Is Legend The Ibm Of China?

With help from Beijing, the computer maker is grabbing share from U.S. rivals

The shiny new research and development center for Legend Holdings, China's leading PC maker, is a busy place. Young hipsters and nerds alike bustle down corridors and clack on keyboards. While two-thirds of the 120 researchers are designing new computers, the rest are testing them for everything from how well they run software to what happens when they fall off the desk to how well they hold up to the 100-degree-plus sizzle of China's summer heat.

Although its research center can't match the resources of Compaq or IBM, Legend still manages to be in a class by itself, thanks to its dominant role in China. The $1.5 billion Beijing-based company has seen sales grow by 70% in two years, making it the biggest seller of PCs in the fastest-growing computer market on earth.

And Legend is going to get a lot stronger soon. In late November, the government announced it would send more than 400 researchers from the Chinese Academy of Sciences--a national think tank and research center--to work at Legend's labs. The move gives Legend much-needed brainpower in its quest to develop better software and more powerful PCs--and it's a sure sign that Legend is girding itself for an even fiercer struggle with Western rivals. "We plan to be among the top 10 PC manufacturers in the world by 2000," says Yang Yuanqing, general manager of Legend Computer Systems. "We will grow as the Chinese economy grows."

State-owned Legend, which is listed on the Hong Kong stock exchange, has just polished off an extraordinary two-year period. Until then, multinationals such as IBM, Compaq, and Hewlett-Packard led the market. But then Legend kicked off a price war, cutting prices three times in a year until its Pentium-powered PC cost 30% less than an IBM or Compaq model. A Legend desktop with a Pentium II chip now costs about $1,200. While multinational rivals were forced to follow suit, they couldn't match Legend's production and logistics costs. Legend surpassed market leader IBM in 1997. IBM now has 7% of the market, vs. Legend's 13%.

This extraordinary performance shows multinationals what they are up against. Legend, set up by 11 government researchers from the Chinese Academy of Sciences in 1984, is becoming more than a PC maker. It's turning into something of a national champion. The Chinese are now struggling to keep local producers sound as the Asian crisis dents growth. Through Legend, Beijing wants to create high-tech jobs, nurture research, and develop a components industry. It also wants a Chinese company to benefit most from the national love affair with the PC: Sales in China are expected to grow 30% this year, to 3.9 million, and reach 10.3 million by 2002, according to International Data Corp. estimates. Those numbers will make China the No. 3 market in the world after Japan and the U.S. Legend plans to increase annual sales to 1.5 million computers by 2001.

TAILORED PROGRAMS. Legend is able to capitalize on its government connections, securing contracts from ministries, banks, and even the postal service as these organizations rush to computerize operations. Government purchases account for 25% of Legend's sales. The company is also pre-loading its computers with software, including Chinese voice and written character-recognition software and tutorial programs on everything from cooking to using the World Wide Web and handling home finances. Legend computers are "more tailor-made for the local market" than foreign ones, says Lyon Lau, an equity analyst at ABN Amro.

Legend is also developing software to help people use previously unfamiliar aspects of the computer. "Before, many Chinese were only using their PCs as word processors in their offices and [for] video games at home," says Legend's Yang. "Now, we can educate people about the market."

A recent Beijing-led crackdown on smuggling has helped Legend, too. Many multinationals tacitly relied on smuggled imports of name-brand computers and components to offer competitively priced systems to customers. Now, foreign PC makers have to pay stiff tariffs on what they bring in. "The anti-smuggling crackdown has helped domestic brands a lot," says Wang Rongzhi, general manager at Tontru Computer Corp., another leading domestic brand. "Foreign market share will be further reduced."

Legend's successes put foreign makers in a quandary. None wants to lose more market share. Dell Computer Corp., for example, just opened its first Chinese factory in Xiamen. It will target large Chinese enterprises and hopes to tap the growing consumer market.

Yet no foreign company can afford to ignore Legend. Its superior distribution and sales networks and strong government connections mean opportunity. Many foreign manufacturers are seeking cooperative pacts with former Chinese rivals--despite previous experiences in which distribution agreements ended up benefiting Chinese partners. IBM, HP, Microsoft, and Intel are all working with Legend in hardware, software, or other areas and are cutting deals with other Chinese manufacturers such as Founder. "On the one hand, we compete with Legend," says D.C. Chien, director of operations at IBM Greater China Group. "But on the other hand, they are our second-largest partner in China." IBM's largest partnership is in joint production of computers with China Great Wall Computer Group.

BIG IDEAS. Legend's standing is helping it expand its business into software and systems integration, with foreign help. In late November, Legend joined with Hauppage (N.Y.)-based Computer Associates International Inc. to develop and market software for China. And in its joint venture with IBM, it is working to tailor that company's software to the China market, then pre-installing it on Legend computers. Legend is also consolidating its dominance of local companies. It purchased a 30% stake in Kingsoft, one of China's largest software companies, which does application software for both Chinese word processing and finance, for $4.5 million in August. "They [Legend] still are relatively weak in R&D and software," points out Jay Hu, managing director of the U.S. Information Technology Office, an industry association in Beijing.

It's clear the Chinese want to turn Legend into China's version of IBM--a maker of computers, software, and systems. And U.S. high-tech companies, uneasily or not, are helping Legend in this goal--all to stay in this promising market. Maybe that's the right strategy for Americans. But that depends on how hungry Legend gets.