Lenovo Group Ltd. (HKSE: 0992) (LNVGY)

[revlis]

Lenovo’s $100 Billion Gambit
Yang Yuanqing built Lenovo into the world’s largest PC maker. His next target? Smartphones. Watch out Samsung, Apple.

China has such a short history of corporate entrepreneurship that outlandish goals don’t seem preposterous, and ambition never looks outsize. That is, perhaps, part of the reason that Yang Yuanqing, the Lenovo Group CEO who once delivered workstations by bicycle, was able to build the world’s largest PC manufacturer. It is also a good part of the reason why his designs on challenging Apple (ticker: AAPL) and Samsung Electronics (005930.Korea) to dominate the world of devices to connect to the Internet might succeed.

Yang, who recently turned 50, has built the world’s largest maker of personal computers and one of China’s most recognizable brands by forging into emerging markets and the Chinese hinterland, and selling ThinkPads, formerly IBM’s laptop brand, to companies all around the world. He’s not finished yet. This fall, Lenovo (992.Hong Kong), which is headquartered in Beijing and Morrisville, N.C., received approval from U.S. authorities to buy IBM ’s (IBM) X86 server operation for $2.1 billion and Google ’s (GOOGL) Motorola Mobility handset business for $2.9 billion. The two deals will increase the company’s revenue by $10 billion, to an estimated $57 billion next year. Lenovo’s goal is to reach $100 billion in sales, although so far there is no timetable in place.

“In a weird way, Yuanqing is almost made for this,” says Yahoo! (YHOO) co-founder Jerry Yang, who sits on Lenovo’s board. (They share the same last name but aren’t related.) “He’s been working his entire career to get to this point. China is probably very proud of Lenovo. But his ambition is to be not just a Chinese company, but a global company that’s headquartered in China.”

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Yang aims to more than double Lenovo’s sales, to $100 billion. Photo: Bruce DeBoer for Barron’s
Lenovo and its CEO, who is known around the company as YY, have marched side by side almost from the start. Lenovo was founded in 1984 as a computer reseller by Liu Chuanzhi and 10 other engineers. They were funded by the Chinese Academy of Sciences, which still owns 36% of Lenovo’s major shareholder, Legend Holdings. Five years later Yang, a graduate student in computer science, answered the company’s newspaper ad for a salesman. He began selling Hewlett-Packard (HPQ) workstations.

As Yang tells it, he did everything: “I introduced the product to the customer. When they decided to buy, I wrote the purchase order, took the money to the cashier, took the order to the warehouse to take the computer and test it, rode the bicycle to [bring the computer] to the customer’s office. If they had a problem they would call me to help them to fix it.”

His enthusiasm and smart choices in building the organization prompted Liu to name him the head of the PC unit, something Liu would later recall as “a risky decision.” At first it was tough. The supply chain was poorly managed and inventories were bloated. Yang ordered an information-technology system so that sales would know what was in inventory. And he introduced a sense of camaraderie, in part by ordering people to address managers, including himself, by their first names, not honorifics.

HE ALSO FIRED PEOPLE. Mary Ma, Lenovo’s former CFO, feared that the glass separating her office from Yang’s would shatter from all the dressing-downs. Older executives rebelled. Eventually, Liu came in and talked to each senior manager to express his support of Yang. Then he told Yang he could keep his job, but tone it down. A grateful Yang was nearly in tears, recalls Ma.

Through a spokesman, Liu, who retired as chairman of Lenovo in 2011, declined to be interviewed.

Yang kept going. Lenovo introduced its first laptop in 1996, and then began distributing IBM software in China. Yang dumped direct sales and used local distributors, and cut prices to just above cost. Lenovo became China’s largest PC manufacturer. And when it began facing flat growth in the early 2000s, under pressure from HP, IBM, and local brands, Yang, who was named CEO in 2001, decided it was time to make a bid for IBM’s PC division. The board was reluctant, but Yang persisted. In 2005, Lenovo purchased IBM’s PC operation for $1.75 billion, quadrupling the company’s sales overnight.

To persuade the board, Yang agreed to step aside as CEO, to give the company an American face. He moved into the chairman role, which Liu vacated.

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The company’s first new CEO, a former IBM executive, was slow to cut costs and stepped down after a year. Next, Bill Amelio, a former Dell executive, clashed with Yang as they worked to reconcile the Lenovo culture with the old IBM culture and the Dell culture that Amelio brought with him.

Meanwhile, Lenovo’s consumer products proved a bust. Then came the financial crisis, and sales took a big hit. Amelio resigned, Yang returned to the CEO slot and Liu returned as chairman.

Once back, Yang cut the top management team from 17 to just nine. The managers met once a month in different locales around the world. He told the team to be frank with each other and respect each other. By this point, he had dropped the brute force, and was using nuance and persuasion. It was leadership by eventual consensus, which they called the Lenovo Way.

Aware of the varied backgrounds of his team and its challenges, Yang hired a director of diversity. He asked for an assessment by his direct reports and other key leaders, recalls Yolanda Conyers, vice president of global HR operations.

