Lenovo Group Ltd.

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Lenovo Group Ltd.

One Manhattanville Road
Purchase, New York 10577-2100
U.S.A.
Telephone: (914) 701-2800
Toll Free: (866) 96-THINK
Web site: http://www.lenovo.com

Public Company
Incorporated: 1988
Employees: 21,000
Sales: HKD 22.56 billion ($2.90 billion) (2004/05)
Stock Exchanges: Hong Kong ADR
Ticker Symbols: 992; LNVGY
NAIC: 334111 Electronic Computer Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 423430 Computer and Computer Peripheral Equipment and Software Merchant Wholesalers; 541511 Custom Computer Programming Services

Lenovo Group Ltd. is a leading global manufacturer of personal computers (PCs). The company was already the largest PC manufacturer in China when it acquired IBM's Personal Computing Division in 2005. In addition, the parent Lenovo Group produces PDAs and mobile phones, and operates consulting and Internet ventures. It has several manufacturing sites in China in addition to IBM's former facility in Raleigh, North Carolina.

HUMBLE ORIGINS

Like many other high-tech start-ups, Lenovo grew from modest origins. The Zhongguanchun (Zhong Guan Can) district of Beijing had a reputation as an electronics black market; the area would eventually be called the Silicon Valley of China.

Lenovo is a spinoff of the Legend Group, which was established in 1984 by a group of eleven computer scientists led by Liu Chuanzhi. Liu managed with a very authoritarian style, at least in the beginning, according to later interviews.

Liu was born in Shanghai; his father worked for the Bank of China. Liu studied radar systems at the Military Communication Engineering College until 1966, then went to work for the China Academy of Sciences (CAS) in Beijing. Some ill-timed criticism of the Cultural Revolution got him transferred to a rice paddy in the late 1960s in an effort to rehabilitate his bourgeois thinking.

In 1970, Liu began working for the CAS's Computer Technology Institute. In the early 1980s, as Deng Xiaoping was reforming the economy, Liu successfully lobbied to start a new computer company (there was already another state-owned computer manufacturer).

The CAS provided start-up capital of CNY 200,000, or $24,000. Legend began by importing a wide range of equipment from abroad, including roller skates, an employee told Time International. Color televisions and electronic watches were early flops. An important technical achievement was the creation of a Chinese character set for computing in 1985.

Legend was the Chinese distributor for Hewlett-Packard Co. (HP) throughout the 1990s. Liu considered HP "our earliest and best teacher." While distributing HP and Toshiba, the company built the country's first nationwide computer distribution network. This would be a key to its dominance of the market for decades to come. The company's state ownership had given it another advantage in the domestic market, which was rooted in the Communist system.

PUBLIC IN 1994

Legend made its first PC under its own brand in 1990. Four years later, the company was celebrating its one millionth PC built. Also in 1994, some shares of Legend Holdings were listed on the Hong Kong Stock Exchange. The offering raised almost $30 million. The Chinese Academy of Science and Technology remained a major shareholder. Legend became first to bring Western-style stock options and other incentives into the People's Republic, offering stock options as a hiring bonus for new talent.

In 1997, Legend surpassed IBM as the leader in the Chinese market for PCs. It was quick to update its offerings, installing new Pentium chips in its machines while starting, and winning, an aggressive price war with its foreign competitors. By 1999 its market share was about 27 percent. Its closest domestic rival, Founder, had about an 8 percent share. Legend had revenues of $2.4 billion in 1999.

The People's Republic was experiencing an ever-growing demand as businesses modernized to keep up with the expanding economy. There was also a large untapped market for home users. According to The Economist, only 4 percent of Chinese households had PCs in 2001, compared with 60 percent in the United States.

A SUCCESS IN THE NEW MILLENNIUM

Legend, of course, benefited from the low production costs that had foreign electronics manufacturers outsourcing their own production to China. It also knew its home market well, Liu told Time International. Legend's Tianxi (Millennium Computer) allowed brand new users to connect to the Internet simply by pushing a button.

The burst of the tech bubble slowed demand for personal computers in the rest of the world, but China's market continued to grow. By 2002, according to Time International, it was worth $10 billion, making it the world's third largest behind those of the United States and Japan.

