Downloaded by Tiffany Zhou on 10/12/2022. New York University, Sekou White, Fall 2022, 004
9-507-014
REV: OCTOBER 19, 2006
________________________________________________________________________________________________________________
Professor John Quelch and Carin-Isabel Knoop, Executive Director, Global Research Group, prepared this case. HBS cases are developed solely
as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management.
Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
JOHN QUELCH
CARIN-ISABEL KNOOP
Lenovo: Building a Global Brand
The brand essence of Lenovo is innovation that makes a difference to customers. Branding is not a marketing
issue for us, it is a business issue. We have to deliver on products and services.1
—Deepak Advani, Chief Marketing Officer
Announced in December 2004, the $1.75 billion acquisition of IBM’s personal computer (PC)
division by 20-year-old Lenovo, China’s largest PC maker, made headlines around the world. A
relative upstart in the business, founded with $25,000 of seed capital from the Chinese Academy of
Sciences, Lenovo was acquiring the IBM division that invented the PC in 1981. While Lenovo was
arguably the best known brand in China and had some brand presence in Asia, it was virtually
unknown to the rest of the world. In 2004, over 90% of Lenovo’s revenues came from China (see
Exhibit 1 for financials).2 But with this major deal, Lenovo aimed to become a global technology
giant. Annual revenues would triple to $12 billion, making Lenovo the third-largest PC maker in the
world after Dell and Hewlett-Packard.
As a new multinational with 20,000 employees operating in 138 countries, Lenovo needed a global
marketing and branding strategy to match its new reach. This meant determining what Lenovo stood
for and designing products that supported that claim. In January 2006, 13 months after the deal was
announced and eight months after it closed, Lenovo was preparing for the intense limelight that
would come with its sponsorship of the February 2006 Turin Winter Olympics. There it planned to
introduce a Lenovo-branded product line designed from the bottom up for small and medium
enterprises, a move considered bold and risky by industry observers.
The Global PC Industry
History
Twenty-five years before this landmark deal, IBM introduced its first PC after watching the
growing adoption of microcomputers and home computers in the 1970s. In particular, the
commercial success of the Apple II series, which ran the financial analysis software called VisiCalc,
convinced IBM that there was a role for small computers in its business. IBM relied on key
technological contributions from third parties (such as the 8080 microprocessor from Intel, the DOS
operating system from Microsoft, and VisiCalc from Software Arts) to quickly launch its own desktop
computer. These partnerships were nonexclusive, allowing the vendors to engage with other
companies who might build similar PCs. The IBM brand gave the PC instant credibility in the
Downloaded by Tiffany Zhou on 10/12/2022. New York University, Sekou White, Fall 2022, 004
507-014 Lenovo: Building a Global Brand
2
business marketplace. The PC itself was designed using a well-specified, open architecture that
allowed other companies to manufacture modular and compatible peripheral components and write
hundreds of applications that would make the PC useful.
An entire industry of IBM-compatible computers (often referred to as clones) developed, led by
Compaq. Founded in 1982 by three former executives from Texas Instruments who each invested
$1,000, Compaq made $111 million in its first year cloning IBM PCs, and raised $67 million in an IPO
in 1983. That same year saw the launch of the software program Lotus 1-2-3, adding database and
graphing capabilities to a spreadsheet program and greatly increasing the business utility of PCs. For
the next 20 years, this product development interplay between hardware and software companies
such as IBM, Microsoft, Intel, and Lotus drove remarkable worldwide growth in the PC industry.
In 1984, Compaq introduced a PC that included Intel’s new and more powerful 80386 class of
microprocessors, beating IBM to market. That same year, Michael Dell began building IBMcompatible computers in his college dormitory. Dell sold directly to customers, bypassing what had
become a well-established retail store distribution model. Dell allowed customers to configure PCs to
meet their individual needs (e.g., changing amounts of memory or disk storage space) at a lower
price. Dell took his company public in 1989, and by 1999 Dell’s sales outstripped Compaq’s.
