive who had run that company’s operations in
Asia, stepped in as CEO later in 2005, bringing many Dell people with
him.

Amelio tried to impose the Dell way of operating the company. He
commissioned a consulting firm to hammer out a common strategy document,
but it was 15 pages long and too complex. Amelio managed to expand
annual sales from $13 billion to $15 billion. But after global financial
shocks knocked the company into a money-losing quarter, Amelio stepped
down. On his way out, he publicly complained about the company’s “yes,
yes, yes” culture. Yang returned as CEO in February 2009.

Around 2010, the company finally began to click. The worst of the
cultural differences were getting resolved, and the Chinese had spent
the period of upheaval learning about the capabilities needed within a
multinational company. “They came to the United States ready to learn
and absorb expertise,” says Yu Zhou, a professor at Vassar College and
author of The Inside Story of China’s High-Tech Industry: Making Silicon Valley in Beijing (Rowman & Littlefield, 2008).

Today, Lenovo has emerged as China’s first true multinational,
surpassing Hewlett-Packard Company and Dell to become the world’s
largest maker of PCs. Sales have grown to $39 billion as of the fiscal
year ending in March 2014, more than twice the level of 2008, thanks
partly to several acquisitions. Its most recent deals, announced within
the space of a week in early 2014, were the purchase of IBM’s low-end
server business in China for $2.3 billion and the handset division of
Google (once part of Motorola) for nearly $3 billion.

Lenovo’s experience thus has broad implications for the future of China’s economy and its outreach into the world.
Cash-rich Chinese companies are currently engaged in a wave of mergers
and acquisitions around the world, in entertainment, agriculture, real
estate, energy, and automobiles. If they stumble and fail to absorb
technology and management expertise, China may still become the world’s
largest economy—but not a particularly sophisticated one.

However, if Lenovo’s success can be duplicated by others, its emerging
multinationals could one day compete toe-to-toe against the world’s
incumbents. “Lenovo is the test case of whether the Chinese can acquire
foreign or U.S. technology at an innovative company and really make the
best of it—or will they lose the capability?” says Oded Shenkar, a
business professor at Ohio State University and an expert on Chinese
companies.

The Networked Enterprise

Lenovo is publicly listed in Hong Kong, ensuring that it operates with a
degree of transparency that many other Chinese companies do not have.
Its board has international representatives and operates on the basis of
global management principles. The company’s top management committee
consists of nine people (including Qiao) from six different countries,
who all have extensive international experience with the company’s
products, markets, and functions. Below them is a leadership team of 100
“high potential” executives, representing 17 countries. Because its
footprint is so big, the company has developed human resources practices
that apply uniformly regardless of market (including China). Pay scales
have been standardized as well; there is little difference in working
for Lenovo in China or Switzerland or the United States.

Lenovo also has evolved its decision-making process. Instead of
demanding fealty based on titles and seniority, the current approach
combines the best of the Chinese long-term focus on strategy with the
West’s intense focus on meeting quarterly targets. “People think Chinese
companies are autocratic and have a chairman or CEO who makes
decisions—everybody salutes him and marches out,” says William O. Grabe,
a former IBM executive turned private equity maven who helped broker
and finance Lenovo’s purchase of IBM’s personal computer unit. (Grabe’s
New York–based firm, General Atlantic, remains an investor, and he
currently sits on the board.) “That couldn’t be further from the truth
at Lenovo.” It may help that CEO Yang Yuanqing, who is known as “YY”
internally, is a relatively young 49 and reflects a new generational
attitude toward the traditional Chinese top-down management style.

In another key respect, Lenovo has distinguished itself from other
Chinese companies; it has created a brand name that is recognizable in
markets around the world. No other Chinese company that competes
internationally (including Huawei and ZTE in telecommunications, BYD and
Geely in autos, and Haier in appliances) has been willing to spend
hundreds of millions of dollars annually to achieve that. In addition,
unlike many other rising Chinese companies, Lenovo is not competing
solely on the basis of low manufacturing costs. Its products, such as
the ThinkPad laptop and Yoga four-position ultrabook, offer cutting-edge
design and command premium positioning in their respective categories.

Internally, Lenovo executives say they have created a new type of
global enterprise that is network oriented, rather than hierarchy
oriented. Some outsiders agree. “They have done an exceptional job in
melding East and West into a new organizational approach,” says Dave
Ulrich, a business professor at the University of Michigan who has
coached Lenovo executives.

