Lenovo Group Limited is a multinational computer technology corporation that develops personal computers, servers and IT software. Amid the global dotcom bubble in the 2000s, Lenovo began to pump resources into sectors such as mobile phones, internet-related business and information technology services. The technology joy ride was short-lived as competition at home grew ferociously with the mainland's entry into the World Trade Organization, eating into Lenovo’s bottom line. After this ill-fated strategy of diversification and a focus on the domestic market between 2001 and 2003, Lenovo chairman Yang Yuanqing said in an interview with the South China Morning Post, Lenovo shifted its business philosophy. “On the one hand, we’d optimize our advantages in the domestic market, on the other, use it to ‘attack’ the international market,” he said.
Lenovo has been working steadily to become China’s first globally recognized brand. In 2003, it changed its name from Legend to Lenovo “specifically because Legend was too common and already trademarked in the West.” Lenovo” combines the first part of the word Legend and the Latin word for new. The Chinese name means thinking that is connected, or associative.
Lenovo’s senior vice president and director of marketing said, “there will be no doubt that ThinkPad is made by Lenovo, just like iPod is made by Apple.” Lenovo’s strategy is to link its name with the better-known products (ThinkPads and ThinkCenters), until they become synonymous in the customer’s mind. This strategy should help Lenovo gain recognition. “The way the deal is structured, with IBM retaining a stake and putting its brand name on the line, will help them do that,” said Oded Shenkar, professor of international business at Ohio State University and author of The Chinese Century.
Lenovo has four core values at the heart of its brand: (a) serving customers, (b) accuracy and truth seeking, (c) trustworthiness and integrity, and (d) an innovative “can-do” spirit.31 Lenovo can leverage these four values to fulfill its ambition of being technology-driven, service-oriented global brand. Since Lenovo Group Limited announced the closing of the acquisition of IBM’s PC Division on May 1, 2013 , Lenovo has been working its way to become one of the largest personal computing companies in the world and has won worldwide consumer confidence in its products. Lenovo reported global profitability, outpacing the industry in key emerging markets, as well as growth from the acquisition. According to Technology Business Research (TBR), by the end of August 2013, Lenovo has moved into the No. 1 position in notebook corporate customer satisfaction, and customer satisfaction rate in ThinkCenter desktops has grown by nearly 4% over the past 18 months.
In 2005, Lenovo proposed to acquire IBM’s PC Company Division, which marketed the ThinkPad line of notebook PCs for approximately $1.75bn—$650 million in cash and up to $600 million in shares, giving IBM an 18.9% stake as well as $500 million in debt (Quelch & Knoop 1) The U.S. private equity fund Texas Pacific Group was Lenovo’s fiercest rival. TPG offered about $100m less, all in cash, but IBM opted for Lenovo’s offer. The reasons were: (a) IBM wanted to retain a stake in the market it created with the first IBM personal computer in 1981; (b) IBM understood that China was a huge developing market for PCs and thus by retaining a stake in a partnership with a Chinese company they were far better positioned to profit in that market. Presumably, IBM’s stake in Lenovo also contributed to boosting confidence in the acquisition precisely because of the intricate connection between the two companies. The deal quadrupled Lenovo’s sales to more than $12 billon, allowed it to use IBM’s brand under license for five years and gave it control of the Think trademark.(Quelch & Knoop 2) Lenovo also transferred its head office to the United States and kept IBM as preferred supplier of after-sales service outside China. This acquisition quickly raised Lenovo’s ranking in the global PC industry to No.3 in 2005—it was making at least 14 million units a year with annual revenue of $13 billion (Athens & Zhou 2 ) By 2014, Lenovo remained the fourth largest vendor of personal computers in the world.
Lenovo has become the first state-controlled Chinese company to acquire an iconic global brand, together with the high profile and psychological leap of faith. In this sense, it is fair to say that the deal gave Lenovo more than Big Blue’s PC business. After the acquisition, Lenovo teamed up with Microsoft on launch market trials in China and India that would validate the market for pay-as-you go personal computing in 2006. (Quelch & Knoop 3) Lenovo is also the main sponsor of the 2008 Olympic Games. Lenovo also went into co-operation with big international brands like Visa, Coca-Cola and Kodak. In December 2008, Lenovo teamed up with leading Formula 1 Team Vodafone McLaren Mercedes It is widely believed that the acquisition of ThinkPad has provided a better platform for Lenovo to involve other influential companies in its marketing strategy, which will inevitably help Lenovo on its way to becoming a global brand. In its 2010 Super Bowl advertisement, “Lenovo” no longer lives in the shadow of “ThinkPad.” Now Lenovo is marketed to consumers, independent from ThinkPad. It has become a valued and trustworthy tech company that not only makes “Think branded” products, but also unveils a suite of new products—including an Android-based tablet “Le Pad.” The corona of the global brand Lenovo makes a bold statement of how far a Chinese company can go.
