Lenovo’s Legend Returns

As China’s economy gains ever greater global influence, its major corporations dream of conquering international markets. Liu Chuanzhi and Lenovo have been at the forefront of that quest. With Liu at the helm, Lenovo became China’s first truly multinational corporation after its $1.75 billion acquisition of IBM’s famed PC unit in 2005. When the deal closed, Liu gave up the chairman job and let the new Sino-American leadership team take over.

The acquisition, it turned out, was the easy part. Lenovo eventually became entangled in a struggle over the combined company’s managerial culture. The internecine intrigue would prove costly. Lenovo’s market share stagnated because the company wasn’t adapting to new trends in personal computing.

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Lenovo’s problems are a looming challenge for corporate China in general. Since few Chinese executives have had meaningful experience operating outside the country, transforming their global aspirations into reality will be a difficult task. “Going global is going to be a big, big issue for Chinese companies,” says James McGregor, senior counselor for consulting firm APCO Worldwide in Beijing.

Liu, 66, intends to fix all that. After four years on the sidelines, he took back control of Lenovo’s management last year from its command-control American CEO and recast Lenovo as a global company with a consensus-style Chinese management structure. If that wasn’t daunting enough, Liu has set his sights on another grand undertaking, to create an industrial conglomerate in China. His game plan: to pass the lessons learned over his long career to a new generation of Chinese CEOs and upgrade corporate management in the country. “For the past three decades, I have developed a very insightful understanding about China,” Liu says. In the future, China’s “potential will be driven by companies and [their] people. What we’ll do is help the top management to improve.”

He is already the wise man of Chinese private enterprise, a soft-spoken but relentlessly competitive entrepreneur who built a small start-up housed in a dusty, two-room Beijing guardhouse into China’s dominant PC maker, with about a third of the rapidly growing market.

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Since its birth in 1984, Lenovo has been one great management experiment, as Liu guided the company by trial and error through the rapid swings and shifts of China’s ever changing economy. Though Lenovo was initially funded by the Chinese Academy of Sciences, a state institute where Liu worked as a researcher, he feared his start-up would become a bloated government behemoth and insisted that bureaucrats have no say in management, a bold stance in the very early days of China’s market reforms. In the late 1980s, when Liu wished to manufacture his own PCs, he dodged an obstructionist communist bureaucracy by locating his first factory in more liberal Hong Kong. When China’s computer market was opened wide to foreign competitors in the 1990s, Liu outmaneuvered them by launching a series of low-cost, high-quality mass-market PCs.

Back in 2003, Liu and his management team came to the crucial conclusion that Lenovo had no future as merely a Chinese outfit, no matter how big its home market was becoming. Scale mattered — global scale — so Lenovo had to expand its overseas operations. That thinking led to the acquisition of IBM’s PC unit, which instantly gave Lenovo a worldwide presence and, perhaps more important, extensive foreign expertise in the form of IBM’s executive team.

Liu wisely accepted that his Chinese colleagues were not prepared to run a global corporation by themselves, and he integrated the IBM veterans into the company’s senior ranks. The first postacquisition CEO was an IBMer. Then in late 2005, Lenovo appointed an American executive from Dell, William Amelio. Lenovo’s official language became English. Liu stepped aside, resigning as the company’s chairman (though he remained a director). “I might not have had enough energy to take care of such a big business,” he once said of his departure. Liu offered his guidance, but the new, very international team floundered.

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Lenovo has been buffeted by culture clashes at its highest levels, which have hampered efforts at correcting the firm’s major deficiencies. The biggest was inherited with the IBM business. Big Blue was focused on big customers, since they were the source of big orders. It was a logical large-corporation alignment. But in continuing it, Lenovo was missing out on the faster-growing segments of the PC market — small businesses and consumers.

After the deal, Lenovo set out to make the IBM business look more like the company’s business inside China, where it competes in every market category with a wide product line. But that plan barely got off the ground. New consumer products were poorly conceived and never caught on. At the time of the IBM acquisition, Lenovo became the world’s third largest PC maker, but it has since slipped to fourth place, with 8.8% of the global PC market, according to research firm IDC. “The top management understood [the problem], but we failed to take action,” Liu says. “It was a question whether the management of Lenovo had the long-term perspective.”

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Liu started to get especially worried in late 2008, as the worst of the financial crisis bit into computer sales. Lenovo swung into the red, posting a $97 million loss for the quarter ending December 2008. He began seriously considering a return to management. “Lenovo was like somebody standing on the edge of a cliff,” he says. “Lenovo is all of my life. When it looked like my life was threatened, I had to come out to defend it.” The board approved his return, which was made official in February 2009. An old protégé, Yang Yuanqing, vacated the chairmanship for him and returned to the CEO post, which he had held before the IBM deal. Amelio, whose contract had ended, was out.