Legend's services unit was spun off as a separate company in June 2001. This included the distribution business, which handled foreign-branded equipment such as Hewlett-Packard PCs and printers and Toshiba notebooks. Legend was building up its IT consulting and systems integration businesses through acquisitions.

Legend Holdings Ltd., the parent company of the Legend Computer Systems Ltd. PC manufacturing business, was developing into a conglomerate. In September 2001 it set up a property development unit called Rong Ke Zhi De. It also established a $30 million venture capital fund. Legend Digital China Holdings, formerly Legend Technology, handled Legend Group's fourth line of business: software and e-commerce services. The company was itself a dedicated user of e-commerce. According to Business Week, its 2,000 retailers could order from the entire catalog online.

The Internet was a key part of Legend's growth plan. It acquired a number of portals in the late 1990s, and was in Web-related technology partnerships with Microsoft and others. It also had started manufacturing mobile phones and PDAs.

China's entry into the World Trade Organization opened Legend to new competition from abroad as its foreign rivals were permitted to form their own distribution networks. World leader Dell Inc. soon became Legend's top threat, tying IBM for fifth place in the Chinese market, by bringing its famous low-cost, low-inventory techniques to assembly centers in China.

COMPANY PERSPECTIVES

Lenovo is an innovative, international technology company formed as a result of the acquisition by the Lenovo Group of the IBM Personal Computing Division. As a global leader in the PC market, we develop, manufacture and market cutting-edge, reliable, high-quality PC products and value-added professional services that provide customers around the world with smarter ways to be productive and competitive. We base our success on our customers achieving their goals: productivity in business and enhancement of personal life.

BUYING IBM PCS IN 2005

Legend Computer Co. Ltd. was renamed Lenovo Group Limited in 2003. Lenovo Group's acquisition of IBM's PC business for $1.75 billion (including $500 million in assumed liabilities) was announced in late 2004. Le-novo officially took over the business in May 2005. As part of the deal, IBM obtained an equity stake in the new company, helping it improve its participation in the Chinese market. Three U.S. private equity firms later invested $350 million.

IBM had introduced the world's first serious personal computer in 1981, freeing corporate IT departments from the mainframe and launching a technology boom. Cutthroat competition from new rivals emerged, and IBM left the retail PC market in 2000. Its PC business slipped from annual revenues of more than $10 billion to $5 billion by 2004. The quality reputation of its Thinkpad series remained high, however. Lenovo retained the right to the IBM brand for five years, but quickly worked to publicize its own name in its new sales territories. Part of the campaign was China's first Olympics equipment sponsorship deal.

Almost all of its 10,000 PC-related employees remained at the unit after the acquisition by Lenovo, at least for a year. Its CEO, Stephen Ward, was replaced after a year by Dell's Asia-Pacific chief, William Amelio. Liu's successor, Yang Yuanqing, had become president and CEO a couple of years earlier while still in his 30s. He became chairman after the IBM deal.

A restructuring followed Lenovo's IBM purchase, which created the world's third largest PC manufacturer after Dell and Hewlett-Packard. Lenovo relocated its headquarters from Beijing to Purchase, New York, near IBM's home, while adding IBM's ThinkCenter in Raleigh, North Carolina to several manufacturing sites in China. Plans to relocate the headquarters to Raleigh were announced in March 2006; the company also was laying off about 5 percent of its more than 21,000 employees.

In April 2006, the company committed to buy genuine Windows software, a deal worth $1 billion a year for Microsoft Corp. In China, most PCs were sold without operating systems installed and cheap pirated versions were rampant. Lenovo was making emerging markets such as India and South America an important part of its growth strategy.

PRINCIPAL COMPETITORS

Dell Inc.; Hewlett-Packard Co.

KEY DATES

1981:: IBM forms a Personal Computing Division (PCD).
1984:: Legend is founded in China.
1985:: Legend creates a Chinese character set for computing.
1990:: Legend builds the first PC under its own brand.
1994:: Legend builds its one millionth PC; the company goes public in Hong Kong.
2002:: Legend starts making mobile phones.
2003:: Legend is renamed Lenovo.
2005:: Lenovo acquires IBM's Personal Computing Division.