Lenovo - A Case Study. (1)

Chinas Competitiveness Myth, Reality, and lessons for the United States and Japan

Chinas CompetitivenessMyth, Reality, and lessons for the United States and JapanLenovo : A Case StudySoumil Popat PGD14003Nivedita Banerjee PGD14022Dhiraj Rathod PGD14057Vinaya Saraf PGD14075Akshay Vaidya PGD14082Aditi Bagri PGD14099

About LenovoLenovo Group Ltd is a $21 billion personal technology company serving customers in more than 160 countries.

Largest in China , second-largest in the world.

Founder : Liu Chuanzhi, known as Godfather of Chinas information technology industry.

Product lines include Think-branded commercial PCs and Idea-branded consumer PCs, as well as servers, workstations, and a family of mobile Internet devices, including tablets and smart phones.

Lenovos Rise

Also, during the 1980s to 1990s period, the Chinese govt. restricted foreign companies from establishing foreign distribution and retail operations in china so that foreign companies had to use Chinese firms to sell and service their computers.3

Lenovos choice to go global or continue in the domestic marketRebranded Legend to Lenovo in 2003Le Legend and Novo New (Latin)Innovative Legend

2004 marked the purchase of IBMs ThinkPad PC businessA major challenge: Transnational company Accession of China to the WTO

Protect/Attack Strategy

Source : International Data Corporation

Competitive advantage Focus on volume instead of profit marginIncrease in market share Brand dominance and improved economies of scale Internationalization of operations Absorbed IBMs Think brands Cautious and conservative absorption Advantage over competitors

China market

Lenovos foothold in growing Chinese market Internationalization of R & DRange of products and high end innovations 20% of global pc volume 34% of large enterprise market in china 19% of SMB market in china

Growth in Asia pacific market and beyond

Asia pacific market share (excluding japan)

In japan, lenovo did joint venture with NEC. Lenovos Japanese market share

Apple v/s LenovoApplePartnership with China Unicorn (Chinas second largest mobile carrier)Luxury brand Apple Inc.s combined revenues in the 2nd quarter of 2011 is more than lenovos total china revenue.

LenovoLaunched the LePhone in 2010Use of android operating systemUse of Baidu and lenovo applications instead of google applications

17

iPad v/s LePad

18

Distribution NetworkLenovo was in the position of being both the manufacturer and the primary distributor for its PC competitorsLenovos distribution channels in China are less fragmented than those in international marketsLenovo has extended its dominance in Chinese distribution

In-House Manufacturing Specialization

Lower marginal costsAdvantages -Companies domestic manufacturing operations have benefitted -Lenovo could set up factories and buy components from Taiwanese suppliersUse of Vendor-Managed Inventory Model (VMI)

LaborSavings on labour cost extended over the entire companyLow-cost labor in China included R & D engineers and designers.Labor accounts for 2-3 % of total costs,while key components accounts for 60-70%Responding to rising Labour Costs in Southern China, Lenovo:-

1) Built Lenovo West China Operation Center in Chengdu Hi-Tech ZoneFunctions:-Production Center- Annual Capacity -> 10 million PCsMarketing Center- Regions covered -> Western China, Central & South Asia and EuropeR&D Center 1000 employees

2) On May 7, 2012, Lenovo announced to build Wuhan Industrial BaseInvestment:- $800 millionFunctions:-R&DProduction FacilitySales Facility TPV Technology Limited handles 12% production capacity of Lenovo

Chengdu Hi-Tech Zone22

Government SupportLenovo received limited government supportViewed by Chinese Government to a great degree as a foreign companyHigh Tariff rates on foreign made PCsImport Permits granted to LenovoJoint Venture in 1988 between Lenovo & China Technology for investment purpose in Hong Kong (HK $900000)Chinas Incentives for FDI in Special Economic Zones & Industrial Parks

InvestorsNominal Tax BurdenActual Tax BurdenForeign 15 %11 %Domestic 33 %23 %23

Beijings Zhongguancun Park (Z-Park)Founded in 1988, Zhongguancun Park was the first high-tech park organized by State Council and sought to foster high-tech start-ups and its long time residents.The main goal of the park is to be an incubator for high-tech firms.

