Desktop and laptop units have come a long way since IBM invented the handy personal computer (PC) in Boca Raton, Florida, in 1981. The invention put IBM on the map as a world leader in computing, particularly when its personal computing division (PCD) created the icon of notebook computing, the ThinkPad, as well as the range of ThinkVantage Technologies software tools.
Meanwhile, in 1984, 11 computer scientists in Beijing were keen to create a company that would bring the advantages of IT to the Chinese people. With Rmb200,000 ($25,000) in seed capital and the determination to turn their research into successful products, the engineers and researchers set up shop in a small, one-storey building in Beijing. Together they founded Legend. Back then, it would have seemed unlikely, bordering on impossible, that this tiny outfit would own IBM’s PC business 20 years later.
Yet that is what happened in 2004, when IBM shed its PCD to China-based Lenovo Group (Legend having changed its brand name to Lenovo). After clearing intellectual property concerns with the US government, the deal was sealed in May 2005. The new investors comprise the Chinese government (46%), private investors (35%) and IBM (19%). The biggest benefit to IBM was ridding itself of a business segment that was dragging down corporate margins.
China’s global bid
Almost overnight, Lenovo became the largest Chinese investor in the US and a leader in the global PC market behind Dell and Hewlett Packard (HP). Annual revenues are more than $13bn. The company is managed primarily by former IBM executives, and of its 19,000 employees, 10,000 are from IBM. The acquisition points to two emerging trends: the communalisation of technology and the emergence of Chinese companies as global players.
To establish its standing in the world, Lenovo is undergoing a three-phase branding programme. The first year focused on leveraging the IBM brand to maintain short-term sales and existing customers. This year the company began strengthening the ThinkPad brand through advertising, most notably with the 2006 Winter Olympics in Turin, Italy. Mid-year, the company began introducing Lenovo-branded products. It is carefully blending its own portfolio of 3000 products, including smart phones and cell phones, with the acquired IBM products.
“The ThinkPad logo stays with us forever. We will gradually lose the IBM logo over time,” says Bill Owens, Lenovo’s vice-president service and support, North Carolina location executive. “We do not plan to introduce the phone business outside of China until we make sure we are comfortable with the PC business.”
Lenovo is now ramping up research and development at its research centres in Yamato, Japan; Beijing, Shanghai and Shenzhen, China; and Research Triangle Park (RTP) in Raleigh-Durham, North Carolina. It also plans to establish innovation centres to enable customers, business partners, solution providers and independent software vendors to collaborate on solutions to address today’s toughest client IT challenges. Centres are already set up in Beijing, RTP and, last August, Mumbai, India. “These are essentially incubation labs where any customer can bring complex IT problems,” Mr Owens explains.
The centres are owned by a consortium of business partners, including IBM, Intel, Microsoft, Symantec and LanDesk. The goal is to incubate new technologies that will drive business advantages for Lenovo customers while demonstrating the company’s commitment to important innovation.
Unlike IBM, which had exhausted its potential for PC growth, Lenovo is exploring new markets that offer great potential, such as China, India, Brazil and the Middle East. Beyond that, the company plans to drive additional market segments in which it has a stronghold, China being its most dominant. “Not only does China represent the fastest-growing PC market in the world; it offers eight times more growth opportunity than the US and western Europe,” says Mr Owens.
Lenovo’s PCs are made at the same facilities as before the acquisition. ThinkPads are almost exclusively manufactured in Shenzhen, where IBM had strategic partnerships and which provides access to excellent worldwide shipping via Hong Kong. There is also a facility in Shanghai, another city with good sea and air connections.
“We will continue to tweak manufacturing a little inside China,” Mr Owens says. “But the nice thing about this particular acquisition was there was no duplication of manufacturing plants outside of China because Lenovo is a Chinese company. If we expand manufacturing, it will be in China, where most of our facilities are.”
As part of its own changing business model, IBM had farmed out its manufacturing in Latin America, Europe and the US to third-party assemblers. For example, it sold its assembly of the NetVista line of desktop computers in RTP for US and Canadian customers to Sanmina-SCI. Sanmina-SCI also manufactures the NetVista line in Greenock, Scotland, and mainland Europe for Europe, Middle East and Africa customers. Desktop computers are made in Monterrey, Mexico.
“We have a location in India that does the assembly for notebooks and desktops,” Mr Owens says.
Aiming to outpace its competitors Dell and HP, Lenovo is working on building its own identity. Early on, corporate executives believed that for Lenovo to truly be on the international stage, it needed corporate ties to an international city, and decided on New York. “We thought we should be close to IBM’s headquarters in Armonk [New York State],” Mr Owens says.
In reality, the office only served as a parking space for when the company’s top management flew to the US from Asia. Ultimately, the idea of maintaining a New York headquarters was abandoned.
“Instead, we consolidated everything to Raleigh in the western hemisphere and Beijing for the eastern hemisphere,” he says.
Lenovo is now making a significant investment in North Carolina, constructing an $84m campus covering 500,000 square feet in the RTP, which is due to be completed early in 2007. All headquarters activities will take place there as well as the functions of notebook development teams, worldwide services, sales and marketing.
“We will consolidate a small global logistics team in Boulder, Colorado, a sales support centre in Atlanta and the controller’s office here [in Raleigh-Durham],” Mr Owens says. The only exception is supply chain management functions, including procurement, which will continue to be based in China. Those teams are split between Shenzhen, Beijing and Shanghai.
A major advantage of RTP is its high-calibre employees: 70% of Lenovo RTP staff have a bachelor’s or master’s degree or a doctorate. Added to that, 40% of US patents for IBM PCD/ Lenovo originated in North Carolina. Lenovo is also involved in innovative research projects with universities located close to the Research Triangle: Duke University, North Carolina State University, North Carolina Central and North Carolina University at Chapel Hill.
Lenovo’s projected economic impact on the state is about $150m for just one year. This includes an estimated $119m statewide payroll; $6.7m in payroll state income taxes withheld; $20m in payments to suppliers with roots in North Carolina; $3m in state sales taxes collected; $1m in state self-assessed-use taxes; $600,000 in philanthropic activity; $850,000 in corporate income and franchise taxes; and $120,000 in property taxes.
Lenovo has shown its commitment to North Carolina. It is now moving fast to demonstrate its commitment to becoming the world’s top PC manufacturer.