In several respects, that approach has already allowed Lenovo to
leapfrog some Western multinationals. For example, it runs a few lines
of business and functions from North Carolina, the location of the
former IBM PC headquarters. The company considers this, along with
Beijing, one of two dual headquarters. Lenovo has created this structure
at a time when many established multinationals are wrestling with how
to decentralize and place local decision-making power in important
markets. Some incumbent players find it difficult to recognize and
redeploy innovation that occurs outside the home country, yet Lenovo is
able to harvest new ideas from the United States, Japan, and China.

The company’s ultimate goal now is to compete against two of the
world’s most innovative companies in the Internet era: Apple and Samsung
Electronics, which dominate the markets for smartphones and handheld
connected devices. That will be a true test of Lenovo’s ambitions.

When Yang returned to the CEO job in January 2009, he articulated a
“protect and attack” strategy that encapsulated how the company would
build on its strong base in the Chinese PC market and in the corporate
and education sectors in the United States—thanks to IBM’s
ThinkPad—while going after new geographies and new product areas, such
as smartphones and related devices. “The ‘protect and attack’ strategy
got all 30,000 employees on the same page,” recalls Gerry P. Smith, who
had formerly run Dell’s display business in Singapore before joining
Lenovo in 2006. This was a crucial moment in breaking down silos within
Lenovo and helping it build a consistent methodology around the world.
Yang also built critical capabilities in three major areas that all
multinationals must excel in: supply chain management, technology
development, and marketing.

Supply Chain: The Best of All Worlds

The problem with Lenovo’s supply chain was that it was not well
integrated, partly because it had resulted from a merger between two
dissimilar companies. When Smith arrived, he says, he found “different
distributors in different regions of the world, with different customers
and different business models.” Employees had 150 key performance
indicators (KPIs) they needed to meet, leading to lengthy internal
delays when they responded to orders for specialized products. The
supply chain also was not built to accommodate the volumes that the
company began to achieve. Deliveries were often unacceptably late.

Part of the challenge in fixing the situation was that Smith’s team
numbered some 15,000 employees, about half the company at that time. The
reason he oversaw such a high percentage of the company’s workforce was
that, with Yang’s concurrence, Smith applied a more comprehensive
definition of the supply chain compared with the prevailing logic in
Western companies. His mandate included procurement of parts,
manufacturing, logistics, sales channels, and even the customers’ “out
of the box” experience as they opened the packaging and began operating
the devices.

To turn things around, Smith added veterans from Dell, DHL,
Flextronics, and HP and slashed the number of KPIs to five, creating a
much more flexible organization. He subjected his top 50 managers to
intensive training in business skills, such as how to make a
presentation and how to read a P&L statement. “They’re now the
younger element of our management team,” he says. “I always believe that
in an organization built to win, it’s not the generals you have to get
to. You have to get to the captains and the lieutenants who are leading
the charge up the hill.”

Smith also adapted Workout, the group-based improvement technique that
General Electric originally developed, in which all key decision makers
on a tough issue are brought into a room—and left there until they agree
on a solution. In some cases, he was able to double the productivity of
a manufacturing line.

The result was a cohesive, much more focused supply chain culture that
combined the best ideas from the different nationalities and company
backgrounds of the team. “When you live overseas for a while,” says
Smith, “you recognize that there’s the U.S. way of doing things, and
then there’s a more global approach. The beauty of our culture is that
we all moved to a new common ground.”

In 2010, Lenovo did not make research company Gartner’s annual ranking
of the world’s top 50 supply chains, but by 2013, it ranked 20th, ahead
of such companies as Nestlé SA and Ford Motor Company. More broadly, the
philosophy surrounding the supply chain has become an advantage for
Lenovo, because the company stressed vertical integration (at a time
when competitors were outsourcing) and manufacturing near target markets
(when competitors were still shipping large numbers of machines across
the Pacific). When Smith first took over Lenovo’s supply chain, he heard
demands from Wall Street to change course. “There was a lot of external
pressure saying, ‘You guys need to outsource. You need to follow HP and
Dell’s strategy,’” he recalls. “I was actually accosted at a Hong Kong
analyst meeting. They basically laughed at me and asked, ‘What are you
doing? You actually own factories in China?’”