Hewlett-Packard (HP) also entered the computer market in the 1980s. Since its founding in 1939,
HP produced sophisticated electronic instruments. Eventually HP expanded into new markets such
as medical and computational devices. HP introduced inkjet and laser printing technologies in 1984.
A year later, HP established a joint venture in China, a pioneering step in the globalization of the PC
industry. From the 1980s on, U.S.-based companies such as Motorola, Intel, AMD, and National
Semiconductor made micro-processors, while other PC components (e.g., memory chips, hard drives,
motherboards, and monitors) were often designed and manufactured in Asia.
In the 1990s, Microsoft and Intel set the basic standard for the PC, reducing differences among
various makers’ machines. Meanwhile, the Internet boom drove demand, and vendors from all
around the world brought PCs to market. Outsourcing and offshoring saw an increasing number of
key PC component parts being produced outside the United States. Although Dell sourced
components from Taiwan, Malaysia, and other global locations, it continued to assemble computers
for domestic customers in U.S. factories. However, other companies—including IBM, HP, and
Gateway—moved their entire manufacturing operations offshore. Dell also established a
manufacturing operation in China to supply completed computers to customers in Asia. Dell, in fact,
became Lenovo’s greatest competitor.
Consolidation
In the early 21st century, merging manufacturers sought to cut expenses or join complementary
pipelines to develop new products. In an example of the former, HP in 2001 acquired Compaq, its
major U.S. rival in PCs, for $20 billion. To speed integration, managers were instructed not to
redesign policies or processes from scratch, but to pick them from one side or the other. Since HP was
the acquirer, most of Compaq’s business practices ended up being discarded.3 Consolidation
continued in early 2004, when PC manufacturer Gateway acquired eMachines for nearly $290 million,
creating a company with a 7% share of the U.S. market.4 While Gateway pioneered its own
unprofitable retail chain of stores, eMachines had profitably sold $1.1 billion of machines in 2003
through established retail channels.5
As a result, by 2004, approximately half of the PCs sold around the world came from five vendors:
Dell led the pack with 17.9% share; HP followed with 15.9%; Lenovo, including IBM’s market share
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Lenovo: Building a Global Brand 507-014
3
prior to the acquisition, held 8%; and Acer and Fujitsu-Siemens held just over 3.5% each. Many
competitors shared the remaining 50% of the PC market, ranging from large corporations with
household names—including Gateway, NCR, Sony, and Toshiba—to small vendors.6
Manufacturers sold 46.57 million PCs in the second quarter of 2005, nearly 17% more than for the
same period in 2004. Non-U.S. markets registered the fastest growth: sales in Europe, the Middle
East, and Africa grew at over 20% compared to only 11.7% in the United States.7 Sales were boosted
by first-time buyers lured by falling prices. The average price of a PC system had fallen steadily from
$1,700 in 1999 to about $1,000 in 2005 (see Exhibit 2).8
By the third quarter of 2005, leading vendors increased their market share at the expense of
Lenovo, which fell to 7.7%.9 Lenovo was in third place globally, with combined PC sales of 3.5 million
units (including those of IBM).10 Dell and HP held 18% and 16% of the market respectively. Taiwanbased Acer clocked the fastest growth among the top five PC brands in the second quarter, delivering
just over 2 million units, up 62.2% over the prior year.11 Buoyed by strong relationships with business
partners,12 Acer was Europe’s top PC brand and had experienced a comeback in the U.S. market. The
world’s top five PC brands sold 23.52 million units, accounting for the first time for over half of the
market. See Exhibit 3 for market share information.
The Legend behind Lenovo
The Rise of Legend
During its first 20 years, Lenovo evolved from a small distributor of imported computers into
China’s leading computer firm. In 1984, the Chinese Academy of Sciences provided about $25,000 for
11 of its computer scientists to form the New Technology Developer, Inc. (NTD). NTD set up shop in
a small concrete bungalow in Beijing with a mandate to commercialize the Academy’s research and
use the proceeds to further computer science research. NTD generated early revenues by distributing
imported computers such as IBM PCs to government agencies and large state-owned companies.
