Lenovo: Amelio's Exit a Sign that IBM Integration Hitting the Rocks?

Jason Dean at The Wall Street Journal is reporting that Lenovo (LNVGY.PK) has replaced CEO Bill Amelio with Chairman Yang Yuanqing, and that co-founder Liu Chuanzhi is returning from his pasture to resume a seat on the board. They're also upping senior VP Rory Read to the new role of Chief Operating Officer and President, and the company has decided to re-focus itself on its home market, China.

Bring on the Empty Horses

The announcement poses more questions than it answers.

We do not know what Mr. Read's duties will be in his new position, so we cannot assess to what extent the promotion was made to tap his talent, and to what extent there were other political or perceptual considerations involved.

We do not know to what extent this is a sign that Lenovo failed to effectively integrate the IBM (IBM) PC division, to integrate the executive teams, and to meld its product lines, and to unite the cultures of the two companies. Lenovo has kept up a veritable sunshine pump of positive messages about how smooth the integration process was, and have effectively kept any discouraging words from sneaking out.

And we do not know the significance of Mr. Liu's return to the board, what forces brought him back, or what value he is expected to bring.

M&A Is not a Global Marketing Strategy

At the same time, there are already lessons to be learned from the Lenovo-IBM saga. Purely from the perspective of marketing strategy, there are three that pop up immediately.

First and most important, as Chinese companies look to expand beyond the borders of the People's Republic, they should now see that mergers and acquisitions are no substitute for a global marketing plan. I am not certain what Lenovo thought it was buying when it purchased the IBM PC business, but if Lenovo thought it was purchasing a market position, it was wrong.

What the IBM purchase did give Lenovo was instant capacity to sell its products around the world, and to that extent the merger made sense. But that capacity only had value as long as it had world-class plans, products, leadership and support. Facing a rampant Apple (AAPL), a resurgent Hewlett-Packard (HPQ), and a humbled but determined Dell (DELL), Lenovo also needed forceful, and, focused, and capable leadership to turn the unified team into a winner against powerful competitors.

Winning against vigorous and entrenched competition is tough enough. Having to do so while integrating two strong and linguistically distinct corporate cultures must have added a maddening level of complexity to an already brutal challenge.

The World is Way Too Much

Second, trying to take on the entire world at once was ambitious in the extreme. Keep in mind that before the merger, the Lenovo team was struggling with its market toe-holds outside of China, and the IBM team was struggling to profit from its global market. A more modest approach was in order.

Rather than seeing this as Lenovo's opportunity to "globalize," the company's leadership might have been better off thinking of the merger as an opportunity to "internationalize" (a favored term among Chinese companies looking to expand beyond Greater China), focusing on a smaller number of markets where the combined company was strongest. (In fact, Dean's article in today's WSJ suggests the company will be doing just that going forward.)

After a merger of this magnitude, customers and employees in each market around the world expect the new company to spend a lot of time and effort explaining what the merger will mean to them. Who is Lenovo now? What is our vision for our company, our product, and our customer? And why should you, customer/retailer/employee/whomever, care?

Making that challenge even more complicated, each market has a different set of perceptions and expectations that need to be addressed, meaning that the effort has to be unique to each market.

It is hard to say whether Lenovo undertook that effort. But even if it did, doing it all at once in dozens of markets around the world would have overtaxed even the most capable, most tightly integrated marketing and communications teams in the world.

We're an American Brand

Third, the August 2005 decision to dump the "IBM" brand from products sold outside of China - five years before Lenovo was obliged to do so and mere months after the deal was finalized - will likely go down as one of the great mistakes in the history of brand management. The decision was made public in a throwaway line in a Mure Dickey piece in the FT:

The focus on [ThinkPad and ThinkCenter] product lines marks a decision to play down use of the IBM brand for products made by the US company's former unit, even though Lenovo acquired the right to use the IBM name for five years.

