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Lenovo reboots again for 2010

By Wang Xing (China Daily)
Updated: 2009-01-19 07:45

A Lenovo laptop displayed in a Lenovo computer shop in Henan province. Lenovo announced its plan to cut 11 percent of its workforce, or 2,500 jobs worldwide, and to reduce executive compensations by 30 percent to 50 percent. [China Daily]

For employees and executives of Chinese computer maker Lenovo Group, the beginning of the new year didn't bring fortune to them as usual.

On January 9, Lenovo announced its plan to cut 11 percent of its workforce, or 2,500 jobs worldwide, and to reduce executive compensations by 30 percent to 50 percent as part of measures to counter declining profits amid the global recession.

It's part of Lenovo's latest restructuring plan to renovate its business amid the global economic slowdown. As part of the restructuring, Lenovo will also merge its China and Asia Pacific operations to reduce expenses. That will help save $300 million by the end of next fiscal year in March 2010, though the restructuring would cost about $150 million, the company said.

This is Lenovo's largest restructuring plan since it acquired IBM's PC department in 2005. During the past three years, Lenovo has successfully stopped the losses in IBM's prestigious but long-time bleeding PC business and risen from a domestic PC maker to one of China's most international companies.

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But the success did not make Lenovo immune from the slowing IT demand amid the global economic crisis.

In November last year, Lenovo's profits in its second quarter plunged 78 percent because of sluggish demands in the corporate sector (corporate entities buy 60 to 70 percent of its products) and slower business in China.

Its share in the global PC market also dropped to 7.7 percent in the third quarter ending December from 8.2 percent a year earlier, according to research firm IDC.

"Although the integration of the IBM PC business for the past three years was a success, our last quarter's performance did not meet our expectations," said chairman Yang Yuanqing in a statement following the second quarter report.

Culture clash

Compared with other successful Chinese internalized companies such as Huawei Technologies and Haier that became successful through organic growth, Lenovo is the rare Chinese firm that became successful through acquiring a foreign company.

Although that enabled Lenovo to have a business presence in more than 100 foreign countries almost overnight, the acquisition also presented a potential risk for a culture clash within the enlarged company.

"Lenovo's problem lies in its inability to copy its success in China to other markets," said Qu Xiaodong, general manager of CCW Research, a domestic consulting firm. "In the past few years, the company has been trying to do that by sending Chinese executives to other markets. But it's been proven that it does not work as well as expected."

Thus, Lenovo made many compromises after acquiring IBM's PC business.

In 2005, Lenovo gave up the original plan to keep its Beijing headquarters and moved the headquarters to the United States. The company also invited William Amelio, the former Dell executive, to replace Yang Yuanqing as the chief executive of Lenovo. And chairman Yang Yuanqing moved his whole family from Beijing to the US and successfully turned himself to a fluent English speaker.

However, experts said that Lenovo's extraordinary gesture increased its difficulty in expanding its successful Chinese experience to other markets and increased the culture conflicts between its Chinese employees and foreign executives.

"Lenovo is so eager to succeed that it is willing to give up some of its Chinese identity," Qu said.

Increase China's role

In Lenovo's last restructuring plan, the two separated Asia Pacific and Greater China regions were merged into a single operation under Chen Shaopeng, Lenovo's former head of Greater China and Russia, Lenovo's most successful market region. The company also moved the Asia Pacific headquarters from Singapore to Beijing.

Simon Ye, analyst from research firm Garter, said that restructuring plan reflected its efforts to increase the role of its Chinese operations in the international markets.

"Lenovo has made a great effort in marketing itself in foreign market in recent years, including spending a great amount in sponsoring the Beijing Olympic Game. But these efforts did not receive good results," Ye said.

He said in the current global economic slowdown, Lenovo needs to reduce its market spending in the foreign markets and pour money to the markets where it could generate more revenue.

According to the new plan, Chen Shaoping's territory will increase from 17 countries and regions to 25, contributing to over 50 percent of Lenovo's total revenue. The company also said it will not cut its workforce in the Greater China region.

"There is only one way for Lenovo to go and that is to copy its experience in the Chinese market to other regions," said Qu. "But simply sending Chinese executives to foreign markets has failed, so it seems that Lenovo now plans to expand the territory of its Chinese operation team."