In 1987 the company introduced its first original product, the Legend Chinese-character card,
which translated English-language operating systems into Chinese. It included a popular
“association” feature that allowed users to form common Chinese phrases by typing in just a few
Chinese characters. Unlike competing software products, the Legend card was a piece of hardware
that attached to PC motherboards, thereby saving valuable hard drive space. NTD bundled the
Legend card with the imported PCs it distributed, achieving substantial first year sales of the card,
which accounted for 38% of company revenue and 46% of profit.13 The Legend card’s popularity
gave a boost to the PC distribution business and the firm won several new contracts, including one to
distribute HP PCs in China.14 With the success of the Legend card securing the firm’s reputation,
NTD was renamed Legend Computer Company in 1989. Legend launched its own-brand PC into the
Chinese market in 1990. Initially marketing only to China’s business sector, the company sold 2,000
units in 1990 and 17,000 units by 1992.15 Legend then pioneered the home computer concept in China,
introducing a line of home PCs and a retail network in 1993. The Legend PC business division was
formally established through a 1994 reorganization that coincided with the company’s listing on the
Hong Kong Stock Exchange. By 1995, Legend was the world’s fifth-largest manufacturer of
motherboards.16
Yang Yuanqing was appointed general manager of the new PC division. Recalling the 29-yearold’s appointment as a “risky decision,” Legend co-founder and CEO Liu Chuanzhi later noted, “I
did not really have any other choice. Most of the senior managers of the company were older than 50
Downloaded by Tiffany Zhou on 10/12/2022. New York University, Sekou White, Fall 2022, 004
507-014 Lenovo: Building a Global Brand
4
and did not have much experience working in a market environment, not to mention a rapidly
changing industry like the PC industry.”17 Yang eliminated the direct sales force in favor of a
network of hundreds of local distributors. The reorganization significantly improved inventory
turns.18 Yang also slashed PC prices by 30% to just above cost.
In 1996, Legend introduced its first laptop model and marketed PCs carrying Intel’s Pentium chip
in China, undercutting prior generation competitor prices. Increased sales volumes brought down
costs dramatically, allowing Legend to make a profit while overtaking IBM as China’s PC market
leader with 7% market share. In 1997, Legend signed an intellectual property agreement with Microsoft
and formed an alliance with IBM for the distribution of IBM software products in China, allowing the
firm to sell PCs with pre-installed IBM software.19
While competitors focused on providing new technologies for the business market, Legend
designed desktops that the average Chinese consumer could use. Focusing on functionality, Legend
introduced in 1999 a PC that overcame China’s complicated Internet access procedures with a
preloaded one-year Internet connection. It also included Chinese voice-recognition software and a
graphics pad for writing Chinese characters by hand. It quickly became China’s top selling PC.20
By 1999, Legend was China’s PC market leader (21.5% share) and well known throughout the
Asia-Pacific region. 21 In addition to exporting Legend PCs, the firm continued to distribute foreignbranded PCs in China, and the combined sales made Legend the number one vendor of PCs in the
region. Its 9.1% market share for PCs topped IBM’s and Compaq’s share in Asia.22
Facing an Increasingly Mature Market
Having maintained Legend’s PC market leadership in China for five consecutive years, Yang was
promoted to Legend Group president and CEO in 2001. In this role, he faced new challenges: while
Legend’s 30% PC market share in China far outdistanced its nearest domestic rival’s 10% share,
China’s entry into the World Trade Organization meant that Legend could no longer count on local
player advantages such as government imposed quotas and tariffs on imports, or restrictions on
foreign companies’ ownership rights, investment, and access to distribution channels. Of particular
concern was Dell’s introduction of a direct sales model in China. Legend also had to deal with the rise
of other Chinese manufacturing giants, such as appliance maker Haier, introducing their own-brand
PCs. Finally, upstarts and grey-market clones challenged Legend’s positioning as company providing
affordable PCs.23 In response, Legend beefed up its marketing efforts, bringing in famous Chinese
personalities as brand spokespersons. In 2002 Legend spent $6.6 million on advertising for the home
PC segment, half Dell’s advertising budget for China.24
Legend nevertheless aimed to become a global Fortune 500 company by 2010 and managers
identified two options: globalization or localization. They saw the choice as either specializing in a
few product categories to develop a global IT brand or increasing the range of their product
categories and adding a service business to grow primarily in the rapidly expanding Chinese market.