The team created an action plan dubbed Protect & Attack. Lenovo would protect cash-cow markets such as China, or premium ThinkPad sales to enterprises, and attack fast-growth geographies and new products. The company kept prices low, helped by the fact that it manufactured half of its goods in-house. Lenovo built distribution centers around the world. It began to scarf up market share. Last year, it became the largest PC manufacturer in the world, with nearly 20% of the market. “I realized YY and his team are a lot more flexible, pliable, and less dogmatic about strategy,” says Alberto Moel of Sanford C. Bernstein. “I didn’t appreciate how much management had learned from the [IBM] experience.”

With the world accessing information via mobile devices and the cloud, Yang decided in 2009 that Lenovo needed a new strategy: Though it was growing market share, PC sales were on the wane, and he figured growth in the PC business might last a few more years, tops. The next big milestone, says Yang, is to be No. 1 in devices that connect to the Internet, what he calls PC Plus. He invited Jerry Yang to join the board. The two dipped into their private wine cellars at a tasting for Silicon Valley luminaries including Google co-founder Larry Page and Tesla (TSLA) founder Elon Musk. Lenovo had arrived.

EVEN BEFORE THE MOTOROLA deal, Yang had huge ambitions. In China, Lenovo had become the second-largest smartphone vendor after Samsung, using the same strategy it had used with PCs—keeping manufacturing and R&D in-house, keeping prices affordable, putting out new models. Trouble was, it was tough to grow anywhere outside the emerging markets: Lenovo knew it could grow even faster if it bought another company. It passed on BlackBerry. In 2012, Google bought Motorola. Over dinner, Yang told Google CEO Eric Schmidt, “If you don’t want the hardware business, we’ll take it,” he said. A year later, he got a call from Schmidt. The Motorola deal gave Lenovo the same cachet and brand IBM gave them in PCs. A couple of years back, Yang set the seemingly impossible goal of selling 100 million smartphones and tablets worldwide in 2015. Now that looks possible.

The phone business is insanely competitive—last quarter, Xiaomi of China came out of nowhere to grab third place, displacing Lenovo. With the Motorola deal, however, Lenovo will return to a solid No. 3. It could manufacture in China, driving costs lower, and reintroduce the brand there.

At the same time, IBM was dumping its low-end server unit. Lenovo was already in servers and storage, and IBM’s so-called x86 operation, with $4.6 billion in 2013 revenue, was a commodity business that went head to head with HP and Dell. It was the kind of business Yang loved. He could reduce prices with Lenovo’s strong supply chain and keep a tight grip on costs. Lenovo could sell the servers to new customers.

“Servers went from being the bottom of the totem pole to being the highest-margin business at Lenovo. That mindset change has been an eye-opener for them,” says Gerry Smith, a former Dell executive who runs Lenovo’s enterprise unit. After the two deals, Lenovo has “a complete defined portfolio from high-mobility products to back-end infrastructure,” says Roger Kay, a consultant with Endpoint Technologies.

Yang is a ferociously hard worker, an ethic that is partly Chinese, and partly just Yang himself. For example, 10 years ago, Yang didn’t know English, so he moved his family to North Carolina after buying IBM’s PC division, studied with an English teacher, and watched a lot of cable news to grow familiar with idioms. Learning a foreign language requires one to be OK with making boneheaded mistakes and looking foolish. Today, Yang conducts interviews and gives speeches in fluent English.

Lenovo’s management team is close-knit and competitive. Among them are Liu Jun, who is quarterbacking the Motorola integration; Gianfranco Lanci, the former CEO of Acer (2353.Taiwan), who runs the PC business and business in mature markets; and Aymar de Lencquesaing, the former CEO of Packard Bell, who oversees emerging markets. They egg each other on. YY often calls suppliers and customers on their behalf and changes his travel schedule to accommodate them. When Gerry Smith, the former Dell exec, asked him to go to Latin America to meet customers and employees, Yang replied “Name the day.” They went two months later. Says Jerry Yang: “He’ll be the first to go and take the hill.”

YY doesn’t confine himself to dealing with just his top executives. He socializes with upper and mid-level managers and has given the cash portion of his bonus back to the rank and file for three years in a row. Last year, he distributed $3 million.

In fiscal 2015, which ends in March, Lenovo is expected to earn $818 million, or eight cents a share, on sales of $47 billion, versus $817 million a year earlier, on $39 billion. Earnings are likely to be under pressure for a couple of quarters as Lenovo digests the acquisitions. The shares, which trade in Hong Kong, recently fetched HK$10.88 a share, or 17 times this year’s expected earnings.

The addition of Motorola and IBM’s server business will bring the company closer to its goal of reaching $100 billion in sales. But that’s “just a number, given by my team,” Yang says. His ambition is bigger: “I want to build Lenovo into the most respected company in the world.”

Yang was born in the year of the Dragon—a sign that traditionally combines ambitiousness and tenacity. His parents were poor surgeons in Hefei province who often worked long hours. At the age of 10, he found himself cooking lunch over a coal stove for his two young siblings. “I’m the older son,” he said to himself. “I have to take care not just of myself, but also of my brother and sister.” Asked what the experience taught him, he grins. “Being persistent,” he says. “Persistence.”

http://online.barrons.com/articles/lenovos-100-billion-gambit-1417234193