Repeat of ’97 Asian financial crisis unlikely – Standard & Poor’s looks at China
Lenovo is paying the price of admission to the global marketplace
By Terry Cooke
Foreign Policy Research Institute Senior Fellow
After the fanfare of Lenovo Group Ltd’s purchase of the IBM ThinkPad Division in 2005, today’s decidedly downbeat news from Lenovo’s Chairman may come as a surprise to some. As Chairman Yang Yuangqing reported today at the Reuters China Century Summit, Lenovo’s “margins are just 1 – 2 percent,” adding that “that’s definitely not a healthy business.” Moreover, Chairman Yang noted that it would take at least three years to return to strong profitability for the Lenovo Group.
In short, Lenovo overpaid for the allure of a blue-chip name in a tightening global market and is now paying the price.
More fundamentally, Lenovo’s balance sheet today shows the impact of local desire in China to forge global brand champions hitting two brickwall realities of the global IT marketplace: commoditization pressures on the technology and merciless competitive pressure on profitability.
None of this necessarily calls into question Lenovo’s long-term prospects. For one thing, if Dell and HP have both stumbled at the head of the pack, it is not surprising that the third-place runner has also been thrown off stride. Long-term, Lenovo’s proximity to, and advantages in, the fast-growing mainland market will bring it real advantages in the global race. The question is how those advantages in the local market can be leveraged over time to counteract and outweigh substantial disadvantages which Lenovo faces today in the much larger global marketplace.
The key to answering this question doesn’t lie in any particular quarter’s numbers. It lies in the history and culture of the Legend Group’s ‘long march’ to its current position of global prominence.
That march began in 1984 when Legend was founded by 11 scientists from the Chinese Academy of Sciences. The three most notable features of Legend/Lenovo’s rise over the next 22 years have been:
(a) the company’s lifeline dependence on the domestic Chinese market, (b) its demonstrated lack of technology innovation for the global market, and (c) the consistent pattern that its international partnerships have been aimed primarily at ‘China market access’ plays.
From this perspective, the heart of Lenovo’s strategy with the ThinkPad acquisition was to transform itself overnight from a domestically-focused regional player to a truly international player. The bottom-line in today’s news is two-fold: they paid a steep price for their admission ticket into the global league and they are now finding the competitive stakes within this league tougher than anticipated.
Bank of China sees vast changes in the mainland’s banking landscape
Zhu Min, the executive assistant president of Bank of China, the country’s second-largest lender, said at the Reuters Summit that there will be vast changes in the mainland’s banking competitive environment as the market is opened further to foreign competition at the end of the year. Regulators have already moved aggressively to reform large state-run banks such as Bank of China by removing billions of dollars of impaired loans from their books and allowing foreign investors to take strategic ownership stakes. Zhu welcomed the greater competition. “Before we competed with pistols, now we have AK-47s,” he said.