Lenovo wants to take on new markets in 2006

One year after announcing plans to acquire IBM’s PC division, Lenovo Group Chairman Yang Yuanqing is ready to take the enlarged company on the offensive and push into new markets.

“If we consider the first phase [of the acquisition] as a defensive phase, right now we should become more and more aggressive to expand our business and to expand our customer base,” Yang said during an interview Wednesday at Lenovo’s research and development (R&D) facility in Beijing’s northwestern suburbs.

Lenovo announced its intention to acquire IBM’s PC division on Dec. 8, 2004. The deal, which was valued at $1.75 billion, marked the first major international acquisition by a Chinese hardware maker and put Lenovo under the global spotlight for the first time, transforming the company from a PC vendor into a symbol of China’s growing economic power and confidence.

“So far, they have been doing a good job,” said Marvin Lo, an analyst at BNP Paribas Peregrine, in Hong Kong.

Not all observers thought Lenovo would succeed. Acquisitions are difficult under the best of circumstances, some warned, pointing to HP’s merger with Compaq as an example of the difficulties that large acquisitions present. Others worried that cultural differences and Lenovo’s limited experience doing business outside China would present additional challenges for its management team.

Amidst this speculation, Lenovo’s competitors saw an opportunity to sow seeds of doubt among customers. Michael Dell, chairman of rival Dell Inc., gave the deal a low chance of success. “When was the last time you saw a successful merger or acquisition in the computer industry? It hasn’t happened, at least not in a long, long time,” Dell said in December 2004.

To Lenovo’s credit, its top management has so far managed to prove Dell and the other naysayers wrong. The company has remained profitable and has largely maintained or expanded its share in key markets, reassuring financial analysts and investors. But the acquisition process is far from complete, and it is still too early to call the deal a success, Yang said.

During the first phase of the acquisition, Lenovo focused on keeping the business stable. The goal was to prevent customers, partners and employees from losing faith in the company’s future, Yang said. Having achieved this, the company now has to prove that the acquisition can yield results by expanding its share of the global PC market while continuing to turn a profit.

“We will make money but we don’t focus on profit, we focus on growth,” Yang said, adding that this phase of the acquisition should last around two years. “Maybe by that time it will be a more appropriate time to declare success,” he said.

In the meantime, Lenovo is counting on much of its future growth to come from emerging markets, such as China and India, where the company recently created a geographical division that reports directly to Stephen Ward, the CEO. But it also expects to make major inroads in mature markets, such as the U.S., by focusing on small and medium-sized business (SMB) customers and consumers, Yang said.

Starting early next year, SMB customers in the U.S. and Europe will see Lenovo-branded desktops designed to cater to their needs, Yang said, adding that consumer models will follow during the second half of the year. While these PCs will be based on models available in China, Lenovo is working to make sure they will fit the needs of users in other markets, said Bryan Ma, associate director of personal systems research at IDC Asia-Pacific.

Cracking the U.S. SMB market won’t be easy, said BNP Paribas’ Lo. “It’s tough to compete with Dell in those markets,” he said, warning that Lenovo may have to spend more on sales and marketing in order to succeed there.

But Yang is optimistic that Lenovo can extend the success it has enjoyed over the last year. “I know one of our competitors once said they had never seen a very successful acquisition in this industry,” he said. “I hope they will see us as a very successful case through our acquisition.”