Many Legend managers concluded in 2002 that their competitive edge over multinationals was based
on local competencies and that the company was not ready to deploy resources internationally to
develop a global brand.25
Beyond China
However, by 2003, Legend faced increased domestic competition and sensed a growing global
opportunity. In spring 2004, the company found that the Legend name was already a registered
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Lenovo: Building a Global Brand 507-014
5
trademark in several Western countries and searched for a new name to use outside China. The firm
prepared for international expansion with the announcement of the new Lenovo name and logo.
Lenovo was derived from “Le-” for Legend and “–novo” signifying “new” or “innovative.” The
name was easy to pronounce in many languages and available for brand registration in major
markets. First used just as a brand name in foreign markets, the company adopted Lenovo Group
Limited as the company’s official English language name, retaining the original Chinese name for use
in the home market.
In an announcement reported worldwide, Lenovo in March 2004 joined the Olympic Partner
Program, the International Olympic Committee’s (IOC) highest level worldwide marketing program.
“Engaging the world” was the slogan Lenovo used at its IOC signing ceremony. Under the
partnership agreement, Lenovo became the exclusive provider of computing equipment and services
for the Turin Olympic Winter Games in 2006 and the Beijing Summer Olympic Games in 2008.
The $80 million price of admission was a significant investment for a company with sales of
around $3.2 billion. Although Lenovo would be able to benefit from using the Olympic logo for
marketing and promotions and have access to exclusive worldwide marketing opportunities, the
company would have to spend at least twice the sponsorship cost on advertising to leverage the
investment. These advertising expenses would be spread over five years, and the company expected
about half of the sponsorship cost to be paid in kind through products and services.
The Deal
A few months after negotiating the Olympics sponsorship, Lenovo in December 2004 acquired
IBM’s Personal Systems Division—essentially annexing all of IBM’s PC operations—for $1.75 billion,
paying $650 million in cash and up to $600 million in common stock, and assuming $500 million in
IBM liabilities. Lenovo management forecasted annual operating synergies of $200 million
26 As part
of the agreement, IBM continued to own 18.9% of the new company. The Chinese government owned
46% of the new entity through Legend Holdings. In 2005 private investors (mostly private equity
firms, including Texas Pacific Group, General Atlantic LLC and Newbridge Capital LLC) took about
10%, leaving IBM with 13.2%, the original founders with 14.7%, and the public with 34.7%. The China
Academy of Sciences held a 27.3% share as passive investor with no board seats.
For IBM, this deal was an opportunity to shed an unprofitable operation and concentrate on
consulting services (including outsourcing of enterprise IT operations) and middleware solutions
(software often bundled with server hardware). Deepak Advani, an IBM veteran who became
Lenovo’s chief marketing officer, explained the IBM rationale: “We had to decide what the right longterm play for IBM was. PCs were more and more at the fringe, with IBM moving more and more into
services. A potential acquisition by Lenovo was an option, as was spinning out the division to a
private equity firm. IBM and Lenovo decided to do the deal.” A few years prior, a Lenovo manager
explained, IBM had approached Lenovo for a potential similar transaction, which Lenovo had
declined on the basis of the PC division’s poor shape at the time. When IBM approached Lenovo
again, it was Lenovo CFO Mary Ma (considered by Fortunate Magazine to be the world’s 27th most
powerful businesswoman in the world in 2005) who reviewed the deal and subsequently
recommended to the top management team that Lenovo go ahead with the transaction.
