Executives of Lenovo and IBM exchange contracts on the handover of ThinkPad brand in 2005. Lenovo bought the brand for $1.75 billion to expand in the global laptop computer market. But later it changed its strategy to put focus on its home turf, China.

After trial and error, Chinese PC maker finds best way to use IBM brand

By Shirley Xie, Henry Han, Waldemar Phoertsch

Lenovo Chairman Yang Yuanqing said in September 2007 that the integration of the IBM PC business had been a success. But the optimism did not last long. According to market research firm iSuppli, the shipping volume of the three largest PC makers —Hewlett Packard, Dell and Acer — recorded year-on-year growths of 13.5 percent, 10.7 percent and 78.8 percent respectively in the third quarter of 2008. But the figure of Lenovo, the world’s fourth largest PC manufacturer, only increased by 7.3 percent, lagging behind the industry average.

While it remains dominant in its home market, Lenovo has struggled in overseas markets, which still account for more than half of its sales, losing its market share to rivals. Is Lenovo experiencing the same failures as TCL or BenQ did? Can we expect that Lenovo can get out of this crisis? What are the rooted reasons for its setbacks today?

Best chance for Lenovo going global

The acquisition of IBM’s PC division was really a great chance for Lenovo to grow overnight. As the No. 1 player in the domestic PC industry, and the role model of Chinese companies, Lenovo was the only one who dared and was able to take this action. The benefits would be obvious — Lenovo got the chance to bridge the gap between global players and itself, to make the distance shorter, from 20 years to five years, or even three years.

The mature markets of Europe and North America, the strengthened bargaining power with suppliers, were good reasons to make this “gamble.” The acquisition also let Lenovo have some distance from its previous domestic competitors that they could no longer catch up.

Worldwide marketing campaign

In 2007, Lenovo, for all its might in Asia, has had to bide its time for a chance to rise from obscurity and court wealthier consumers in the West. The Chinese-American computer maker began an ambitious ad campaign to coincide with 2008 Olympic Games in Beijing. Lenovo rolled out print and online ads, and it bought TV ad spots closer to the start of the games in August. The message of the global marketing campaign was that Lenovo computers are the best engineered and are a mark of quality for the savvy and aspiring PC users.

Much of Lenovo’s effort was aimed at getting U.S. consumers to buy the new IdeaPad line. Despite the effort, getting a piece of the U.S. consumer market was not easy. Lenovo faced a sluggish U.S. economy and counteroffensives from incumbent players such as Apple, HP, Dell and Acer-Gateway, which was merged in 2007.


Confusion in brand strategy

Lenovo put all the eggs in the single basket of Olympic sponsorship. However, Lenovo did not achieved the desired success as Korea’s Samsung, another IT giant, gained from its Olympic marketing. As Lenovo acquired the IBM PC division, many asked Liu why he thinks Lenovo can make it when even IBM could not make money in the PC business.

Liu answered, “PC business is just like selling the Chinese twist cruller, (a traditional cheap breakfast, deep-fried fluffy dough sticks, often twisted to oval or ring shape). Lenovo was frying the sticks in overalls, while the IBM guys were doing the same job in business suits. How can they make money from selling cheap food at this high cost?”


Rebounding by refocusing on home market

With losses mounting, Lenovo quickly announced a restructuring plan to cut costs by $300 million by March 2010, refocusing on its roots — China and other emerging markets.

The change is bringing clear results. In the most recent quarter, sales in its home mainland market were up 18 percent compared with a year earlier at $2.7 billion, according to the PC maker, adding that its market share in the mainland has reached a record 32.2 percent, up 2.4 percentage points from a year earlier.

Its market share also was growing at three times the industry average. In the global market, Lenovo reported a market share of 10.2 percent, up 1.5 percentage points compared with the same period last year.

Lenovo’s experience highlights not only a broader slump in the global PC industry, but also the challenges facing Chinese companies as they try to expand abroad. The IBM acquisition was a landmark deal that created one of China’s first truly multinational companies and landed Lenovo, already seen as a national champion in China, among the upper ranks of the global PC industry.

It might take more time to evaluate the performance of Lenovo’s acquisition, but it is already clear that Lenovo is trying to catch up and even lead electronic consuming trends — after launching Lephone, a smartphone brand, Lenovo entered the tablet market by unveiling the LePad which similar in size with the iPad’s, though the LePad is only available in China for now.

Shirley Xie is an MBA class of 2008 at China Europe International Business School (CEIBS). Henry Han is a research assistant and Waldemar A. Pfoertsch is a professor of the same school. Certain names and other identifying information may have been disguised to protect confidentiality.