A New Twist in Legend's Tale

As foreign rivals move in, it's making a global push

It looked like it was going to be a tough year for Legend Group Ltd., China's biggest maker of PCs and a mainstay of the country's growing high-tech economy. As the SARS panic swept through China this spring, consumers stayed away from the computer stores where Legend sells its wares. Major customers across the country, grappling with the impact of the disease, put corporate sales into a deep-freeze. And the outbreak took its greatest toll on Legend's hometown of Beijing, leaving execs scrambling to help keep staffers healthy. Investors, fearing the worst, fled from the Hong Kong-listed company's already battered shares, which lost almost a fifth of their value in April.

Investors' fears of a SARS-driven free fall were unfounded -- but Legend faces other, more important hurdles. As fast on its feet as most of its Western rivals, Legend quickly shifted its emphasis to online and phone sales, keeping its 500 call-center employees busy handling inquiries from customers afraid to leave home. Legend says its sales of desktop PCs jumped by 20% in early May -- when the SARS panic was at its peak -- even as researcher IDC estimates overall PC sales in China will slip by 6% in the second quarter. That has helped boost Legend's stock price by 28% since late April. "Legend is capable of tackling this difficult environment," says Chief Executive Officer Yang Yuanqing, a 36-year-old former Legend salesman who worked his way up to the top job.

For Legend's sake, Yang had better be right. Even if SARS really is becoming more controllable, the company has a full plate of other challenges. Dell Computer (DELL ) Corp. has set up shop in the coastal city of Xiamen and is pumping out thousands of computers a month. While Legend continues to dominate sales to consumers, it's suffering from Dell's push to win more high-margin business from corporate clients. Other foreign companies have boosted sales as China's accession to the World Trade Organization has forced the country to ease curbs on imports and distribution. And the market for Legend's flagship product -- desktop PCs -- is slowing, as more Chinese choose notebooks, where Legend is weaker. In the fiscal year that ended Mar. 31, sales slipped 3%, to $2.6 billion, following a 23.4% drop the year before, when Dell made a renewed push in China. Profits last year were flat, at $130 million.

Yang says he has a plan to restore some of Legend's shine. He is expanding its IT-services business, which helps corporate customers set up computer networks. Although services brought in just $23 million last year, Merrill Lynch (MER ) & Co. expects that to grow tenfold by 2006. Yang also plans to boost the company's fledgling line of non-PC products, such as cellular phones, digital cameras, and handheld computers. "If a company wants to be successful, it needs to diversify," Yang says. The risk: Legend may run into the same problems Compaq Computer Corp. and other hardware makers did when they tackled the tricky area of IT services.

But Legend's ambitions go beyond services: It is forging a global strategy as well. The company is planning to sell its PCs abroad under the name Lenovo -- a moniker meant to evoke innovation. Why? Legend is already a registered trademark in many countries. "We had no choice," says Yang.

Don't expect to see Lenovo in lights above Times Square, Piccadilly Circus, or the Ginza anytime soon. Legend is planning to move slowly with its overseas push, first targeting Hong Kong, then proceeding to the U.S. and Europe. The company gets just 7% of its revenue overseas now and hopes to build that up to about 25% by 2007, says Chief Financial Officer Mary Ma. One reason for her caution: When Legend ventures beyond China's shores, the company loses the home-field advantage of a countrywide distribution and marketing network. "In the U.S. and Europe, we [will be] playing in their home country," says Ma. "It will take time."

Legend will also need to overcome an image problem. In China, the company has built up a reputation for providing good products and reliable service at reasonable prices. In more developed markets, customers will likely be less eager to buy computers from a little-known Chinese company. Taiwan's Acer Inc. encountered similar problems when it tried to establish its PC brand in the U.S. "The biggest challenge is to build up people's confidence about the product," says Annie Chung, an analyst with Gartner (IT ) Inc. in Hong Kong. "They need to get away from the China-made, low-quality image." Legend insists it won't compete on price.

Even as it ventures overseas, Legend faces issues at home. It's still No. 1 in the local desktop market with a 25% share, but it has slipped two percentage points since last year. That is partially because of increased competition from local "white-box" players that assemble no-frills machines. These PCs are popular in second-tier Chinese cities where consumers balk at paying the $700 to $950 that Legend typically charges. Meanwhile, Legend also risks getting squeezed at the higher end as foreign makers grab market share in the lucrative notebook PC market. While China's notebook sales grew at a torrid 60% last year, Legend has a tougher time in that market since notebooks are harder to make, more expensive, and usually sold to higher-end customers who are more brand-conscious. With Dell, IBM (IBM ), and Hewlett-Packard (HPQ ) coming on strong, Legend's share in notebooks has dropped to just 17%, from 25% in 2001, according to J.P. Morgan.

Moreover, Yang's diversification plans may be overly ambitious. Legend's dominance of desktop PCs in China won't help much as it tries to expand into cameras and cellular phones. While its distribution network is good for computers, consumers tend to look elsewhere for cameras and phones. And cell phones are already an intensely competitive industry in China -- hardly a refuge for a company fleeing the thin margins of the PC business. "There is a risk of biting off more than they can chew," says Ted Dean, managing director of BDA China Ltd., a Beijing telecommunications consultant.

Still, rivals shouldn't dismiss even a weaker Legend. Foreigners such as Dell and IBM are aggressive, but they're hard-pressed to match Legend's advantages in China. It "has the ability to touch and reach so many customers," says Jeff Gallinat, general manager of International Information Products Co., an IBM venture with China Great Wall Computer Shenzhen Co. that manufactures PCs in Shenzhen. "Nobody else can do that." As Legend emerges from the SARS crisis, Yang Yuanqing's challenge is to keep the momentum going.

By Bruce Einhorn in Hong Kong and Dexter Roberts in Beijing

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