Background: Who exactly is Lenovo?
Following the sale of IBM PC division to Chinese manufacturer Lenovo, the question on everyone’s lips is ‘who exactly is Lenovo?’
Formed in 1984, the company is the leading PC vendor in China and has been for seven years. According to IDC it held 26.8 per cent of the Chinese market in the third quarter of this year. Worldwide, it accounts for about three per cent of global sales. Added to the six per cent or so of IBM’s market share, this will put the company in a firm third place, but still somewhat behind Dell and Hewlett Packard on 16.8 and 16.2 per cent respectively.
The company, originally called Beijing Legend Computers was founded with help of $25,000 worth of start-up funds from the Chinese Academy of Sciences. Its early business was importing and selling PCs from the likes of IBM and AST with an early development being a Chinese character graphics card.
By 1989, the company, now known as Hong Kong Legend had branched out into motherboard manufacture and in 1994, it changed its name again to Lenovo and launched itself on the Hong Kong stock exchange. Until the transfer of 19 per cent of the group to IBM, 57 per cent of the company was owned by Legend Group Holdings, which is controlled by the Chinese government.
The company now produces the whole range of PC based products, from consumer and business desktops to notebooks to servers and mobiles.
As well as three assembly plants in China capable of turning out up to five million units a year, it also has an extensive local distribution network with some 4,400 retail outlets selling PCs as low as $350.
The company’s market capitalisation on the HK Exchange prior to the acquisition of IBM’s PSD was $2.6 billion although the share price has fallen by around five per cent over the last year following an actual decline in sales and revenues in 2003 before recovering a little in 2004.
Despite its market share in China, competitors like Dell are setting up shop and, government edicts about buying locally notwithstanding, are beginning to eat away at Lenovo’s domestic market at the top end of the market and local competitors at the bottom.
Even with the wage costs in China as low as they are, producing PCs at rock bottom prices is not a recipe for a company with long term global ambitions, especially as it’s a game that everyone can play. As more and more companies set up shop in China or countries with even lower wages, the price advantage will soon disappear. Lenovo needs premium products to be able to sell at premium prices.
Having paid out $1.75 billion to IBM and taken on some 10,000 extra employees, the Personal Systems Division is a sizeable fish for the company to swallow. However, Lenovo needed to get big fast to become a player on the world stage. By buying IBM’s PC division, its certainly done that.