A Tough Sell For Lenovo

Chairman Yang says a U.S. base will help the Chinese PC maker's IBM deal pay off

Yang Yuanqing wants U.S. computer buyers to know that he is now a New Yorker. The 41-year-old chairman of China's Lenovo Group Ltd., the world's No. 3 PC company, recently moved from Beijing to New York when his company took over IBM's (IBM ) computer division. Lenovo is now headquartered in West-chester County, although it is 27%-owned by the Chinese Academy of Sciences and China remains its strongest market.

The takeover is the most prominent example of a growing trend as Chinese companies attempt to expand overseas by acquiring well-known Western brands. Yang recently spoke with BusinessWeek Correspondent Bruce Einhorn. Here are some edited excerpts:

What's it like acquiring such a famous American brand?

We have a lot of challenges. We have to build ourselves a brand worldwide, to realize the transition from the IBM brand to the Lenovo brand.

How far along are you?

There are three stages. First, we have to preserve stability for our customers and keep them very satisfied. If you look at the Hewlett-Packard (HPQ )-Compaq merger, over the course of several months they lost about 20% of their customers. So preserving business stability is foremost, and we have achieved that goal.

What comes next?

Starting from Sept. 30, when we merged the two businesses together, we launched the second phase: to achieve profitable growth. This will take two to three years. You shouldn't expect that we can deliver 5% net profit in this very short time because we have to build our capacity, build our core competency, invest a lot in branding, and in growth initiatives. The third stage will come after two or three years, when we'll have better profits and our profit and revenue growth rates will be more equal.

Have you been losing market share outside China?

Actually we are becoming better and better. In the past three quarters, quarter by quarter, we have improved our market share. When two companies merge together, it's normal that you lose some customers. But fortunately, we are very complementary, so we only lost a few. In America we didn't lose any market share last quarter, and in China and Asia, we gained.

Where do you see the opportunities for the new Lenovo?

We want to duplicate our success in China in emerging markets such as India, Brazil, and Mexico. The second [target] is the small and midsize business (SMB) sector. Prior to this acquisition, Lenovo did business only in China; IBM had a worldwide business but focused only on large enterprise customers. So SMB was very weak at the time. Right now [outside China] 75% of our business is so-called relationship customers, enterprise customers, and only 25% is SMB.

What's your view of the U.S. market?

We have already begun to sell our products in retail shops [such as the Office Depot Inc. (ODP ) chain]. But maybe we should first focus on the emerging markets, then mature markets. Especially in the U.S., we should be very careful. Maybe we should learn something from our competitors.

Critics contend that consumers who buy from Lenovo are supporting the Chinese government. Given the differences between the political systems in the two countries, how do you deal with negative American attitudes?

Right now the number of employees we have in the U.S. is second only to China. We have put our headquarters in New York. I have moved to New York. That's a signal to the U.S. market. We want to build our company as an international company, so we have an American from the old IBM as our CEO. We want to convince our customers this new company is really an international company.

How do you answer critics who say that PCs are low-margin commodities, with little room for innovation?

This is a low gross-margin industry, and that means that we should focus on efficiency to build our capability, our competitiveness. But we don't agree that we cannot continue to innovate in this industry. We still have a lot of room to innovate in areas such as security and connectivity.

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