Q&A with Lenovo Founder Liu Chuanzhi

The current president of Legend Holdings discusses the evolution of the Chinese PC maker, the role of Chairman Yang, and the acquisition of IBM's PC division

As founder of Lenovo (LNVGY)—then known as Legend Group—Liu Chuanzhi has been one of the most important figures in China's emerging powerhouse economy. Over more than two decades, Liu, who helped form the company while working as a researcher at Beijing's Chinese Academy of Sciences, has presided over Lenovo's transformation into China's first multinational company. Liu, 62, has played a key role in choosing, nurturing, and developing much of the company's top management, including Lenovo Chairman Yang Yuanqing.

BusinessWeek's Beijing bureau chief Dexter Roberts met with Liu in Lenovo's Beijing offices. In a wide-ranging, two-hour interview, Liu, who now serves as president of parent company Legend Holdings, talked about Yang Yuanqing's rise to prominence as a Chinese business leader, the runup to the historic purchase of the IBM (IBM) PC division, and the State Dept. ban on using the company's laptops for classified work. Edited excerpts follow.

In the early 1990s, Lenovo was just entering the PC business and was faced with an onslaught of competition from Western PC firms. The stress was so great that you were hospitalized. How did that experience help you decide to more aggressively expand Lenovo's PC business?

In 1993 the Legend [the previous name for Lenovo] brand PC was not performing very well and our business was not going very well. We held a series of meetings to analyze the problem. We decided that there were some problems with our structure. We had one vice-president in charge of all sales, one in charge of all manufacturing, and one in charge of all research and development. This was a very scattered structure.

The key issue we faced was a lack of talent. Unlike other state enterprises that were restricted in their decision-making, Lenovo was free to make any changes it wanted within the company. So our real issue was talent: Could we find a really good person to run the PC business? We decided to promote Yang Yuanqing (now Lenovo's chairman) but were not 100% confident he was the right person. We had seen his many achievements but whether he could be successful running such a big business, we still did not know.

Because our business was going very badly, I was not able to sleep properly for a long time. This damaged my health so that I had to go to the hospital and stay there for three or so months. But this time in the hospital gave me an unusual opportunity. It enabled me to focus my energies on the most critical issues at Lenovo. During my stay in the hospital I thought long and hard about what direction the company should take and how it should be restructured, and who should be in charge of this new business.

The PC division was very successful from 1996 to 2000. Why was it such a success?

During those years Yuanqing used his deep understanding of the PC industry as well as his ability to quickly learn new things, and so was able to very successfully build the business. This also won him respect and trust from his team as a leader.

For example, Yuanqing realized that a key issue for success was to not keep inventory for too long. So he took several actions to reduce the operation cycle of the PC, to cut costs, and to reduce inventory. Second, Yuanqing paid much attention to the user in the market. For example, he promoted our one-button access to the Internet computer. At that time, it was very hard to access the Internet in China. One had to buy a modem, install software, and then go to the post office to buy a user's account. However, for our PC we had already installed hardware and software, and we helped the user register for an Internet account. So the end user could just take the PC home, press one button, and they were able to access the Internet—that helped us win a large share of the Chinese market.

Yuanqing and his team not only paid attention to short-term business goals but also constructed a long-term strategic plan for our company. For example, Yang paid much attention to setting up a good corporate culture. When Yuanqing became CEO of the company, he tried to set up very equal and very close personal relationships among company employees. In China, we are usually very formal with names. But Yuanqing told all the employees to call him by his first name or Yuanqing—not president and CEO.

In 2001, Lenovo launched a diversification strategy. And by 2003 it was clear that the diversification strategy was not successful. What lessons did you learn from that effort?

In 2001 we had a three-year diversification strategy, and today when we look back we see it had some problems. The fact is that the diversification strategy didn't work out well. So in 2003, Yuanqing and his team did a very critical review of our business and formed a new strategy. One thing worth mentioning about Yang's handling of situations like this—first, he did not try to hide the mistakes he had made. And second, he organized a team to learn from the mistakes in the past and tried to correct them going forward.

The biggest lesson learned was that we had not had the proper resources in place in the company—especially management resources. Because Yuanqing himself was an expert on the PC business, he found that he had to focus his energies on the new areas of the Internet and software business as we diversified. So after the problems surfaced, he had two choices: continue to focus the company much more on the new businesses or refocus on our original PC business. He chose the latter.

How did the company's decision to pursue an aggressive international strategy evolve?

We had two options—either to acquire an international company or to gradually go international by ourselves. We decided to approach IBM, and top management, led by Yuanqing, pushed very aggressively to move that process forward. I was not so sure about that decision and at that time, we held a board meeting, and in reality pretty much the entire board disagreed, and really no one fully supported the decision to go with IBM. The argument made was that we had started this company 20 years ago and that it had been successful and no one wanted to risk that success now.

Yuanqing however held another meeting to explain his support for going with IBM. You could say that without Yuanqing's perseverance we never would have made this acquisition. One of the biggest concerns of the directors was that the IBM PC business was losing money, and they wondered how it would become profitable under Lenovo. And there were also concerns about the integration of the companies. Yuanqing's team very clearly answered those questions and to a degree alleviated [the board's] concerns.

If Yang was the architect of the deal, then why was the decision made to make him chairman, rather than CEO of the new Lenovo?

This decision was made before the acquisition. The decision was made early on that if the company were to be successful then the CEO must be a foreigner and probably an American. So we decided very early that Yuanqing would be the chairman. We also discussed the relationship between the chairman and the CEO before the acquisition.

Why did the board replace Steve Ward as CEO?

Steve Ward achieved his targets and accomplished his responsibilities very well. In the early period of integration we experienced a very smooth transition for the entire organization. After this was accomplished, our company was faced with more aggressive competition from our competitors. And we knew we needed someone with better experience in this industry.

What was your reaction to the State Dept. decision to bar the use of Lenovo computers for classified work?

When I heard the news I felt disappointed. As you know, Lenovo is not controlled by the Chinese government. As for our board of directors, a third comes from the U.S. or Europe. Another third comes from Hong Kong. And our CEO is American, while 30% of our top managers are also American. So the State Dept. concern about [the security of] our computers is completely unreasonable.

We feel that we have not been fairly treated. What makes things even worse is that no one is listening to us or trying to understand us. I will point out that before the 1990s China had very high tariff rates and also had a licensee system to restrict the import of computers and software. Then around 1993, the Chinese government reduced the tariff on computers and eliminated the licensee system. And that meant that local companies faced very severe competition from international brands. At that time, Lenovo didn't ask for any support from the government. Instead we tried to improve our level of management and our competitiveness in the market. We thought this decision to open the market was correct.

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