As part of the deal, Lenovo gained the right to use the IBM on its products for up to five years,
along with two major product offerings: the well-established IBM ThinkPad laptop and ThinkCentre
desktop brands.27 The IBM logo could only be used on IBM Think-family products. For any type of
advertising, the IBM logo could only be shown on the product within the ad, not as a separate logo in Downloaded by Tiffany Zhou on 10/12/2022. New York University, Sekou White, Fall 2022, 004
9-507-014
REV: OCTOBER 19, 2006
________________________________________________________________________________________________________________
Professor John Quelch and Carin-Isabel Knoop, Executive Director, Global Research Group, prepared this case. HBS cases are developed solely
as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management.
Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
JOHN QUELCH
CARIN-ISABEL KNOOP
Lenovo: Building a Global Brand
The brand essence of Lenovo is innovation that makes a difference to customers. Branding is not a marketing
issue for us, it is a business issue. We have to deliver on products and services.1
—Deepak Advani, Chief Marketing Officer
Announced in December 2004, the $1.75 billion acquisition of IBM’s personal computer (PC)
division by 20-year-old Lenovo, China’s largest PC maker, made headlines around the world. A
relative upstart in the business, founded with $25,000 of seed capital from the Chinese Academy of
Sciences, Lenovo was acquiring the IBM division that invented the PC in 1981. While Lenovo was
arguably the best known brand in China and had some brand presence in Asia, it was virtually
unknown to the rest of the world. In 2004, over 90% of Lenovo’s revenues came from China (see
Exhibit 1 for financials).2 But with this major deal, Lenovo aimed to become a global technology
giant. Annual revenues would triple to $12 billion, making Lenovo the third-largest PC maker in the
world after Dell and Hewlett-Packard.
As a new multinational with 20,000 employees operating in 138 countries, Lenovo needed a global
marketing and branding strategy to match its new reach. This meant determining what Lenovo stood
for and designing products that supported that claim. In January 2006, 13 months after the deal was
announced and eight months after it closed, Lenovo was preparing for the intense limelight that
would come with its sponsorship of the February 2006 Turin Winter Olympics. There it planned to
introduce a Lenovo-branded product line designed from the bottom up for small and medium
enterprises, a move considered bold and risky by industry observers.
The Global PC Industry
History
Twenty-five years before this landmark deal, IBM introduced its first PC after watching the
growing adoption of microcomputers and home computers in the 1970s. In particular, the
commercial success of the Apple II series, which ran the financial analysis software called VisiCalc,
convinced IBM that there was a role for small computers in its business. IBM relied on key
technological contributions from third parties (such as the 8080 microprocessor from Intel, the DOS
operating system from Microsoft, and VisiCalc from Software Arts) to quickly launch its own desktop
computer. These partnerships were nonexclusive, allowing the vendors to engage with other
companies who might build similar PCs. The IBM brand gave the PC instant credibility in the
Downloaded by Tiffany Zhou on 10/12/2022. New York University, Sekou White, Fall 2022, 004
507-014 Lenovo: Building a Global Brand
2
business marketplace. The PC itself was designed using a well-specified, open architecture that
allowed other companies to manufacture modular and compatible peripheral components and write
hundreds of applications that would make the PC useful.
An entire industry of IBM-compatible computers (often referred to as clones) developed, led by
Compaq. Founded in 1982 by three former executives from Texas Instruments who each invested
$1,000, Compaq made $111 million in its first year cloning IBM PCs, and raised $67 million in an IPO
in 1983. That same year saw the launch of the software program Lotus 1-2-3, adding database and
graphing capabilities to a spreadsheet program and greatly increasing the business utility of PCs. For
the next 20 years, this product development interplay between hardware and software companies
such as IBM, Microsoft, Intel, and Lotus drove remarkable worldwide growth in the PC industry.
