Truth and incentives at Lenovo

Lenovo, the world's third largest personal computer (PC) manufacturer, recently celebrated the first anniversary of its buyout of IBM's computer division last year. It was a low-key affair at a private bar in London, with a big Lenovo birthday cake taking centre stage. Back in 2004, nobody at Lianxing (as Lenovo is called in Chinese) had dared imagine such a dramatic eventuality.

The deal between a company that practically invented the PC and Lenovo was a stunner to everybody in business. Surely, if evidence were needed of China's emerging dominance of world markets, this was it. Others thought it too bizzare a deal to prove effective.

However, what's little realised is that the first move came not from the Chinese but the Americans. John R Joyce, senior vice-president of IBM, threw up the idea, while Liu Chuanzhi, Lenovo's founder chairman, had his jaw drop at the prospect of a snake swallowing an elephant.

Written passionately by Shanghai-based journalist Ling Zhijun, The Lenovo Affair: The Growth of China's Computer Giant and its Takeover of IBM-PC traces the story of the company's rise from obscurity to the grand $1.25-billion purchase of the maker of computers "nobody got fired for buying", as the American phrase once went.

Lenovo, or Lianxing, is a story all in itself. It was Liu's love and passion for scientific products that led to its birth in the mid-1980s. Like all tech successes, it all began in a garage: well, in a two-room space of no more than 20 square metres. But these were not exuberant youngsters. At 40, Liu was the youngest of the 11 members at the first board meeting. The challenges were even less Silicon Valleyish, but the founder held on to his ideology and principles, even as he pushed the boundaries of control exerted by the Communist regime, changing how business in China is done along the way.

Liu got his initial break in business through a close understanding of the functioning of the Chinese Academy of Sciences, a focal point of scientific minds, and also a big importer of IBM computers in the 1980s. Integrity was a big issue. Without the market's self-corrective mechanisms, efficiency of outcomes depended to a large extent on people's dedication to the truth (and so beyond immediate self-interest too). Under the import system, the computers had to be checked, "repaired", accepted, repacked, and then shipped off to some location. It was a cumbersome process, and by keeping track of people at the Academy with integrity, Liu was able to create a team that knew exactly how to go about making institutional sales on the strength of a proposition of honest value.

Liu's early business model would be familiar to many in India. He took Hewlett-Packard's computers, reverse engineered them at lower cost, and then copied the sales system being used in Western markets. The company was innovative in much else as well. It was the first company in China, for example, to create advertisements that did more than just name a product and price. While other companies were mere assembly operations, Lenovo invested in its brand. Besides, Liu created the country's first company that had public shareholders.

All through, Liu took calculated risks. He even risked imprisonment once to sidestep the government's 300 per cent tax on bonus payments when he handed out cash and share options to his staff. A business revolutionary, he wanted his employees to have the incentives their counterparts had in the West.

This book tells the tale of a company that few could imagine existing, let alone thriving, in China. Some readers may be disappointed that it offers no strategic tips for conducting business or planning an acquisition in China. In fact, going by the title, one would have expected the story of the consummation of a cross-cultural business affair, complete with details on the IBM deal that brought the Chinese company to the world stage. Instead, it is largely about Liu's lifelong affair with Lianxing.

That, as it turns out, is interesting enough as a read. Lenovo is a company that managed to navigate its way through a period of intense economic change in China, coming out on top of a system elements of which it once had to work around (Lenovo now banks on government support). On the whole, it's a story of a dalliance between management styles demanded by Communism and Capitalism. This "affair" would be relevant to anyone studying business in China.

THE LENOVO AFFAIR
THE GROWTH OF CHINA'S COMPUTER GIANT AND TAKEOVER OF IBM-PC

Ling Zhijun; translated by Martha Avery
John Wiley & Sons
Price: $15.75; Pages: 369