More than a few analysts praised Lenovo's move to cast off the IBM moniker. As Bruce Einhorn of BusinessWeek reported in February of 2006:

It's a smart gamble for Lenovo, some analysts say. Using IBM's well-knwn Think brand has been helpful, but it won't do in the long run. 'The Band-Aid has to come off at some time,' says Samir Bhavnanii, principal analyst at San Diego-based PC consultancy Current Analysis. 'They need to establish the Lenovo brand and start thinking about their computer company as Lenovo, not IBM.' According to Bhavanani, this is the only way Lenovo will be able to break into the big leagues. 'If they want to compete as a global brand with Samsung, Dell, and HP, they need to get people to start thinking of Lenovo as Lenovo.'"

I do not disagree with the larger gist of the statement, but as I argued in August 2005, the problem was timing. (Apologies for the long quote, but the post is not linkable, and despite the fact that I was fasting and a little irritable at the time, I think I phrased it fairly well.)

As regulars here will recall, the primary reason I was a supporter of Lenovo's IBM purchase (from Lenovo's standpoint - it was a no-brainer for IBM) was that Lenovo was going to have an opportunity to leverage the IBM brand for five years while it built credibility with customers. Anyone with just a little business sense knows that's worth something.

In fact, it's worth a lot. According to the August 1 edition of BusinessWeek and InterBrand, the value of the IBM brand - the third most valuable brand in the world behind Coca-Cola and Microsoft - is US$53,376,000,000.00. My point back in December was that Lenovo wasn't buying a money-losing business for its $1.7 billion in hard currency, it was renting a highly usable $53 billion brand asset for a mere $350 million a year.

But Lenovo, under the expert guidance of Chairman Mr. Yang Yuancheng, apparently feels that not only do customers not need a transition, but Lenovo is unable to utilize a $53 billion asset to their benefit, an asset that they paid cash for and an asset that, arguably, was about the only useful thing they took from the deal.

Is the use of the brand "Think" worth that kind of money? I'm sure it's worth something, but I'm not sure it's worth $1.7 billion. And due to some stupid decision making at Lenovo, that's all the company is getting for its cash.

If I were a Lenovo shareholder, I'd be screaming. Five years usage of a $53 billion asset tossed into the garbage? In the U.S., that would be grounds for an uprising at the next general meeting, and grounds to question the competence of management, and any auditing firm with a conscience would require a write-off of those assets as a one-time charge against earnings.

The burning question is "why?" I'd suggest one or more of the following reasons:

1. Lenovo leadership just doesn't understand the esteem the IBM brand retains worldwide. Entirely possible since I'm not sure the Chinese side of the Lenovo house much understands the market outside of China.

2. Lenovo has no clue how to use the IBM brand. Also possible because they didn't know how to use the "Legend" brand, and they did a poor job building the Lenovo brand in countries where they lacked explicit government support and fawning-lapdog media endorsement.

3. Lenovo is ignoring it's advertising and PR agencies on a) the value of the brand, and b) how to use it. Having worked with Lenovo in an agency relationship and walked away when they weren't listening to either us or our competitors, I'd say this is a pretty real possibility. Salesmen and Engineers rank highly at Lenovo. Marketers do not.

4. Lenovo's advertising and PR agencies are incompetent and not pointing this out to Lenovo, or are terrified to do so because they think they'll get sacked for talking back. Also possible, because who knows where Lenovo is actually getting assistance these days.

5. Somebody really high in the Lenovo organization genuinely believes that the Lenovo brand means more to businesses and consumers outside of the PRC than what it really does, which is "Made in China by a Chinese Company - Beware."

Take your pick. I have my prejudices.

I genuinely hope Lenovo's management reconsiders. If they don't, I hope they're prepared for the consequences, which they quite clearly appear to have underestimated. If nothing else, they will have screwed themselves out of the biggest asset they got from IBM.

As I said, a mite harsh, but it makes the point. Had Lenovo ejected the IBM brand and followed it with a massive global effort to drive awareness, positive perception, credibility, and trust of the Lenovo brand in its place, discarding the IBM brand would have been a ballsy move. But both at the time and now in hindsight, that decision paints an unflattering picture of decision making at the top of the company.

