References
Millman, G. J. (2008). Global Growth From East to West. Financial Executive, 24(10), 31-33.
| AUTHOR: |
Gregory J. Millman |
| TITLE: |
Global Growth From East to West |
| SOURCE: |
Financial Executive 24 no10 31-3 D 2008 |
| COPYRIGHT: |
The magazine publisher is the copyright holder of this article and it is reproduced with permission. Further reproduction of this article in violation of the copyright is prohibited. To contact the publisher: http://www.fei.org/ |
Chinese entrepreneurs have worked wonders in their country to drive economic growth that has lifted hundreds of millions of people out of poverty and made China the factory floor of the world. In recent years, Chinese firms have begun to spread their wings with acquisitions abroad — but have made more headlines for failure than for success.
Indeed, only one Chinese firm has deftly managed to negotiate its transition from the Chinese market to the global stage: Lenovo Group Ltd. After establishing itself as the dominant computer brand in China, in 2005, Lenovo acquired International Business Machine Inc.’s personal computer business and, despite an initial stumble, the merged company has defied the odds by growing globally.
Lenovo neatly avoided the turbulence and infighting that came in the wake of the Hewlett-Packard Co.-Compaq Computer Corp. merger. Clearly, the current global financial crisis will prove to be a difficult test. Although its stock price soared last year, in October, Daiwa Securities Group Inc. downgraded its rating on the company and its profit forecast, citing weakening demand.
While no company’s future is 100 percent secure in the current economic marketplace, Lenovo has shown that it is possible for a strong Chinese firm to become a global company, and that — in itself — is a singular achievement.
What’s Lenovo’s secret?
Senior Vice President and Chief Financial Officer Wong Mai Ming credits Lenovo’s founder Liu Chuanzhi for his strategic vision and set of management principles that defy stereotypes about Chinese business.
Indeed, Wong says there may be little merit in the stereotypes, which merely reflected a particular stage in China’s economic development.
For example, consider the alleged importance of guanxi, or relationships. “If s not really true that relationship is everything in China,” he says. Twenty years ago, the Chinese economy was primarily dominated by state-owned companies, and many customers were government officials. Thus, relationships were important. But now, China is moving toward a market economy.
“Government relationships are about equally important in the U.S., U.K. and China — though somewhat more in China because we have a much thicker slice of the economy run by government,” Wong says.
FINANCE’S ROLE
Lenovo’s insistence on using accurate financial information and hard numbers to guide its strategy also sets the company apart from many other Chinese companies. Wong explains that, in his experience, Chinese companies “tend to underestimate the problems or challenges they will face, and use optimistic assumptions instead of the truth.”
The finance function at Lenovo plays two roles. On the one hand, he says, it maintains an accurate record of what has actually happened. Then, it helps the business side crystallize and quantify its ideas and challenges assumptions by providing hard numbers.
To do this job effectively, finance people need to have a deep understanding of the business so that they’ll know how costs flow and relate to each other. Wong says his belief is that “finance has to work as a partner to the business. The CEO and CFO have to work hand-in-hand.”
PLANNING FOR THE LONG-TERM
Wong, a native of Hong Kong, attended the University of Manchester in England, graduated in 1982 and became a chartered accountant in 1985. He began his career in investment banking, with Baring Brothers & Co., where he worked with the manager who later failed to notice or prevent the rogue trading that caused the company’s collapse in 1999.
Wong recalls the manager as being highly intelligent and capable, and when he read the reports of the institution’s failure, he took them as a warning.
“This was a lesson to me that you have to step back and look at the good and the bad. If things happen too quickly, you really need to sit down and think about how things can be so good,” he says. “I don’t believe that luck is always good.”
Wong had worked with Liu on several investment banking issues and became an independent, non-executive director of the group in 1999. In 2007, he accepted an invitation to join Lenovo as CFO.
Liu was one of the first technology entrepreneurs in China. In 1984, he left his post as a researcher with the Computer Institute of the Chinese Academy of Sciences to found Lenovo, naming it Lianxiang, or Legend. His connection with the Institute gave him access to both intellectual capital and bank credit, but he had to chart his own course through the perplexities of China’s transition to a market economy, with its unpredictable policy shifts and business risks.
