Myth, Reality, and lessons

for the United States and

Japan

Lenovo : A Case Study

Soumil Popat
Nivedita Banerjee
Dhiraj Rathod

PGD14003
PGD14022
PGD14057

Vinaya Saraf

PGD14075

Akshay Vaidya
Aditi Bagri

PGD14082
PGD14099

About Lenovo
Lenovo Group Ltd is a $21 billion personal
technology company serving customers in more
than 160 countries.
Largest in China , second-largest in the world.
Founder : Liu Chuanzhi, known as Godfather of
Chinas information technology industry.
Product lines include Think-branded commercial PCs
and Idea-branded consumer PCs, as well as servers,
workstations, and a family of mobile Internet

Lenovos Rise
1984

With an initial capital outlay of only RMB200,000,

Lenovo's founding chairman Liu Chuanzhilaunched
the New Technology Development Company (NTD Co.)
funded by the Chinese Academy of Sciences (CAS).

1988

Legend developed a Chinese-language add-on card ,which

gained a 50% market share for the company in this
technology.
Legend Hong Kong was established.

Early 1990

The very first Legend PC is launched in the market.

Legend changes its role from that of an agent for
imported computer products into that of a producer
and seller of its own branded computer products.
Legend gained its technical and management
expertise from its Hong Kong operations and its
foreign partners such as HP.
Use of horse race strategy.

1994

Listed in Hong Kong, with CAS still holding a large percentage of

ownership.

1996

1998

Legend becomes the market share leader in China for the

first time.
Legends PC strategy focused firmly on localization and on
the consumer market.

The 1 millionth Legend PC comes off the production line.

Intel Chairman Andy Grove attends the ceremony, and
takes the PC for Intels museum collection.
End of 1998, Legend had a market share of 17.9% and
ranked 3rd in the Asia-Pacific region, excluding Japan.

Accession of China to the

WTO
Lenovos choice to go global or continue in the domestic
market
Rebranded Legend to Lenovo in 2003
Le Legend and Novo New (Latin)
Innovative Legend
2004 marked the purchase of IBMs ThinkPad PC business
A major challenge: Transnational company

Protect/Attack Strategy

Protect
Attack

Chinas PC leadership
Drive profitability
Grow commercial with server and work
station
Solidify Chinas leadership position in
smart phones and Tablet market
Jumpstart Tablets outside China
Mobile Internet
Focus on SMB
Expand cloud offerings worldwide
PC+ and MIDH

Global Market Share 3Q2011

Global Market Share 3Q201
Dell; 12%
HP; 18%
Others; 57%
Lenovo; 14%

Source : International Data

Dell; 13%
Others; 48%

HP; 19%

Lenovo; 20%

China Market Share (2010)China Market Share (2013)

Dell; 12%

Dell; 10%
HP; 9%

Other; 29%

HP; 16%

Other; 52%
Lenovo; 29%
Lenovo ; 43%

U.S. Market Share (2011)U.S. Market Share (2013)

Dell; 23%

Dell; 23%
Other; 45%
HP; 27%
Lenovo; 6%

Other; 41%
HP; 27%
Lenovo; 10%

Revenue by product (2011)

Revenue by Product (2013)
Mobile; 9%
Other; 1% Mobile; 4%

Other ; 8%

Desktop; 34%

Notebook; 53%
Notebook; 61%

Desktop; 30%

Competitive advantage
Focus on volume instead of profit margin
Increase in market share
Brand dominance and improved economies of scale
Internationalization of operations
Absorbed IBMs Think brands
Cautious and conservative absorption
Advantage over competitors

China market
Lenovos foothold in growing Chinese market
Internationalization of R & D
Range of products and high end innovations
20% of global pc volume
34% of large enterprise market in china
19% of SMB market in china

Growth in Asia pacific market

and beyond

Asia pacific market share (excluding japan)

 In japan, lenovo did joint venture with NEC.

Lenovos Japanese market share

Market shares of pc vendors in India as on 2014

Other
Acer
Lenovo
Dell
HP

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

Apple v/s Lenovo

Apple

Partnership with China Unicorn (Chinas

second largest mobile carrier)
Luxury brand
Apple Inc.s combined revenues in the 2nd
quarter of 2011 is more than lenovos total
china revenue.
Lenovo
Launched the LePhone in 2010
Use of android operating system
Use of Baidu and lenovo applications instead
of google applications

iPad v/s LePad

Distribution Network
Lenovo was in the position of being both the manufacturer
and the primary distributor for its PC competitors
Lenovos distribution channels in China are less fragmented
than those in international markets
Lenovo has extended its dominance in Chinese distribution

In-House Manufacturing
Specialization
Lower marginal costs
Advantages
-Companies domestic manufacturing operations have
benefitted
-Lenovo could set up factories and buy components from
Taiwanese
suppliers

Labor

Savings on labour cost extended over the entire company

Low-cost labor in China included R & D engineers and
designers.
Labor accounts for 2-3 % of total costs,while key
components accounts for 60-70%
Responding to rising Labour Costs in Southern China,
Lenovo:1) Built Lenovo West China Operation Center in Chengdu HiTech Zone
Functions:a) Production Center- Annual Capacity -> 10 million PCs
b) Marketing Center- Regions covered -> Western China,

2) On May 7, 2012, Lenovo announced to build Wuhan

Industrial Base
Investment:- $800 million
Functions:a) R&D
b) Production Facility
c) Sales Facility
) TPV Technology Limited handles 12% production capacity of
Lenovo