Whither Points the Finger

Thus far the global economy and no less than two non-Chinese CEOs (Amelio follows his predecessor, Stephen Ward, out the door: Ward lasted just over seven months) have shared the implicit blame for Lenovo's fortunes. The latter have paid with their jobs.

In the coming months, however, the media and analysts will begin to turn their forensic attentions to the man who, in the words of author Ling Zhijun in The Lenovo Affair, "played a decisive role in the acquisition" of IBM-PC in the face of "serious" opposition from members of Lenovo's board: Yang Yuagqing.

It is instructive to remember that Lenovo co-founder and then-Chairman Liu Chuanzhi stepped aside after the merger, leaving the task of merging and running the combined company to Yang and Ward. In that light, it is even more interesting that he is coming back now. To those of us fond of the ancient and honored practice of reading tea leaves here in Beijing, the implications are compelling.

If I were a betting man, I would wager that there is a debate taking place behind closed doors at Lenovo headquarters in Beijing and in government offices around the capital about whether or not the IBM acquisition was the right call, whether it was handled well, and where the blame lies for its mishandling.

Make no mistake: the next few months will be critical for Lenovo, and they will be the deciding factor in Yang Yuanqing's career with the company. His task will not be easy, and he will be second-guessed at every step.

I, for one, wish him luck. He will need all the help he can get.

Comments

[Moon Kil Woong:]

The reason China doesn't have a respected brand name is because they don't understand branding. I'm 100% with David Wolf on how bad it was dumping the IBM brand.

Unless they were willing to spend billions guaranteeing every detail and proving their stuff should be sold at a premium, they were bound to loose value. Likewise, dumping the IBM brand but keeping the same models is rather disenginuous about shedding IBM's skirt tails, especially when they still used IBM's distribution channel system.

Personally, Lenovo thought they were too big for their britches and got spanked. Now they are headed toward the clone market status with their brand. Like Acer, they also need a visionary, not just a bunch of stock manipulators and manufacturing pals on their board.

Feb 05 10:15 PM

[HaavBline:]

Lenovo's mistakes were very apparent to everyone other than the Chinese themselves. It was naive for Liu Chuanzhi to pass the torch to a young and untested executive like Yang Yuanqing too soon, it was naive for both Liu and Yang to think they can digest IBM PC when they have no exposure whatsoever to basic US culture, let alone selling to US corporate custmers. Only gamblers throw a dice like that. I was naive for them to drop the IBM brand so soon, It was a evern bigger shocker to me than the M&A decision, it showed right then that these people has very little understanding why they paid so much money to buy the entity. What were they thinking when they buy a PC company? For technology? What a joke.

Both Liu and Yang whould have been shown the door long ago. Especially Yang, who had nothing but blunders and squanderred billions for nothing but trouble and missed opportunities. Lenovo would have been a much stronger company and perhaps number 2 now if they had taken the right and solid approach to develop the company patiently. They should have followed the example of Huawei, develop a strong technology base, worked the grunt low-end road of developing the less competitive emerging markets one by one with their cost advantages while gradually accumulate mass and skills. Instead, Lenovo tried to take the fast and flashy lanes without a safety belt. I am afraid they are going to crash and burn eventually.

Feb 06 01:18 AM

[Teutonic Kn...:]

Dave,

You've made a number of very insightful and perceptive points. The American culture has strong influence and foreigners taking over our business often had to learn the ropes the hard way.

Even our cousins the Canadians with their similar North American culture learned hard lessons. In retails, Canadian Tire went into full retreat with an over $300M in 1990 dollars trying to move into the hardware store business. Likewise, TeleSat, TeleGlobe retreated losing billions in attempting to capture the satellite communications business. Of late, Nortel which for decades had been dressing itself to be All-American, declared bankruptcy, not to mention the fiasco of the Germans with their ill-fated merger with Chrysler, to name a few.

The Chinese being new-comers are of course not immune. They probably learned some lessons, so Huawei is backing away from buying parts of Nortel, and their car makers are saying no to Ford for Volvo.

The question in my mind for you, Dave, is that this strong cultural identity of ours, is it good or bad for our business in the longer term?

Thank you in advance for your response.

Teutonic

Feb 08 07:57 PM