Competition was fierce, and Legend operated as a Chinese agent for foreign computer makers. The key to its early success was a card that essentially translated an English-language operating environment into Chinese characters, allowing employees to work in their own language. It eventually began to produce computers under its own brand.
As the company grew, Liu successfully coped with internal dissension and challenges to his power that sometimes included threats of violence, according to the company history, The Lenovo Affair: The Growth of China’s Computer Giant and Its Takeover of IBM-PC, a 2006 book written by Ling Zhijung, a reporter for the People’s Daily in Shanghai.
Meanwhile, the company had to change nimbly to survive the storms of the changing computer market. When U.S.-based Dell Inc. made its big push into online sales, Liu and his successor, Yang Yuan-qing revamped Legend’s distribution channels.
When Liu discovered that the name Legend could not be registered in the international market, as it was already in widespread use, he changed the name to “Lenovo.”
Though Liu had his eye on the long term, Wong says, “Mr. Liu kept telling me when I was an investment banker that he wanted to build the company to last at least 100 years.”
Upcoming entrepreneurs seldom think about long-term strategy, adds Wong, but Liu did. In fact, he thought about training people, getting the strategy right and thinking very carefully before execution. And he emphasizes that when you have a problem, you have to go to the root.
“Sometimes you get entrepreneurs who are very macro, but lose the details,” says Wong. “Mr. Liu actually has a very good combination of the two.”
MANAGING FOR A GLOBAL STRATEGY
Investment in China was the prominent global business story of the past two decades. Now, though, the focus is increasingly on Chinese investment abroad. The Economist recently noted that the Chinese are “increasingly regarded as unpalatable buyers.” And, when Chinese firms have succeeded in acquiring their targets, results have generally been less than encouraging.
Liu’s caution and strategic vision has apparently helped Lenovo avoid that fate. IBM first approached Legend with a sales pitch for the IBM PC business in 2002.
“Mr. Liu really wanted to bring Lenovo into the international arena, but he took a realistic look at his own team and said at the time the team was not mature enough to take on the challenge,” says Wong.
Liu’s cautious and conservative assessment of his organization helped Lenovo take a rare step after the acquisition. Because running a global business would require skills that the company’s Chinese management had not yet acquired, Lenovo put experienced, non-Chinese executives in charge.
“That is something that is very, very rare, especially for an Asian entrepreneur,” notes Wong. “A lot of the failure of Asian companies is that they do not put in the right people to run the business; they are over-optimistic about their capabilities.”
In late 2005, Bill Amelio, former head of Dell’s Asia-Pacific operations, came on as Lenovo CEO, and Wong estimates that only about a third of Lenovo’s senior management group is Chinese.
One mark of the company’s global ambition is its approach to “headquarters.” Lenovo is not headquartered in China, nor does it define itself as a Chinese company. It has no formal headquarters, although Amelio is based in Beijing.
“Is it important to have a headquarters?” Wong rhetorically asks. Lenovo is organized geographically in four regions, and senior management is dispersed throughout the world. There is great emphasis on cultivating trust and mutual respect for managers and management styles, no matter what their national context, he explains.
“At the executive level, you have people coming from the East and West. These are all successful people. You have to respect that there are different ways of doing things that can be successful,” he says.
Lenovo enforces respect with rules that require executives to listen to each other. “Language may be an issue for the Chinese,” says Wong. So, when they are slowly expressing themselves, he says, you have to let them elaborate.
“We have a rule that in the first 10 minutes — when someone is doing a presentation — you should not ask questions.”
Another rule requires that the person giving a presentation tell the listeners its purpose upfront. For example, is it to secure approval, surface an idea for discussion, etc.? A third rule requires that anyone arriving late to a meeting stand in the corner for a minute before joining the group.
“Mr. Liu hates people being late; he says you’re wasting everyone’s time,” Wong says.
Lenovo also encourages questioning authority to a degree unusual in Asian companies. Generally, in China, people tend to not disagree with the boss.
“You say, because he’s so successful, it’s more likely that I am wrong than right and why embarrass him if I’m wrong,” says Wong. But, at Lenovo, “people actually raise different views and debate.”
ADDED MATERIAL
GREGORY J. MILLMAN (gj.millman@earthlink.net) is a freelance writer in New Jersey and a frequent contributor to FINANCIAL EXECUTIVE.