According to the U.S. Treasury, China’s U.S. equity portfolio holdings increased from $1.4 billion in 2010 to $4 billion in 2014, and subsequently swelled to $93 billion in early 2014. According to Dealogic, a provider of financial data, Chinese acquisitions of equity stakes in U.S. companies reached $3.9 billion in 200, climbing past the minimal levels seen a few years ago (Athens & Zhou 4). Some critics have pointed out that China’s main overseas investments have been in the energy and mineral sectors—an indication that China is merely trying to secure resources essential to its economic expansion.
Besides trying to secure strategic resources for its continued development, the Chinese government is trying to encourage outflows of capital from China to relieve pressure on the yuan. Excess liquidity has been fueling inflation in China and the Chinese government is under grave pressure to reevaluate the currency. The weakened value of the United States dollar as well as the financial struggles in the aftermath of the Great Recession also put companies in a vulnerable position which made them more attractive to investors in China.
Chinese government and non-profit organizations actively support and promote government institutions to increase China's foreign acquisitions. China Council for International Investment Promotion is a national non-profit organization responsible for promoting China’s inward and outward investment in line with China’s economic strategies, with a view to advancing economic development and social progress. The Ministry of Civil Affairs approved CCIIP’s formation in January 2006.(Athens & Zhou 7) Founded by the State Council—the chief administrative authority (Cabinet) of the People’s Republic of China, CCIIP reports to the Ministry of Commerce. One of the objectives of CCIIP is “to facilitate Chinese enterprises investing overseas and participate in international economic and technical cooperation projects.” The China Investment Corporation is an investment institution established by the Ministry of Finance as a wholly state-owned company. About 70% of China’s foreign exchange reserves were invested in U.S. treasury notes before 2008. To get a better return on investment, the Chinese government established the China Investment Corporation to manage a $208 billion (1.55 ) trillion yuan) sovereign wealth fund (Athens & Zhou 8). .Unfortunately, CIC’s first move was a bust as it invested $3 billion of China’s national savings into the IPO of America’s best-known equity firm, the Blackstone Group, only to have the investment lose almost half its value since then. In December 2007, CIC also invested $5 billion for a 9.9% stake in the second biggest U.S. securities firm, Morgan Stanley, which was hard-hit by the U.S. sub-prime crisis.(Athens & Zhou 9). These several failed major acquisitions have shaken CIC’s aim of being a proactive investor. On March 2, 2009, Chinese media reported that the CIC was shifting its investment strategy to focus more on real estate, resources, and other areas more tied to the “real economy.”(Athens & Zhou 11).
U.S. government has resisted Chinese acquisitions in more sensitive sectors military, aviation and technology industries. Congress is particularly concerned about the motives of potential Chinese buyers who are usually owned by or have deep ties to the Chinese government, such as oil companies or sovereign wealth funds, or other ostensibly “private” companies that nevertheless lack transparency regarding ownership, such as Huawei Technologies. The major concerns about sovereign wealth funds like CIC appear to be: 1.Is there a strategy of ruining the U.S. economy? 2. Do SWFs mean information is not available to the ordinary investor, and engage in insider trading? Do they use their investments to eradicate competition in favor of companies at home? 3. Can SWFs destabilize U.S. companies by threatening to withdraw their equity over whichever reasons that might emerge? (Athens & Zhou 26).
As China has been one of the greatest recipients of foreign investment, the hostility and resistance against its investment in other countries seems unjustifiable. With economic reform in the past quarter century, the Chinese government has been credited with creating and incubating the market, enhancing incentives to liberalize the economy and promoting inward foreign investment. Competition among localities was induced by the state to provide better infrastructures in order to attract capital. $74.8 billion in non-financial FDI in 2013 is much higher than in China (Athens & Zhou 21). Even though United States foreign investment in China is only a small fraction of its total global investment (less than 1% of total FDI based on a historical analysis of costs), this investment alone is still much higher than in China. In 2014, Chinese FDI in the United States was approximately $600 million compared with $22.2 billion of U.S.FDI in China. It was not until 2009 that Chinese acquisitions of U.S. equity stakes surpassed U.S. acquisitions of Chinese equity stakes for the first time(Athens & Zhou 20). It seems in this case that the complaints of United States persons about the restricted access in Chinese markets for investments are unfounded and may be provoked by nationalist fears.
Skeptics harbored doubts that other Chinese companies would follow Lenovo in the trend of seeking international brands and markets. First, the domestic market is a large and growing one. If a Chinese company is able to clinch a substantial domestic market share, it can create a lucrative business. The high-growth prospects of many industries in China will act as a constraint on cross-border deals. In Lenovo’s case, the acquisition was not only to enter the global league, but most important, to cushion the blow of growing competition in the home market. The PC industry in China had been suffering from falling margins and overcrowding. Lenovo executives cited IBM’s PC business’s gross margins of 20% as part of its appeal, compared to Lenovo’s 15%. Second, there are few companies that encompass the caliber of Lenovo. Even groups with an avowed ambition to expand abroad, like Haier, have so far “focused on picking low-hanging fruit closer to home.”(Athens & Zhou 14). And even for those that are equipped for overseas expansion and backed by the State Council, such as CNOOC, the risks are high. CNOOC was forced to withdraw its $18.5 billion all cash bid for Unocal on U.S. political opposition, despite surpassing Chevron's rival offer of $17.3 billion. Third, the lack of experience in management posed challenges for mergers and acquisitions deals. It took 18 months for Lenovo to close the deal with IBM.