Chengdu Hi-Tech
Zone

Government
Support
Lenovo received limited government support
Viewed by Chinese Government to a great degree as a
foreign company
High Tariff rates on foreign made PCs
Import Permits granted to Lenovo
Joint Venture in 1988 between Lenovo & China Technology
for investment purpose in Hong Kong (HK $900000)
Nominal
Tax Economic
Actual
Tax &
Chinas Investors
Incentives for FDI
in Special
Zones
Burden

Burden

Foreign

15 %

11 %

Domestic

33 %

23 %

Industrial Parks

Beijings Zhongguancun Park (ZPark)

Founded in 1988, Zhongguancun Park was the first high-tech park

organized by State Council and sought to foster high-tech start-ups

and its long time residents.
The main goal of the park is to be an incubator for high-tech firms.

Lenovo along with other companies resident in the park,

enjoy the following benefits:
- The park provides access to modern research facilities.
- The park provides favorable land policies for modern
manufacturing and high-tech corporations

Employees benefit from housing subsidies

given by corporations
- The 1+6 policy from the State council in
2010 launched pilot programs
- Another benefit is preferential treatment
through the avenue of mandated
government purchases

Tax Advantages
Foreign investment in Chinas central and western regions
enjoys 5 years of tax reductions and a possible 3 years of
halved income tax afterward.
Advanced technologies including Lenovo
-Exempted from income tax for 2 years followed by a
halved income tax
for the following 6 years
Export enterprises

 Lenovo also benefits from Chinas unified value-added tax

(VAT) reform of 1994
Tariff Exemption Policy for Equipment Import
-Tariff rate exemption
-Import-stage VAT exemption
Lenovo receives government financing from the Golden
projects program, and other national campaigns

Government grants
In 2009, Lenovo signed major information contract with
Turkmenistan
Agreement to provide Turkmenistan with
1. Information services for education
2. Business, medical, travel & technology sectors
.Agreement to provide Lenovo with
1. Expansion of its sales channel
2. Talent Training
. Grant ($7.5 million) given to Turkmenistan to buy Lenovo
computers

863 program
It was approved by Deng Xiaoping in the March 1986
hence the name 863
Used to fund and commercialize significant amounts of
science and technology development
Recent example is the virtualization technology from
the National University of Defense Technology that will
be used in Lenovo computers

Subsidies
Chinas rural computer subsidy program was launched in
2009 as the third round of the national rural home
appliances subsidy program
The central government funds 80% of the subsidy while
provincial governments fund 20%
Eligible computers cannot cost less than RMB 1,998.
Lenovo announced 15 different computer models priced
between RMB 2,500 and 3,500 for the program

Lenovos Relationship with

United States and Japan

United States:

1. Hewlett Packard:
i.

First Partner & Teacher

ii.

Provided Business and Managerial Know How

iii. Product technology, Business models, management

practices and strategic planning

2. Lenovos Acquisition of IBMs PC Division:

.Highlights:
i.

Deal struck in December 2004 for a total of $1.75bn,

making it the 3rd largest PC maker in the world and
increased PC business fourfold, from $3bn to $12bn.

ii. Expansion time was reduced by almost 5 years, according

to senior managers.
iii. Increased the brand value of Lenovo, significant as
Chinese Cos have struggled with the tag of Cheap
Chinese Products
iv. Lenovo gained IBM distribution in 116 countries.

v.

Gained a 5 Year right to use IBMs Brand, Marketing & Corporate Sales
Force.

vi. Also, worldwide network of computer sales and distribution employees as

well as knowledge of tax laws and invoicing practices in 66 countries.
vii. Retained executives with U.S. corporate experience and connections.
Notably, including an American CEO, Stephen Ward (formerly of IBM), then
followed by fellow American, William Amelio (formerly of Dell)
viii. Huge R&D gains Lenovo added 1500 patents from IBM to the already
existing 1000 held by Lenovo. Also, increasing its R&D workforce from 1,100
to 1,800.
ix. The acquisition propelled the companys expansion into laptop production
and corporate sectors.

3. Other tie ups:

i.

DAW- Legends early partner. Authorized distributors of IBM PCs in Hong

Kong & China.

ii.

1997: Intellectual property agreement with Microsoft.

iii. 1998: Tinaxi Lenovos first laptop was launched after working with GE
Plastics, NIKE, IDEO & Ziba Design.
iv. 1999: Combined Laboratories with Texas Instruments for developing cell
phones and projectors.
v.

2003: Establishment of Lenovo-Intel Teach for the development of new

products for global consumers.

vi. Currently using Googles Android platform for its smartphones and tablets.

 Japan:
1. Thinkpad research center in Yamoto, Japan.
2. Sources key parts from like Hard drives and Batteries from Hitachi and
Sony, Sanyo; respectively.
3. Joint venture with NEC:
i.

NEC Lenovo Japan Group, finalized on July 4 th,2011.

ii.

Lenovo holds a 51% stake while NEC holds 49%.

iii. Biggest PC supplier in Japan with 25% market share.

iv. NEC gained $175 million worth of Lenovos stock in the deal.
v.

First full-fledged alliance between a major Japanese and Chinese players

Key Findings(Conclusion):
Right place, right time.

Developing a brand image internationally requires patience.

Adaptive instead of Innovative.

Market led industrial policies do exist in China