Which company do you think sold the most PCs in the world last year? HP? Dell? Acer? In fact, it was China’s Lenovo, perhaps the least talked about big hitter in the tech industry today, completing 16.9% of unit sales in 2013 (according to Market Researchers Gartner). After conquering this market in the past few years, attention has now turned to growing their mobile and tablet businesses. Mobile sales have jumped rapidly. They have grown to be the most popular brand in China, and the fourth biggest seller worldwide. Today, Lenovo is a $34 billion personal technology company with more than 33,000 employees, serving customers in more than 160 countries. The BBC reported a few weeks ago that they are reported a staggering 23% jump in net profits for the three months to June 2014 as they outperformed the industry hugely (http://www.bbc.co.uk/news/business-28783354). They are now ready to take on the giants of Apple and Samsung in the smartphone industry.
How has this Chinese multi-national proved so effective at selling it’s products around the world? What will it’s strategy look like going into the future? Understanding these questions can help build our understanding of the interaction between corporations in China and the West, and what lessons can be learned by Lenovo’s impressive expansion.
First, a bit of history
The organisation began in China with the name Legend in the early 1980s. In the very early inception of the company, engineers altered IBM-compatible PCs for the first time to work with a Chinese characters keyboard. This was the kickstarter to a hugely profitable business model for Legend of altering IBM computers for the Chinese market. Legend was the first to enter the IBM Pentium era, producing China’s first “586” PC in 1983. They ensured complete integration of the PC production process, from design to sales. By 1986, they were market share leaders for PC’s in China.
Legend continued to innovate and remained the ‘first-mover’ for the rest of the century. In 1997 a deal was signed with Microsoft to license their software in China for the first time, a watershed moment that was the most valuable licensing agreement in Chinese technology history. This catapulted Legend to a completely dominant position in the market.
With the desire to grow the company further, Legend looked to overseas markets, which presented some signifiant challenges for the company; entering regions with different customer tastes and operating environments for the first time. They decided to rebrand to ‘Lenovo’ in 2004 to help with this transition, and aggressively expanded with their brand of good quality, low priced models.
The most significant moment in Lenovo’s history to date was the acquisition of IBM’s personal computer division in 2015 for $1.25bn, including taking on $500mn of the company’s debt. Lenovo had got their hands on the hugely profitable ‘Thinkpad’ brand. The acquisition presented many difficulties for the company with the integration of a Western culture and different methods of working. Within a few years the fruits of the partnership began to show, and Lenovo became the fastest growing company in the PC market by concentrating on business and the public sector for sales. In 2012 they finally became the biggest sellers of PCs in the world. The acquisition strategy was hugely successful as a way of moving into the Western world.
In 2008, Lenovo had sold it’s mobile business for $100m to focus on PCs. However, in November 2009 it purchased it back again for $200m once realising the importance the industry was going to be for personal technology in the future. Lenovo focussed on being a ‘PC+’ company, catering for all personal needs. In 2012 it surpassed Apple as the second biggest vendor of smartphones in China, but with only a 10.6% share. The Chinese market is very fragmented, with over 100 smartphone brands.
What makes Lenovo different?
Basis in China
Whilst most of Lenovo’s competitors are attempting to gain a foothold in the world’s most lucrative market, the company has it’s basis there. Being a homegrown brand increases customer loyalty, and means Lenovo have a far superior understanding of the market and culture than foreign firms. With the Chinese market as the centrepiece of the business, it can generate the revenue to help expansion overseas. The success of Lenovo so far has suggested it is easier to expand out of rather than into China.
One striking difference in the operations of Lenovo compared to their biggest competitor in the smartphone industry, Apple, is the fact they are completely vertically integrated; controlling everything from product development to supply chain. Apple concentrate solely on design, outsources the rest of it’s activites. This has the potential to cut costs for Lenovo, if they can effectively manage the entire operation without inefficiencies. In the long run, this could allow them to maintain lower prices than their competitors and dominate the market.
Lenovo has managed to escape many of the issues that have dogged Chinese companies when competing in multi-national markets. Firstly, it has little or no state involvement, allowing it to make it’s own decisions and not be influenced by political doctrine. Secondly, they have managed to develop a culture of transparency above and beyond statuatory requirements, which has given investors confidence and meant capital can be obtained when needed. Finally, as shown by being the ‘first-mover’ throughout the development of the PC in China, they have a real culture of innovation. All three are generally seen as Western culture characteristics, and stand them in good stead to expand in this direction.
How will Lenovo look to flourish going forward?
Lenovo will look to become the world market leading smartphone provider by offering good quality for exceptional value, targeting the masses. This will be achieved through remaining at the forefront of innovation, and using their size and integration to simply offer a better value proposition than the rest.
The difficulty for the organisation will be balancing this offering with maintaining a desirable brand image. This may be particularly troublesome given their reputation for business products in the PC industry, and this conflict between these two views of Lenovo. It is also hampered by the image of Chinese technology production, which is tarnished with the association of poor quality in the West. The tablet industry will also become more important as part of their strategy as the market grows.
A long term goal will be to offer the customer a full suite of personal technology devices, similar to the current Apple offering. This will require a significant expansion of Lenovo’s capabilities, and for now focus must be squarely on the smartphone market.