But Smith had a more realistic understanding of the total costs “per
box” than the analysts because he included manufacturing, logistics,
excess materials, overhead, and labor in the total. “Analysts look only
at manufacturing cost, but that’s not the real cost,” he says. “The cost
is the total end-to-end delivery cost of a product.”

At Smith’s urging, Yang agreed to zig while others were zagging, to
vertically integrate the procurement of some parts, while still relying
on partners for others (such as Intel for semiconductors and Microsoft
for operating software). The key was to achieve enough scale so that the
company could drive down prices, giving it a structural cost advantage
over its competitors.

That overarching philosophy is one reason that Lenovo began
experimenting in 2013 with reestablishing electronics assembly in the
United States, an activity that had disappeared long before. In a
cavernous, 242,000-square-foot testing and distribution facility in
Whitsett, N.C., about an hour north of Raleigh, the company is using
U.S. workers to assemble ThinkPads. Customers include the World Bank,
the New York City Department of Education, the United Nations, and the
U.S. Air Force.

Workers in the United States still cost more per hour to employ than
their Chinese counterparts. But the gap is narrowing, and it requires
smaller teams of U.S. employees to do the work: just 22 per line,
compared with 60 in China. One reason is that Lenovo’s U.S. workers are
cross-trained and can perform different functions, whereas Chinese
workers are typically trained to perform just one. When transportation
costs are added in, the gap becomes even smaller. “The costs are
starting to equal out,” says operations manager Jeffrey Benes. Looking
around at the ThinkPads moving down the assembly line, he adds: “This is
ground zero for onshoring.”

Smith argues that the trend could deepen. “For some customers, it gives
us a huge advantage to bring more local manufacturing into the fray,”
he says. “You could see Lenovo going even more local over time.” Thus a
Chinese-based company is ahead of Apple in figuring out how to make
products in the United States. Apple relies on third-party outsourcing
in China, and although it has announced it will spend $100 million to
launch some type of assembly function in the United States, it has yet
to do so.

Technology Development: The Innovation Triangle

Yang engineered another crucial shift beginning in 2010, by recognizing
the emergence of smartphones, tablets, and similar devices. In Lenovo’s
view, this was another benefit of vertical integration—it kept its
design in-house, whereas HP and Dell had both outsourced many of their
design functions to Taiwan-based firms. (“They outsourced their brains,”
says Smith.) By contrast, Lenovo was able to see how consumer
technology was evolving, away from desktops and toward smaller and more
mobile devices.

Yang called this the “PC Plus” sector. In line with his “protect and
attack” strategy, the company would protect the PC sector but attack the
PC Plus sector. His ability to articulate a strategy was once again key
in refocusing management and increasing spending on key technologies.

The result has been a blitz of innovative new laptops, tablets, phones,
and other products. The company has developed 18-hour batteries for
tablets, along with rapid-charge batteries for laptops that can be
recharged up to 80 percent in 35 minutes. Some models have spill-proof
keyboards that can survive being doused with 16 ounces of liquid. In the
industry’s ongoing pursuit of thinner, lighter, and faster products,
the company has also come up with super-light, carbon-fiber laptop
bodies; for example, its X1 Carbon ThinkPad, with a 14-inch screen,
weighs less than three pounds. That product uses the owner’s fingerprint
to wake up the system. No passwords are necessary.

The company also was early to recognize the emergence of “convertible”
products that could be used in different ways. Several versions of the
Yoga Ultrabook, for example, can function as a conventional laptop, a
tablet (by flipping the screen over), a viewing screen to watch videos
(by flipping the screen backward), and a demonstration panel (by folding
the device into a tent shape and standing it upright, so that, for
example, someone could refer to a recipe while cooking).

The Yoga illustrates how the company can leverage what it calls its
“innovation triangle,” which refers to its R&D and engineering
activities in three locations—China, Japan, and the United States. For
instance, when creating the Yoga, designers struggled over what to do
with the keyboard when the device was turned upside down on a hard
surface. That could create false keystrokes or damage the keyboard
itself. It was the company’s Japanese engineers, who have been the
creative center of the ThinkPad since IBM developed it, who came up with
a solution. They devised an ingenious way to automatically retract the
keys of the keyboard into the Yoga’s body so that they would no longer
be exposed to possible damage.

This ability to tap into different geographies for technological
solutions is key. “If you have only one central point of innovation, you
start adopting the market characteristics of the region where that
development occurs,” says Smith. “It’s great to have development in
multiple areas, because you get a different global perspective.”

