Lenovo's global ambitions take a hit

As recently as 2005, Lenovo Group Ltd. was a little-known computer maker that sold only in China, sometimes relying on deliverymen on bicycles.

Its acquisition of IBM's personal-computer business catapulted Lenovo onto the world stage: Now about 60 percent of the company's sales come from outside China, and it is the fourth-biggest computer maker by shipments.

The company rotates its headquarters among Raleigh, Paris and Beijing.

Lenovo has filled its ranks with Westerners from International Business Machines Corp. and Dell Inc., opened factories in Mexico and Poland, and gone on an Olympics-led marketing blitz. While Lenovo has fared better than other Chinese companies that have tried to become global players, it has fallen behind competitors in the PC industry.

Lenovo's computer shipments rose 8 percent in the third quarter, but its growth was eclipsed by the overall market, which grew nearly twice as fast. That left Lenovo's global market share at 7.3 percent, down from 7.8 percent a year ago, according to research firm Gartner.

Analysts have scaled back their expectations for Lenovo, which reports its quarterly earnings Thursday. Morgan Stanley, for example, expects a weak quarter and projects Lenovo's net income will fall 20 percent in the current fiscal year, the first year of decline since the IBM PC acquisition, which was completed in May 2005.

In the early days after the IBM deal, cultural clashes and power struggles nearly derailed the Chinese computer maker's aggressive strategy to become a world player, say current and former executives. Now the company's global ambitions must confront the economic malaise in the U.S. and Europe – two markets that were key to its expansion plans.

Lenovo's $1.25 billion deal to buy the PC arm of IBM gave it brand credibility, a global sales force and access to Western management skills. In turn, investors hoped, Lenovo's low-cost structure in China would bring new efficiency to the IBM business, which had been unprofitable for years.

“We knew we could not fail,” says Mary Ma, a Lenovo director and former chief financial officer. “Not just for us, but for all of China. They viewed us as a symbol of a Chinese company going global, and we felt a great responsibility.”

Before the deal, Lenovo's business culture was steeped in militaristic discipline. At the China headquarters in a dusty industrial park in northwestern Beijing, calisthenics were broadcast twice daily over the public-address system. Employees who arrived late to meetings were humiliated by having to stand in front of the room while other executives went silent and bowed their heads for a full minute.

After the takeover, Lenovo Chairman Yang Yuanqing gave up the chief-executive position to a Western executive and switched the company's official language to English.

Still, the culture clashes persisted. Bill Amelio, a former Dell executive who became Lenovo's CEO in late 2005, was sometimes frustrated by his Chinese colleagues' reluctance to speak their minds.

“You don't want everyone saying ‘Yes, Yes, Yes' all the time,” says Amelio, a brawny former college wrestler. “You want them to be able to smack you upside the head and say, ‘Hey, I've got a better idea.'”

Conference calls were difficult as Americans hogged the airtime. “The Americans would just talk and talk,” says Qiao Jian, a vice president of human resources. “Then they'd say ‘How come you don't want to add value to this meeting?'”

Working closely with Yang, Amelio ordered two major restructurings that have slashed more than 2,400 jobs, which amount to roughly 10 percent of the company's current global work force. The company also shifted jobs to lower-cost areas. Development of desktop computers has been shifted to Beijing, while Lenovo's marketing headquarters have been moved to Bangalore, India.

While IBM had focused on selling laptops to businesses, Lenovo is aggressively expanding into on the cutthroat consumer market despite the souring economy. Last month, Lenovo began selling a $399 mini-laptop called the IdeaPad S10 – its first foray into the fast-growing “netbook” market.

At the same time, Hewlett-Packard Co., the biggest of Lenovo's competitors, is making international-market gains, Apple Inc. has revitalized its Macintosh business, and fast-growing Taiwanese rival Acer Inc. surpassed Lenovo as the third-largest PC maker by units shipped by acquiring Gateway Inc.

To streamline its supply chain, Lenovo has shifted more manufacturing to new factories outside of Asia. In October, it opened a 260,000 square-foot plant in Monterrey, Mexico. While shipping a PC to the U.S. from China can take 30 days, shipping from Mexico takes just three or four.

Lenovo's global supply network was a problem since the beginning of the marriage. “It looked like spaghetti,” says Gerry Smith, senior vice president, global supply chain. While rivals such as Dell could deliver a PC within days, Lenovo deliveries sometimes took weeks or months.

But the early efforts to fix the supply chain sparked an internal backlash. Because Amelio felt the efforts weren't moving fast enough, he removed a popular Chinese executive, Liu Jun, as head of Lenovo's supply chain in 2006 and replaced him with an executive from Dell.

Liu had long been viewed as a rising star. His removal from a senior position inflamed tensions. The friction over Jun's departure – he has since returned as senior vice president of Lenovo's consumer business – was a “catalytic moment,” says Ken DiPietro, senior vice president of human resources. “We had people derailing. And we were starting to see factions develop.”

In fact, tension had been brewing from the beginning. Salary has been one major point of contention. After the IBM acquisition, many Americans far outearned their Chinese peers.

At IBM, base compensation accounted for roughly 80 percent of salary, and performance-based bonuses about 20 percent. That meant Americans could miss targets and still get paid decently. For the Chinese managers, pay was almost entirely performance-based.

Lenovo says it has narrowed the gap in compensation structures for senior executives.

Bridging the East-West divide also has included smaller efforts. Silkworms have been taken off the menu in the Beijing cafeteria. Sports metaphors, which were a source of confusion, have been banned from conference calls.

Confusion over the meaning of silence was another problem. “When we disagreed in meetings, we would keep silent,” says Chen Shaopeng, president of Lenovo's China operations. “But the Americans assumed we were agreeing.”

This spawned a system of backchannel communications that eroded trust between top executives. After staying quiet in meetings, Chinese executives would often voice their complaints privately to Yang or Amelio, in what the Americans called “end runs.”

Peter Hortensius, senior vice president of the notebook business, recalls being furious when he found out a Chinese colleague had reported a minor quality problem with a computer shipment directly to the chief executive, without informing him first. “I was going, ‘Why the heck did he go behind my back on this one?'” says Hortensius.

In Chinese companies, executives often take problems to a boss instead of a colleague of similar rank to maintain harmony.

Juliet Ye and Gao Sen contributed to this article.