How Legend Lives Up To Its Name

The state-owned PC maker aims to become a Chinese IBM

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

So far, Legend--and its PCs--are holding up just fine. Even though its research center can't match the resources of Compaq or IBM, it is Legend that's turning up the heat on those rivals and others. The $758 million Beijing-based computer company saw its sales grow by 106% last year, making it the biggest seller of PCs in the fastest-growing computer market on earth--a title that foreign rivals had hoped to capture. But with 15% of China's sales, Legend has twice the market share of its closest competitor, IBM. "We plan to be among the top 10 PC manufacturers in the world by 2000," vows Yang Yuan-qing, general manager of Legend Computer Systems Ltd. Legend's goal: to sell 1.5 million computers in 2001, up from 800,000 units today.

How did Legend dash the dreams U.S. PC makers had of dominating the Chinese market? Credit the company's low prices, broad product range, helpful software, and vast distribution network. Just as important have been Legend's strong links to the Chinese government, which accounts for 25% of Legend's sales, and the decision to push state-of-the-art PCs, not yesterday's models. That helped remove the stigma associated with buying a local computer. Consumers "stopped being ashamed of buying a Chinese brand," says Sean Maloney, senior vice-president for sales and marketing at Intel Corp., which urged Legend to sell the more powerful PCs. "Legend has become synonymous with high tech."

LOCAL HERO. The computer maker is also benefiting from China's love affair with the PC. Desktop-computer sales there are expected to swell 30% this year--double the growth that's forecast for the U.S. market. If this torrid pace keeps up through 2002, some 10.3 million PCs will be sold in China that year, making it the No. 3 market in the world following the U.S. and Japan. (Sales are higher in the U.S. and Japan.)

But Legend's ambitions go well beyond the PC. The company is aiming for nothing short of becoming China's version of IBM--a full-service provider of computers, software, and high-tech knowhow. In the past 12 months, Legend has parlayed its local savvy into development and marketing alliances with Microsoft Corp. and IBM, among others, to take the company into new markets, including software and systems-integration services for China's businesses. This month, Legend plans to sell in China a handheld computer that will challenge 3Com Corp.'s popular Palm computer. "As a local company, we have much more insight into the needs of Chinese customers," says Legend's Yang.

In China, hand-holding is need No. 1. After all, it is a population of PC newbies with only 1 out of every 175 Chinese currently owning a computer. Legend understands this better than foreign PC makers do. The company has developed a variety of software products for first-time customers that are bundled with its PCs, including tutorial programs on everything from using the World Wide Web to mastering home finances.

Legend will test just how well that formula works in a new market: palm-size computers. After one year of development work with Microsoft, Legend's palm-size computer, called Tianji, will appear this month running Microsoft's Windows CE software. As with PCs, Legend has tailored the product to the local market by including a stylus for entering Chinese characters and English letters and by installing a powerful English-Chinese dictionary. Legend and Microsoft also are working with 10 local software companies to develop applications for the product. And with a price of around $540 in China, the Tianji is $60 less than the price of 3Com's Palm computer.

HEMORRHAGE. Just two years ago, Legend might have been viewed as the least likely to survive. The company, founded in 1984, was hemorrhaging $25 million a year and lagging behind multinational rivals IBM, Hewlett-Packard, and Compaq. Then Legend launched a vicious price war, cutting prices three times in one year. With lower production and distribution costs than its foreign rivals, Legend now sells its desktop PC with a Pentium II chip for about $1,200, or 30% less than IBM or Compaq.

State-owned Legend, which is listed on the Hong Kong stock exchange, has something else going for it: a strong distribution network. That's what has stymied foreign competitors. In the past 10 months, Legend has added 800 distributors and now has close to 1,800 across China. It also has its own retail stores that sell Legend products, make repairs, and offer free training for China's often first-time users--including home visits. With 11 shops now open, Legend plans to have more than 50 by yearend. "They have an extremely well-developed distribution network," says Tony C. Leung, director of Greater China marketing for Compaq in Hong Kong. "It will take a lot of time to catch up."

That's why no foreign company can afford to ignore Legend. Its superior distribution network and strong government connections spell opportunity. Last summer, Legend inked a deal with IBM to pre-install Legend PCs with IBM software, including a Chinese-language version of IBM's ViaVoice 98 speech-recognition software. IBM and Legend also are developing software for China's telecom, finance, and aviation sectors. "On the one hand, we compete with Legend," says D.C. Chien, general manager of distribution for IBM's Greater China Group. "But on the other hand, they are our second-largest partner in China."

ACHILLES' HEEL. Despite its standing in PCs, Legend needs foreign help to expand into corporate software and service. Last fall, for example, the company signed deals with Lotus Development Corp. and Oracle Corp. to resell groupware and database software to Chinese businesses. "They still are relatively weak in R&D and in software," says Jay Hu, managing director of the U.S. Information Technology Office, an industry association in Beijing.

For now, that is. In late November, Legend and Computer Associates International Inc. agreed to a $3.5 million software joint venture. First task: to create a software development tool to compete with Microsoft's Visual C++. The software will be available in the Chinese market this summer.

Legend isn't relying strictly on the kindness of foreigners to create a software stronghold. It recently invested $4.5 million to become the leading shareholder of Kingsoft, a Chinese software company. The two will develop Chinese word processing, dictionary, and game programs. And in November, the government announced it would send more than 400 researchers from the Chinese Academy of Sciences--a national think tank--to work at Legend's research labs. The move gives Legend much-needed brainpower in its quest to develop better software and more powerful computers.

With China's computer market the lone bright spot in a now-battered region, competition is bound to be intense. It will take more than frenetic nerds and hipsters to keep Legend on top.