Because of such innovations, Lenovo has grabbed 40 percent of the U.S.
market for laptops that sell at $900 or more, such as the X1 Carbon
ThinkPad. The company won 55 awards at the 2013 Consumer Electronics
Show in Las Vegas, a competition that it has dominated for the past
three years. And it is now working on new products such as its
IdeaCentre Horizon, a 27-inch monitor that lies flat and becomes an
interactive table for games and group activities. It retails at around
$1,600. Through products like these, Lenovo has begun to compete on the
basis of innovation, not just price.

Marketing to “Those Who Do”

Lenovo was a sponsor of the 2008 Olympic Games in Beijing, which helped
Yang and the company get their first lesson in marketing. “It was
China’s introduction to the world,” says chief marketing officer David
Roman, an Australian who previously worked for HP. “The Olympics showed
the value of making a big statement, and YY loves making big
statements.”

Yang brought Roman into the company in 2010 because he wanted to escape
the trap of competing on the basis of price alone. Yang wanted a brand
that would allow him to charge higher prices. “You can’t become a
premium player unless you have a brand, and YY was very conscious of
that,” Roman says.

The company launched many of the usual marketing efforts. It struck a
three-year deal as the official PC sponsor of the National Football
League. And it turned to basketball star Kobe Bryant to be the face of
its smartphone products in Asia. But as the company shifted into
trendier mobile products, it realized it needed to do more. “As we moved
into smartphones and tablets, we had to be driven by our relationship
with our audience of consumers,” says Roman. “We had to become a
relevant and interesting global consumer brand. A lot of our focus has
been on becoming relevant to the youth audience, which is consistent
around the world. They listen to the same music and watch the same
videos.”

Soon after he arrived, Roman conducted a competition among the world’s
advertising agencies to win the Lenovo account. Saatchi & Saatchi’s
New York office won for coming up with the slogan “For Those Who Do.” It
was conceived of as a way to demonstrate that people who buy Lenovo
products are risk takers and achievers. Banners with outtakes from the
campaign can be seen throughout the company’s complex in North Carolina.
“Get Off Your Mental Ass,” reads one. Another proclaims: “Impossible Is
Only a Figment of Your Un-Imagination.”

The campaign launched in 2011 and included such innovative features as a short film titled The Pursuit,
which depicted a mysterious young woman using the IdeaPad Yoga 13 to
stay ahead of her evil pursuers. The film was shot by Martin Campbell,
who works on action movies and James Bond films. (He directed GoldenEye and the remake of Casino Royale.)
The campaign showcased how Lenovo’s “convertible” products fold, twist,
and separate in useful ways. Although some of this marketing may seem
standard for a global consumer goods manufacturer, Lenovo was the first
company from China to adopt such an approach—and to invest accordingly.

More recently, Lenovo announced a collaboration with Ashton Kutcher to
promote the new Yoga Tablet. (Outside his acting career, Kutcher has
made VC investments in tech companies such as Skype, Airbnb, and
Foursquare.) In late 2013, Lenovo signed Kutcher to a multiyear deal as
product engineer, wherein he will help Lenovo design products that
appeal to his contemporaries; financial terms were not disclosed.

Like other companies, Lenovo doesn’t disclose how much it spends
overall on marketing and advertising. It does receive some support from
Microsoft and Intel, whose products it relies on. Roman says the company
spends roughly in line with the industry average of 1.5 percent of
sales, which would be about $500 million a year, dwarfing the known
spending of any other Chinese company. The investment appears to have
worked. In March 2011, the company’s “unaided brand awareness” among
U.S. PC buyers was 4.3 percent, and only nine companies were ahead of
it. Early in 2014, its research showed that Lenovo was at 26.3 percent
awareness and ranked fourth in the minds of U.S. shoppers.

Taking on the World

The momentum that Yang’s strategic bets created allowed Lenovo to
undertake a rapid-fire series of acquisitions starting in 2011. The
company bought NEC’s PC operations in Japan and is now the PC market
leader in Japan, with its name-branded products widely displayed in
consumer electronics stores in Tokyo. Lenovo bought a controlling
interest in Medion, a German PC maker, and used that to establish itself
as the top German PC brand as well. In Brazil, which is a tricky market
because of government controls, Lenovo bought CCE, the leading maker of
PCs and mobile devices, in 2012. The company expects to use that
acquisition to dominate there too, not only in PCs but also in mobile
devices.

