Lenovo's Foreign Affairs

Lingering concerns over its sale of PCs to the State Department could hamper the Chinese company’s efforts to win other U.S. deals

When China's Lenovo Group purchased IBM's (IBM) PC division a year ago, the deal looked like a pioneering step in a new era of cross-cultural business collaboration that might bring China and the U.S. closer. Now, even with Chinese leader Hu Jintao here visiting government and business leaders, the two countries seem as far apart as ever. There's friction over Iran, Taiwan, software piracy, and trade. And Lenovo is in the no man's land in between.

The political predicament is on the mind of Lenovo Chairman Yang Yuanqing. Yang, who moved to the U.S. last year to be near Lenovo's new headquarters just north of New York City, vented his frustrations in a recent interview with BusinessWeek Online. He was responding to a hail of criticism that greeted news last month that the U.S. State Dept. had bought 16,000 Lenovo PCs for use in offices worldwide.

Critics, including CNN's Lou Dobbs, tarred Lenovo as a government-owned company that might help the Chinese government spy on the U.S. "We are not a government-controlled company," says Yang. "This didn't create a good image for us, and I want to clarify."


  The remarks may be well-timed. Although the State Dept. transaction seems like a done deal, the political troubles may not be over. Lenovo has delivered the PCs, which were manufactured in the U.S. and Mexico. The State Dept. itself is loading software into the machines and distributing them to its offices.

Still, several members of the U.S.-China Economic & Security Review Commission, which was set up to monitor the commercial relationship between the two countries, remain concerned about the deal. That could put a damper on Lenovo's future prospects of landing government contracts.

So what's the problem? Larry Wortzel, the chairman of the commission, was a U.S. Army intelligence officer in a decades-long career that included five years at the U.S. Embassy in China. In those days, he says, the Chinese government routinely tampered with PCs brought into the country by embassy employees. Simply put, he remains untrusting.

"It's a country with a highly active intelligence program," says Wortzel. "Could they insert things into these PCs? Could damage be done? We're asking those questions." Darla Jordan, a State Dept. spokesman, says the PCs "will be subject to rigorous security testing and screening."


  The commission isn't taking any chances. Already, commissioners have queried several U.S. intelligence agencies and learned that there's potential for tampering, says Wortzel. Now he's setting up meetings with the State Dept and the Homeland Security Dept.

Wortzel wants to find out from State how the computers will be used. Will they be loaded with sensitive information or connected to networks that house classified data? From Homeland Security, he wants to find out if Lenovo employees who are Chinese nationals have the proper security clearances. "We're in the middle of methodically moving through this," says Wortzel.

There has been little direct communication between the commission and Lenovo, however. Lenovo says it has offered to have its executives speak to the commission and is looking forward to having a meeting. Scott Bunton, the commission's executive director, says he hopes to arrange for a meeting within the next two weeks.


  Yang says the commission's concerns are unwarranted. While the company that's now called Lenovo was launched in 1984 with $25,000 in funding from the Chinese Academy of Sciences, the academic research organization now controls only 27% of the stock -- with the rest owned by public shareholders, employees, IBM (IBM), and three U.S. private-equity investment firms. None of the directors is from the Chinese government or the Academy of Sciences. "After we acquired the IBM PC company, we became an international company," Yang says.

Yang's second point is that Lenovo has always been run by its founders and executives. It's a point of considerable pride for him. "We were the pioneer of the Chinese transformation from the planned economy to the market economy," he says. In the early 1990s, the Chinese PC market was dominated by four government-backed organizations that got special treatment.

"We beat them," Yang points out. The efforts made Lenovo the dominant PC maker in China. The original chief executive of the new Lenovo was Steve Ward, a former IBM executive. Now, it's Bill Amelio, who formerly ran Asia-Pacific operations for Dell (DELL) (see BW Online,12/21/05 , "Lenovo's New Boss -- from Dell").


  What's more, Yang says, Lenovo is a model of transparency and modern corporate governance. It was listed in 1994 on the Hong Kong Stock Exchange, and was the first China-based company to diversify its shareholder base by listing on a public exchange and to award its founders and managers with shares and stock options.

Until the two sides align, there's little chance that this matter will be resolved to Lenovo's satisfaction. That's a potentially serious drag on a company that's trying to rapidly establish a global footprint and create a trustworthy global brand (see BW Online, 2/23/06, "Lenovo Makes a Name for Itself").

Lenovo's U.S. government business is relatively small. The company doesn't disclose exact figures but makes no bones about wanting to expand that business. Meanwhile, it's increasingly pushing the Lenovo brand in front of corporate buyers and small- and medium-sized businesses. Any questions about Lenovo's independence muddy its image and harm its ability to compete against Dell, Hewlett-Packard (HPQ), and other top PC makers.

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