Fixing Lenovo, Liu determined, required fundamental reform. Factions had organized in the company’s top echelons — among the original Chinese managers, the IBM old guard and new executives imported by Amelio — which loosened the team’s cohesion. But Liu’s biggest concern was that the rapid changes Lenovo had made in its culture after the IBM acquisition were undermining the effectiveness of its management. He believed Lenovo had to get back to its roots. Liu “was worried about losing that culture that had been such an important part of Lenovo’s success,” says James Coulter, one of the founders of private-equity giant TPG Capital and a Lenovo board member.

Liu calls that culture the “Lenovo way.” At its heart, Liu’s system is based on a collective decisionmaking process in which the CEO develops and implements strategy as part of tight-knit group of executives. Liu contrasts the Lenovo way with what he sees as the “classic MBA way,” in which a dominant CEO makes decisions more independently and then works with the individual chiefs of the business units to execute them. Describing his system as homegrown, forged over his years by the trials of building Lenovo, Liu specifically refutes that it’s culturally Chinese, although consensus-based management processes are common in many Asian firms. “We are not just following any menu,” he says.

Liu won’t go so far as to say the Lenovo way is superior to Western management practices, but he sees it as an alternative — perhaps one better suited to certain cases, like Lenovo’s, in which the management team is Sino-global. “The Lenovo way of decisionmaking is more prudent and more thorough,” Liu says.

He faults former CEO Amelio for using the wrong, top-down management system. “Amelio’s approach was the classic methodology in MBA textbooks,” Liu says. “But Bill was facing a very complicated situation where there are different teams from different cultures and nations [in Lenovo’s management]. Using the classic approach, it was very hard to really mobilize or motivate [these] teams to achieve goals.” On his return, Liu narrowed the senior management team down to an eight-member executive committee that meets regularly to discuss strategy and carefully plan its execution.

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Amelio sees the changeover differently, as a kind of graduation for the Chinese managers. When the IBM unit was acquired, Amelio says, its managers were not prepared to handle a global enterprise. After Amelio’s three years at the helm, they had learned a lot. Liu’s goal in altering the management system, Amelio says, was to give the Chinese executives greater say in the company’s affairs: “The Chinese team was able to pick up its skills and manage in other countries.” He also defends his performance, saying he put in place the proper strategy. “I stand by my record,” he says.

Liu’s new management structure seems to have energized Lenovo — although a rebounding economy didn’t hurt either. “The good news is, right now, they’re in a good place,” says William Grabe, a managing director at private-equity firm General Atlantic and a member of Lenovo’s board. Wong Wai-ming, Lenovo’s chief financial officer, says Liu’s reforms have enhanced discussion among the senior executives and heightened the commitment among their subordinates. “Strategy-wise, there is a lot more clarity,” he says.

That’s shown up in a flurry of recent initiatives. Realizing how the PC and mobile-phone businesses are converging, Lenovo in November repurchased a Chinese handset maker it had sold less than two years earlier.

The company is also launching a slew of new products. Tapping into the growing demand for smaller machines, Lenovo this year introduced ThinkPad Edge, a line of light, powerful notebooks aimed at the small-business market, at a starting price of only $579 in the U.S. In May, Lenovo will begin marketing the Skylight smartbook — a cross between a mini-PC and a smart phone — and later the unique IdeaPad U1 hybrid, a notebook with a detachable screen that acts as a stand-alone tablet, much like an Apple iPad. The new product line “suggests at least that it’s no longer the button-down, stodgy Lenovo of the past,” says Bryan Ma, a computer-industry analyst at IDC in Singapore. “They are trying to push themselves ahead of the curve.”

Liu believes the Lenovo way can be the path for other Chinese firms as well. He intends to transform Legend Holdings — an investment firm that is Lenovo’s largest shareholder — into a holding company, which, through acquisitions, would collect a stable of firms in industries such as energy, biopharmaceuticals, information technology and environmental protection. Then Liu and other lieutenants at Legend would work with the executives at the acquired companies to help them raise capital, strengthen strategic planning and improve everything from supply-chain management to human-resources practices. “For the Chinese economy to really rise, one of the key drivers will be capital from the private sector,” Liu says. “We can find and identify the best people and use our funds and our experience to help them so their companies will grow very fast.”

Lenovo, however, may remain Liu’s biggest test. The company returned to profitability in the second half of 2009, and it is aggressively pushing into emerging markets, where, by using its experience in China, managers believe they might hold a special advantage. Lenovo’s PC shipments surged 58% last quarter from the same period a year earlier, while the total market grew 24%, according to IDC.

Come back after Lenovo posts more results, Liu says, and “you could say at that time the Lenovo method works.” Wong, the CFO, expresses greater optimism. “Mr. Liu learned the hard way,” he says. “This is the way he survived, and he won.” For the sake of corporate China, Liu must keep winning.

Smart Move. Lenovo expands its line as it expands its reach

Lephone

Designed to capture China’s emerging smart-phone market; not yet priced

Thinkpad Edge

Created with features for the small-business owner; $649 for the 14-in. model

Skylight Smartbook

With a 10-in. screen and weighing under 2 lb., it’s a netbook in disguise; $499

Ideapad U1 Hybrid

Detach the screen, and it’s a tablet; pop it on, and it’s a notebook; about $999