Lenovo's deal with IBM spans great divide

The merger of the Chinese computing giant and IBM's PC division has many fascinating subplots and introduces a powerful new brand to the West, writes Karlin Lillington

For anyone seeking an insight into the internal politics as Chinese computing giant Lenovo works to integrate IBM's personal computing division, a telling moment arose during its results announcement last week in Hong Kong.

Chief executive (and former IBM executive) Steve Ward, seated in the centre of a table flanked by his Chinese chairman and chief financial officer, offered a relatively bland version of the challenges of merging not just two corporate cultures, but two vastly different cultures. The company now has the most diverse executive team of any in the world, he offered. Next it was the turn of chairman Yuanqing Yang, CEO of Lenovo until his company made the $1.75 billion (€1.49 billion) IBM purchase.

"Steve and I had disagreed on where to put the headquarters of the company but we agreed that basing the company in New York would be better for our global positioning," he said, implying that in future he'd like to see HQ back in Beijing.

He also made a pointed comment that although his Chinese audience would expect to see a chairman seated at the centre of the table, in western companies the chairman sits at the right hand of the CEO "to show honour". He didn't look very happy with the arrangement, however.

For a group of visiting European journalists, the exchange was a small window finally opening on to a fascinating, complex merger.

The ease of some aspects of the merger cannot be disputed. For example, the decision to have Lenovo move forward as a single entity rather than running the two companies side by side has been made months sooner than originally planned, due to the smoothness of the integration of IBM's 11,000 employees, Yang and Ward say.

But still. For the previous three days, Lenovo executives had given cheerful PowerPoint presentations to the European group, politely sidestepping questions on anything other than operational and business matters.

To be fair, the language barrier is clearly a restrictive element for many of the Chinese executives. One senior executive confided privately that many had felt awkward having to speak in English for 15-minute presentations; for some, it was the first time they had done so. The western media was also very different to the Chinese media, he said: "More aggressive. They ask many more questions and we are not used to this."

They are undoubtedly going to ask many more. For example, in a country well-known for poor labour conditions for workers, many wonder about those of low-end Lenovo employees on the assembly lines, as well as conditions at its subsuppliers. Lenovo conforms to international good labour practice, says Milko van Duijl, general manager, Europe, Middle East and Africa.

There's plenty of curiosity, too, about the involvement in the company of the Chinese government. Still a large shareholder with about a one-third ownership of Lenovo, the government was depicted as a mild presence in Lenovo's science academy. This is akin to the participation of Stanford or MIT as shareholders in campus companies, said several IBM people who have made the transfer over to Lenovo.

However, the government has been known to show favour, by way of various benefits, to its companies. Lenovo has risen quickly to become the number one computer supplier in China, before the IBM purchase, but executives such as Lenovo chief financial officer Mary Ma - number 57 on the Forbes list of the world's 100 most powerful businesswomen - dismiss any connection.

"From day one, we had the same treatment [ as other technology companies]," she says. "HP and IBM were working the same market, using the same business model. But in China, Lenovo has a volume advantage and we push our contacts with channel partners as much as possible."

Founded as a company called Legend in 1984 by 11 researchers, the company now has 27,000 employees (fewer than 2 per cent of IBM people departed after the acquisition), projected revenue in 2005 of $13 billion, and research facilities in China, the US and Japan, the latter two acquired through the merger.

Lenovo is currently pushing a two-pronged strategy to reel in both business orders and transaction orders direct from consumers, with the latter constituting 70 per cent of business, says Yang.

Ranked number six in size among global PC manufacturers before the merger, Lenovo already had a strong product line in China, including consumer electronics, a small but increasingly profitable mobile phone division, and some innovative PCs, including some that run Linux alongside Windows for heightened security. Lenovo was weak in notebooks, generally a higher margin product than desktops - so the IBM purchase had a definite strategic purpose.

Executives all stress how the IBM ThinkPad notebook line will complement Lenovo offerings, though IBM desktops are also on offer. In general, the IBM line will be the company's higher end offerings and its main products for the time being to the global market. Lenovo has the right to use the IBM name on those products in the short term and owns the copyright to the "Think" brand name, which will continue to be used as the company makes the transition to the Lenovo brand on all products.

Generally good financial results since the merger have led to increased confidence within the company. So much so that executives speak now of dropping the IBM name sooner rather than later for Lenovo branding on Think products, which were directly responsible for increased shipments in the recently ended quarter. There's a distinct note of frustration in the company that the Lenovo name is seen as an unknown in the West when it is a well-established brand in Asia.

While Lenovo is eager to present itself as a stable, capable inheritor of the IBM brand franchise, the reality is that this is an extraordinary new era not just for Lenovo but for the global business world. If Lenovo can make the transition into an acceptable global brand - blending East and West in a way not seen before - it will be a first for a Chinese company, but more importantly, a harbinger of things to come as China opens up to the world.