In 1984, Compaq introduced a PC that included Intel’s new and more powerful 80386 class of
microprocessors, beating IBM to market. That same year, Michael Dell began building IBMcompatible computers in his college dormitory. Dell sold directly to customers, bypassing what had
become a well-established retail store distribution model. Dell allowed customers to configure PCs to
meet their individual needs (e.g., changing amounts of memory or disk storage space) at a lower
price. Dell took his company public in 1989, and by 1999 Dell’s sales outstripped Compaq’s.
Hewlett-Packard (HP) also entered the computer market in the 1980s. Since its founding in 1939,
HP produced sophisticated electronic instruments. Eventually HP expanded into new markets such
as medical and computational devices. HP introduced inkjet and laser printing technologies in 1984.
A year later, HP established a joint venture in China, a pioneering step in the globalization of the PC
industry. From the 1980s on, U.S.-based companies such as Motorola, Intel, AMD, and National
Semiconductor made micro-processors, while other PC components (e.g., memory chips, hard drives,
motherboards, and monitors) were often designed and manufactured in Asia.
In the 1990s, Microsoft and Intel set the basic standard for the PC, reducing differences among
various makers’ machines. Meanwhile, the Internet boom drove demand, and vendors from all
around the world brought PCs to market. Outsourcing and offshoring saw an increasing number of
key PC component parts being produced outside the United States. Although Dell sourced
components from Taiwan, Malaysia, and other global locations, it continued to assemble computers
for domestic customers in U.S. factories. However, other companies—including IBM, HP, and
Gateway—moved their entire manufacturing operations offshore. Dell also established a
manufacturing operation in China to supply completed computers to customers in Asia. Dell, in fact,
became Lenovo’s greatest competitor.
Consolidation
In the early 21st century, merging manufacturers sought to cut expenses or join complementary
pipelines to develop new products. In an example of the former, HP in 2001 acquired Compaq, its
major U.S. rival in PCs, for $20 billion. To speed integration, managers were instructed not to
redesign policies or processes from scratch, but to pick them from one side or the other. Since HP was
the acquirer, most of Compaq’s business practices ended up being discarded.3 Consolidation
continued in early 2004, when PC manufacturer Gateway acquired eMachines for nearly $290 million,
creating a company with a 7% share of the U.S. market.4 While Gateway pioneered its own
unprofitable retail chain of stores, eMachines had profitably sold $1.1 billion of machines in 2003
through established retail channels.5
As a result, by 2004, approximately half of the PCs sold around the world came from five vendors:
Dell led the pack with 17.9% share; HP followed with 15.9%; Lenovo, including IBM’s market share
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Lenovo: Building a Global Brand 507-014
3
prior to the acquisition, held 8%; and Acer and Fujitsu-Siemens held just over 3.5% each. Many
competitors shared the remaining 50% of the PC market, ranging from large corporations with
household names—including Gateway, NCR, Sony, and Toshiba—to small vendors.6
Manufacturers sold 46.57 million PCs in the second quarter of 2005, nearly 17% more than for the
same period in 2004. Non-U.S. markets registered the fastest growth: sales in Europe, the Middle
East, and Africa grew at over 20% compared to only 11.7% in the United States.7 Sales were boosted
by first-time buyers lured by falling prices. The average price of a PC system had fallen steadily from
$1,700 in 1999 to about $1,000 in 2005 (see Exhibit 2).8
By the third quarter of 2005, leading vendors increased their market share at the expense of
Lenovo, which fell to 7.7%.9 Lenovo was in third place globally, with combined PC sales of 3.5 million
units (including those of IBM).10 Dell and HP held 18% and 16% of the market respectively. Taiwanbased Acer clocked the fastest growth among the top five PC brands in the second quarter, delivering
just over 2 million units, up 62.2% over the prior year.11 Buoyed by strong relationships with business
partners,12 Acer was Europe’s top PC brand and had experienced a comeback in the U.S. market. The
world’s top five PC brands sold 23.52 million units, accounting for the first time for over half of the
market. See Exhibit 3 for market share information.