-Lenovo along with other companies resident in the park, enjoy the following benefits: - The park provides access to modern research facilities. - The park provides favorable land policies for modern manufacturing and high-tech corporations

Employees benefit from housing subsidies given by corporations- The 1+6 policy from the State council in 2010 launched pilot programs- Another benefit is preferential treatment through the avenue of mandated government purchases

Tax AdvantagesForeign investment in Chinas central and western regions enjoys 5 years of tax reductions and a possible 3 years of halved income tax afterward.Advanced technologies including Lenovo -Exempted from income tax for 2 years followed by a halved income tax for the following 6 yearsExport enterprises -2 years exemption and 3 years at half rate

Lenovo also benefits from Chinas unified value-added tax (VAT) reform of 1994Tariff Exemption Policy for Equipment Import -Tariff rate exemption -Import-stage VAT exemptionLenovo receives government financing from the Golden projects program, and other national campaigns

Government grantsIn 2009, Lenovo signed major information contract with TurkmenistanAgreement to provide Turkmenistan with Information services for educationBusiness, medical, travel & technology sectorsAgreement to provide Lenovo with Expansion of its sales channel Talent Training Grant ($7.5 million) given to Turkmenistan to buy Lenovo computers

28

863 programIt was approved by Deng Xiaoping in the March 1986 hence the name 863Used to fund and commercialize significant amounts of science and technology developmentRecent example is the virtualization technology from the National University of Defense Technology that will be used in Lenovo computers

Subsidies

Chinas rural computer subsidy program was launched in 2009 as the third round of the national rural home appliances subsidy programThe central government funds 80% of the subsidy while provincial governments fund 20%Eligible computers cannot cost less than RMB 1,998.Lenovo announced 15 different computer models priced between RMB 2,500 and 3,500 for the program

Lenovos Relationship with United States and JapanUnited States: Hewlett Packard: First Partner & TeacherProvided Business and Managerial Know HowProduct technology, Business models, management practices and strategic planning

Lenovos Acquisition of IBMs PC Division:Highlights:Deal struck in December 2004 for a total of $1.75bn, making it the 3rd largest PC maker in the world and increased PC business fourfold, from $3bn to $12bn.Expansion time was reduced by almost 5 years, according to senior managers.Increased the brand value of Lenovo, significant as Chinese Cos have struggled with the tag of Cheap Chinese ProductsLenovo gained IBM distribution in 116 countries.

Gained a 5 Year right to use IBMs Brand, Marketing & Corporate Sales Force.Also, worldwide network of computer sales and distribution employees as well as knowledge of tax laws and invoicing practices in 66 countries.Retained executives with U.S. corporate experience and connections. Notably, including an American CEO, Stephen Ward (formerly of IBM), then followed by fellow American, William Amelio (formerly of Dell)Huge R&D gains Lenovo added 1500 patents from IBM to the already existing 1000 held by Lenovo. Also, increasing its R&D workforce from 1,100 to 1,800.The acquisition propelled the companys expansion into laptop production and corporate sectors.

Other tie ups:DAW- Legends early partner. Authorized distributors of IBM PCs in Hong Kong & China.1997: Intellectual property agreement with Microsoft.1998: Tinaxi Lenovos first laptop was launched after working with GE Plastics, NIKE, IDEO & Ziba Design.1999: Combined Laboratories with Texas Instruments for developing cell phones and projectors. 2003: Establishment of Lenovo-Intel Teach for the development of new products for global consumers.Currently using Googles Android platform for its smartphones and tablets.

Japan:Thinkpad research center in Yamoto, Japan.Sources key parts from like Hard drives and Batteries from Hitachi and Sony, Sanyo; respectively.Joint venture with NEC:NEC Lenovo Japan Group, finalized on July 4th,2011.Lenovo holds a 51% stake while NEC holds 49%.Biggest PC supplier in Japan with 25% market share.NEC gained $175 million worth of Lenovos stock in the deal.First full-fledged alliance between a major Japanese and Chinese players in the IT industry.

Key Findings(Conclusion):Right place, right time.

Developing a brand image internationally requires patience.

Adaptive instead of Innovative.

Market led industrial policies do exist in China