By Bruce Einhorn Does China's biggest computer company have an unfair advantage over foreign-based and private-sector competitors? That question seemed to go unasked amid all the hoopla surrounding the June 11 announcement that AOL-Time Warner (AOL) was forming a $200 million joint venture with Legend Holdings (LGHLY), the No. 1 maker of PCs in China.
The logic behind the deal is simple enough: The two companies hope to become the dominant player in the Chinese Internet industry, thanks largely to Legend's top position in the local PC market. According to International Data Corp. (IDC), Legend commands 27% of the domestic market for computers. The closest competitors are IBM (IBM), which has 9%, local rival Founder, which has 7%, and Dell (DELL), at 5%.
By bundling the AOL product in Legend machines, the companies figure they'll have easy access to Chinese Web surfers. That, in turn could help the partnership surpass current portal leaders like Netease.com (NTES), Sina.com (SINA), and Sohu.com (SOHU) (see BW, 06/25/01, "Legend Thinks Out of the Box").
IN JEOPARDY. All those Nasdaq-listed portals are encountering severe financial problems and would probably have loved to team up with AOL. The fact that AOL chose to go with Legend and its second-tier portal, www.fm365.com, puts the three private-sector companies in jeopardy. State-backed Legend, on the other hand, seems to be in a good position to expand its dominance of the PC market into other areas.
Legend's government guanxi, or connections, continue to be a sore point for rivals, say some people who follow the computer industry in China. Executives from Legend's multinational rivals have long argued that the Chinese market is not a level playing area -- and that Legend, as the government's local champion, enjoys a big home-field advantage.
This sort of talk riles Legend CEO Yang Yuanqing. I spoke to him a few days after the AOL signing and asked him about criticisms that Legend has grown so big in China thanks to help from the communist regime. "It's an unfair comment on Legend's success," he replied. Most of Legend's customers, Yang said, are small and midsize businesses or consumers, people who are not vulnerable to government pressure. Big corporate customers -- often state-owned enterprises in China are -- now account for less than one-quarter of Legend's sales.
"LOCAL SENTIMENT." In some ways Legend's edge is clearly no different from what local heroes in Japan and Korea enjoy, says Chip Saunders, the president of Dell Computer's Asia operations. In Japan, the top PC players are NEC (NIPNY), Fujitsu (FJTSY), and Sony (SNE). In Korea, Samsung (SSNHY) is No. 1. Like China's Legend, however, those companies haven't been able to do much elsewhere -- at least in PCs. "There is a lot of local sentiment, for the local brands, within certain of these countries," Saunders says. But, he adds, "when you look at these guys markets outside of their home countries, in essence they are nowhere."
Kitty Fok, who works in the research department of IDC in Hong Kong, thinks there may be more to Legend's local success than simply patriotic customers. Companies like Legend, she contends, "still have a big advantage compared to multinationals." That, she adds, is partially because Legend has "support from the local government."
How does that support manifest itself? Take procurement by government companies and offices looking to buy computers. "The government in China always promotes buy-local [campaigns]," Fok says. As a result, "the Legend name is always on the short list from the government" of vendors that companies should consider. Legend can also count on help from upstream companies in the supply chain, Fok believes. "We hear that they give a bigger discount to Chinese companies," she says. That would help Legend underprice foreign rivals.
JUST JEALOUS? Yang vehemently disagrees. Any gripes about Legend are really just jealousy, he argues. When executives from rival companies complain about all the direct and indirect support that Legend gets in China, they're just trying to deflect attention from their own poor performance, according to Yang. "It's because the operations staff of those multinational players in China have no other excuse to report to their bosses overseas" for their inability to increase their Chinese market share, he says.
"Legend and other local vendors really have made a lot of effort in increasing their market share," Yang told me. After all, it was not that long ago -- the mid-1990s, to be exact -- that foreign companies controlled more than half of the Chinese market. "It is impossible to say that government helped foreign players [to gain that market share] and then local players [to catch up]," said Yang. "It's unreasonable."
Johnny Wong, an analyst with Dresdner Kleinwort Benson in Hong Kong, tends to agree with Yang. "It has always been a fairly competitive business," says Wong. Once China joins the World Trade Organization (WTO), foreign players might think that they'll be able to counter Legend's edge, but Wong isn't so sure. There's no state-owned-enterprise monolith supporting Legend, he says, so the company doesn't stand to lose much by having more competition: "The WTO won't make any difference at all."
LASTING LEGACY. Perhaps, but I still think Legend's critics make some valid points. In a host of businesses in key industries, the Chinese want to have at least one national champion that can hold its own against foreign rivals. To be able to reach that level, the local player often gets a boost.
Sure, Legend has diversified its customer base so that state-owned buyers represent a small part of its business. But it's easy to see how that's simply a legacy of Legend's protection in the past: Many of the company's new customers among consumers and small and midsize businesses are choosing the brand thanks in part to its dominance in the offices of government-affiliated companies. Legend is the brand they know. That's an awareness that the company may have earned through its hard work -- but also partially through its government ties.
Yang will soon have many opportunities to prove that these criticisms are off-base. After all, the AOL deal is part of Yang's overall plan to remake Legend, moving it away from its core PC business and turning it into a bigger IT company with a host of products and services. Legend is even gingerly testing out foreign markets, with Yang planning to begin selling some notebook PCs in Europe later this year.
Right now, the company is -- to borrow a word from Dell's Saunders -- "nowhere" outside China. If Legend hopes to become an important player on the global stage, it may find that a communist pedigree isn't all that helpful. Einhorn covers technology for BusinessWeek from Hong Kong. Follow his column every week, only on BW Online