Most cross-border mergers such as these fail because the acquiring
company imposes its culture and management practices, driving out or
smothering key innovators at the acquired company. But Lenovo’s steep
learning curve in the United States gave it the cultural and managerial
experience needed to leave local management teams in place while working
behind the scenes to improve supply chains, spur innovation, and reduce
costs. “We’re buying local focus,” says Smith, the former supply chain
head, who was promoted to run Lenovo’s Americas business. “But we’re
also using the scale and cost advantages and the cultural advantages of
Lenovo.”

The company works hard to integrate the management of each acquired
company into a larger whole. A small M&A team is in charge of
tracking how well the integrations are going. Once a year, the company
invites the management of its acquired companies to come to a meeting of
its top 100 high-potential executives. There, in meetings conducted in
English, Lenovo explains the company’s global strategy and how the new
executives fit in. So far, the strategy has worked well, with only a
handful of departures by acquired executives.

The net result is that Lenovo is expanding its lead in PCs globally,
with a 17.7 percent share in the first quarter of 2014, at the same time
that it gains global market share in mobile devices. In results
announced late in 2013, the company ranked third globally in overall
sales of PCs, smartphones, and tablets.

Meanwhile, Lenovo’s revenue in the first quarter of 2014 was $9.8
billion, a 13 percent increase over the same quarter in 2012, and profit
grew even faster, increasing 30 percent year over year.

“We’re growing like crazy, but we’re not sacrificing profitability to
grow,” says Smith. The fact that the company is gaining ground in PCs is
key because the overall market, although huge at about $200 billion a
year, is stagnant. Lenovo is thus defending its 37 percent of the PC
market in China, as well as its strong position in ThinkPads in the U.S.
government and education sectors.

It was ambitious enough to go up against HP and Dell in the United
States; it will be a greater challenge still to take on Apple and
Samsung. For a period of time, it appeared that Lenovo would seek to
compete against Apple and Samsung only in emerging markets, but its
acquisition of Motorola Mobility from Google is a clear signal that it
aims to compete aggressively in the U.S. mobile phone market as well.
“This will be a good start to challenge the big players in smartphones,”
Yang told the Wall Street Journal in January 2014. The acquisition will make Lenovo the third-biggest U.S. player in smartphones by the end of 2014.

Lenovo will continue to sell smartphones in the United States under its
own brand name, but it will also sell Motorola phones that use Google’s
Android mobile operating system, making Lenovo a key Google ally.
Motorola Mobility is losing money, and many analysts are skeptical that
Lenovo can turn it around, but Yang dismisses those worries, pointing
out that his company was able to achieve the near-impossible goal of
absorbing IBM’s PC division years ago.

The same week that Lenovo made the IBM server and Motorola
acquisitions, it announced a reorganization that hinted at the company’s
ambitions. In the new structure, Lenovo will have four main business
groups: PCs, mobile, enterprise, and cloud computing. Gerry Smith will
take on added duties: running the enterprise group and managing the
integration of IBM’s server business. The announcement that the company
would also have a division concentrating solely on mobile devices sends a
clear signal that Lenovo is seeking to greatly expand into the turf
dominated by Apple and Samsung.

It’s impossible to predict how long it will take Lenovo to absorb its
latest acquisitions, or to know whether the company might stumble for a
period of time. But by buying the money-losing divisions of major
companies, Lenovo has clearly arrived as a global competitor in some of
the IT industry’s hottest sectors. In doing so, it serves as a model for
other Chinese companies. “At the moment, Lenovo is unique,” says
Vassar’s Zhou. Chinese companies, as a whole, are still preoccupied with
their vast home market and have not started globalizing in earnest.

If growth continues to slow in China, however, and its companies begin
to look outward, Zhou argues that they will copy Lenovo, rather than
going through the agony of spending years learning how to manage global
enterprises. “Lenovo’s success is going to inspire other companies
because it shows it can actually work,” she says. “It will be easier for
other Chinese companies to learn from Lenovo than from anyone else.” In
that sense, Lenovo’s success offers a definitive answer to the question
of whether Chinese companies can compete globally. If they seek to mesh
cultures, and focus on winning capabilities, they clearly can.

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William J. Holstein is a contributing editor to strategy+business and author of The Next American Economy