Chinese corporations have been rapidly gaining the attributes of global multinational giants. The number of Chinese companies listed as Fortune Global 500 jumped—from 16 in 2005 to 46 in 2010—by 187.5% within mere five years. Some of the companies, such as Sinopec and Huawei, are actively seeking and closing overseas M&A deals. But many of these Global 500 companies from China may never become household brand names. Few of them are consumer brands and most of them are in the industries of energy, minerals, banking and insurance. China’s foreign investment in the world has been on the rise to support economic development and commercial expansion. Not-for-profit organizations such as CCIIP aim to facilitate Chinese enterprises investing abroad. Sovereign wealth fund CIC was established to manage a flux of foreign reserves (Athens & Zhou 27) Encouraging outflows of excess capital is also a remedy for curbing inflation in China. CIC invested heavily in the United States, but Chinese acquisitions of U.S. assets have met with great resistance from the U.S. government. CFIUS reviews the national security implications of a wide range of foreign acquisitions of, and investment in, American businesses and the committee’s proceedings are secret. CFIUS is considered a “deal breaker” and its inquiry for the Lenovo-IBM deal was a full investigation.(Athens & Zhou 27) Meanwhile, Chinese companies have intrinsic attributes that dwarf their overseas expansions and it will be a long way to go for them to become internationally household brand names.
As companies venture overseas, corporate reputation, a company’s intangible asset, is gaining increasing importance. Jay Wang, professor of strategic public relations at the USC Annenberg School for Communication & Journalism, argues that one of the essential tasks for business communicators is to examine and understand the “political ecology” of the host country market in order to effectively manage foreign public’s perception of the company and its brand (Wang 134). Political ecology as used in this context means transactions representing exchanges based on social legitimacy and authority rather than those of goods and monetary resources (Hutt et al., 1986). One particular aspect of the political ecology of the United States that Chinese companies must grapple with is the national image of China and its implications for Chinese companies’ public relations and branding communication.
While public perceptions of China and the state involvement in businesses are inevitably impacting public perceptions of Chinese companies, strategic public relations provides a powerful way to give the best possible impression of the business—engineered to create intrinsic value, maximize market impact and desirability. Penetrating a foreign market does not happen overnight, but rather takes painstaking efforts and tremendous amount of time and patience. The combination of the language barrier and the cultural barrier makes any merger and acquisition transaction difficult from a communication standpoint. The approach to globalize through purchasing part of a well-known company is beyond reproach a good strategy. Lenovo’s acquisition of IBM’s PC business was said to “bring confidence and pride to all Chinese people.”(Knoop et al 21). But even in such a successful case, there were noted issues: (summarized by former chairman and co-founder of Lenovo, Liu Chuanzhi6 (a) keeping the original IBM employees with the new company; (b) retaining original clients and customers of IBM; (c) integrating the business operations of the two vastly different companies; and (d) facing potential cultural conflicts.(Knoop et al 22)
Needless to say, the deep involvement of the Communist Party in the Chinese economy poses a significant challenge. One may contend that just as Japanese and Korean companies overcame skepticism to succeed abroad, so China’s ambitions should be taken seriously. Certainly, Japan and South Korea encountered distrust from Washington, mass media and U.S. customers in the 1980s and now brands like Toyota, Honda, Sony Corp. and Samsung Electronics are some of the most valued brands in America. The main difference is, while there were high-profile cases of resistance to Japanese investments, Japan was considered a close U.S. ally and not an adversary. Chinese companies, undoubtedly, face unique challenges—the brands come from a country that is still communist, a pernicious notion in the West.
U.S. politicians and government agencies exert strong influence on Chinese investment deals. At times, they direct the tone of the conversations and dominate the public discourse on such topics. The Committee on Foreign Investment in the United States could single-handedly determine the outcome of supposedly free-market economic activities, if such activities were ruled by the agency as posing threats to national security. There are signs that the U.S. government is more welcoming of Chinese investment, which is of strategic importance to the United States. For better or worse, America’s economic capacity and its technological capabilities will be closely intertwined with China. Chinese companies, such as Lenovo and CNOOC, show the U.S. public the scale of ambitions swelling in Chinese corporate hearts. Their acquisition deals or proposals also highlight the degree to which they are backed by the Chinese government keen for global influence and resources. Names like TCL, Haier, Huawei and Pearl River will soon become well known to Americans.
In the meantime, one can expect a continued growth of Chinese foreign direct investment, including acquisitions by Chinese companies, be it private or state-controlled, in the United States. In addition, American firms are reluctant to welcome Chinese investments into the U.S. market, especially in the high-tech arena. Three major factors account for this reluctance: (a) the belief that the Chinese government unfairly manipulates the value of its currency; (b) the belief that intellectual property and privacy is not respected in China; and (c) the belief that the Chinese government unfairly subsidizes its exporters.(Yiang 16) It is open to dispute whether buying foreign companies is the best way for Chinese enterprises to succeed. But the trend is irreversible for China’s investment in developing and developed economies to continue to grow.
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