TIME Magazine’s May 10, 2010 article on Lenovo (OTCPK:LNVGY) (“Lenovo’s Legend Returns“) was a well-written and long-overdue review of the company’s internal challenges since its purchase of IBM’s (NYSE:IBM) personal computer unit in 2005. What the article does not do, however, is instill confidence in the future of Lenovo as a computer company.
Giving Up on Globalization
While the top of the article suggests that Lenovo is trying to reform itself to blaze a pathway to globalization, a careful read makes it clear that the return of company co-founder Liu Chuanzhi means something else entirely: he wants to create a diversified Chinese industrial conglomerate, focusing the company on up-leveling management skills across a range of industries, based on the computer maker’s parent company:
He intends to transform Legend Holdings — an investment firm that is Lenovo’s largest shareholder — into a holding company, which, through acquisitions, would collect a stable of firms in industries such as energy, biopharmaceuticals, information technology and environmental protection. Then Liu and other lieutenants at Legend would work with the executives at the acquired companies to help them raise capital, strengthen strategic planning and improve everything from supply-chain management to human-resources practices. “For the Chinese economy to really rise, one of the key drivers will be capital from the private sector,” Liu says. “We can find and identify the best people and use our funds and our experience to help them so their companies will grow very fast.”
On the one hand, I have to applaud Liu’s domestic focus. Given the company’s current and foreseeable management skills, and keeping in mind that the Chinese economy looks more promising than just about any other in the medium term, Legend Holdings is better off focusing on opportunities in the market it knows best.
On the other, I cannot help but worry about poor Lenovo. While Liu has eliminated one leadership issue by returning cultural homogeneity to Lenovo’s executive team, he stands on the verge of creating another by spreading his limited management resources across a wider range of businesses. Instead of keeping himself and his best people focused on beating Apple, HP, Dell, and Acer, he will spread their attention across a half dozen complex and highly competitive industries.
Even worse, Legend does not look like it plans to use its cash to bolster Lenovo’s strength as a computer manufacturer. Instead, it seeks to divert its capital and profits into the acquisition of other businesses that bear little relation (and can offer limited help) to Lenovo’s business.
Lenovo’s efforts to improve its products and its focus on mobility are all good signs, as is the 58% annual jump in PC shipments in the first quarter of this year. An optimist might suggest that Lenovo can build a decent run on this. But Liu’s planned long-term strip-mining of Lenovo’s brains and cash suggests that Legend’s leaders have already decided that the company’s future does not lie in computers or consumer electronics. Instead, they are giving up, and getting ready to take their ball and go play somewhere else.
I am not a big fan of the conglomerate as a business structure, for both business and personal reasons. Yet I am willing to grant that diversificiation may be the right path for Legend, and that a sober assessment of the direction of the information technology and consumer electronic industries may have led Liu and company to conclude they could not or should not be a computer company.
This cannot be encouraging news, however, for companies in China and around the world who are staking all or part of their future on selling Lenovo products, and I suspect Apple (NASDAQ:AAPL), Dell (NASDAQ:DELL), HP (NYSE:HPQ), and Acer are getting ready to divide the spoils as Lenovo retreats.