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IBM Deal Puts Lenovo on Global Stage

During its ascendance, the company has been aided by its status as an offshoot of a well-connected institution. Liu used his military university background and Communist Party connections to gain a seat on the National People's Congress, making him one of the rare entrepreneurs to penetrate the inner sanctum of Chinese power. The president of the science academy, Jiang Mianheng, is the son of China's former president, Jiang Zemin.

Despite the rise of an emerging private sector, connections to the party and state power remain critically important in the Chinese economy. State-owned companies are still the largest customers for many goods, and the relationship between buyer and seller is often more important than price and quality in determining what products are sold.

Lenovo has been the top seller of personal computers in China for seven years. Soon it will be No. 3 in the world. (Claro Cortes Iv -- Reuters)

_____In Today's Post_____
IBM Sells PC Business to Chinese Firm in $1.75 Billion Deal (The Washington Post, Dec 8, 2004)
Video: IBM is selling a majority stake in its pioneering personal computer business to China's biggest computer maker, Lenovo Group, for $1.75 billion in cash and stock.
_____World Markets_____
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But despite Lenovo's position as one of the darlings of the Chinese business world, analysts say the company slipped markedly recently.

"In its core computer business, earnings growth has been flat the last two years," said Joe Zhang, China analyst at UBS Securities Asia Ltd. in Hong Kong. "Lenovo faces competition on the high end from Dell and HP and on the low end from everyone else. It's squeezed in the middle. The management has run out of new ideas. It's a deteriorating business."

Some say China's rise as a manufacturing power has been driven largely by skill in cutting costs and a relentless commitment to low prices. But persevering in the face of foreign competition is likely to require innovation and research -- something thrifty Chinese companies have generally been reluctant to invest in heavily.

Unlike Japan and Korea, whose markets were largely shut off to foreigners as governments nurtured fledgling powerhouses such as Samsung Corp. and Sony Corp., China's market is increasingly open to outside capital. That means multinational giants are free to tap the same labor as their Chinese competitors, though the outsiders must pay duties that don't always apply to locals.

Lenovo's leaders have acknowledged that their global reach is largely motivated by the realization that their position at home is vulnerable.

"We are losing our brand advantage in China's domestic market," Liu said in recent interview in the Beijing-based Xinjing newspaper. "We seek to build an internationally recognized brand, which will require plenty of courage and capital."

In going after IBM's personal computer business, Lenovo appeared to be trying to make that strategy work in one giant leap. IBM gives it a proven distribution channel in markets around the world. Where Lenovo now has less than 3 percent of the global market for personal computers, owning IBM's operation -- the world's No. 3 PC maker -- roughly triples that share.

But the technology world is littered with examples of seemingly strategic acquisitions that went awry. Many are skeptical that a cost-conscious Chinese company will have the stomach to pump billions of dollars into resuscitating what for IBM has been a source of grief and eroding profits.

"Lenovo has no experience outside of the China market," said Fang, the Tsinghua University expert. "This is a huge problem for Lenovo, and I doubt whether they can overcome this difficulty."

Still, even the talk of such a deal has accomplished one goal of the Chinese company: A lot more people around the world have now heard of Lenovo.

Special correspondent Jason Cai contributed to this report from Shanghai.

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