The Legend behind Lenovo
The Rise of Legend
During its first 20 years, Lenovo evolved from a small distributor of imported computers into
China’s leading computer firm. In 1984, the Chinese Academy of Sciences provided about $25,000 for
11 of its computer scientists to form the New Technology Developer, Inc. (NTD). NTD set up shop in
a small concrete bungalow in Beijing with a mandate to commercialize the Academy’s research and
use the proceeds to further computer science research. NTD generated early revenues by distributing
imported computers such as IBM PCs to government agencies and large state-owned companies.
In 1987 the company introduced its first original product, the Legend Chinese-character card,
which translated English-language operating systems into Chinese. It included a popular
“association” feature that allowed users to form common Chinese phrases by typing in just a few
Chinese characters. Unlike competing software products, the Legend card was a piece of hardware
that attached to PC motherboards, thereby saving valuable hard drive space. NTD bundled the
Legend card with the imported PCs it distributed, achieving substantial first year sales of the card,
which accounted for 38% of company revenue and 46% of profit.13 The Legend card’s popularity
gave a boost to the PC distribution business and the firm won several new contracts, including one to
distribute HP PCs in China.14 With the success of the Legend card securing the firm’s reputation,
NTD was renamed Legend Computer Company in 1989. Legend launched its own-brand PC into the
Chinese market in 1990. Initially marketing only to China’s business sector, the company sold 2,000
units in 1990 and 17,000 units by 1992.15 Legend then pioneered the home computer concept in China,
introducing a line of home PCs and a retail network in 1993. The Legend PC business division was
formally established through a 1994 reorganization that coincided with the company’s listing on the
Hong Kong Stock Exchange. By 1995, Legend was the world’s fifth-largest manufacturer of
motherboards.16
Yang Yuanqing was appointed general manager of the new PC division. Recalling the 29-yearold’s appointment as a “risky decision,” Legend co-founder and CEO Liu Chuanzhi later noted, “I
did not really have any other choice. Most of the senior managers of the company were older than 50
Downloaded by Tiffany Zhou on 10/12/2022. New York University, Sekou White, Fall 2022, 004
507-014 Lenovo: Building a Global Brand
4
and did not have much experience working in a market environment, not to mention a rapidly
changing industry like the PC industry.”17 Yang eliminated the direct sales force in favor of a
network of hundreds of local distributors. The reorganization significantly improved inventory
turns.18 Yang also slashed PC prices by 30% to just above cost.
In 1996, Legend introduced its first laptop model and marketed PCs carrying Intel’s Pentium chip
in China, undercutting prior generation competitor prices. Increased sales volumes brought down
costs dramatically, allowing Legend to make a profit while overtaking IBM as China’s PC market
leader with 7% market share. In 1997, Legend signed an intellectual property agreement with Microsoft
and formed an alliance with IBM for the distribution of IBM software products in China, allowing the
firm to sell PCs with pre-installed IBM software.19
While competitors focused on providing new technologies for the business market, Legend
designed desktops that the average Chinese consumer could use. Focusing on functionality, Legend
introduced in 1999 a PC that overcame China’s complicated Internet access procedures with a
preloaded one-year Internet connection. It also included Chinese voice-recognition software and a
graphics pad for writing Chinese characters by hand. It quickly became China’s top selling PC.20
By 1999, Legend was China’s PC market leader (21.5% share) and well known throughout the
Asia-Pacific region. 21 In addition to exporting Legend PCs, the firm continued to distribute foreignbranded PCs in China, and the combined sales made Legend the number one vendor of PCs in the
region. Its 9.1% market share for PCs topped IBM’s and Compaq’s share in Asia.22
Facing an Increasingly Mature Market
Having maintained Legend’s PC market leadership in China for five consecutive years, Yang was
promoted to Legend Group president and CEO in 2001. In this role, he faced new challenges: while
Legend’s 30% PC market share in China far outdistanced its nearest domestic rival’s 10% share,
China’s entry into the World Trade Organization meant that Legend could no longer count on local
player advantages such as government imposed quotas and tariffs on imports, or restrictions on
foreign companies’ ownership rights, investment, and access to distribution channels. Of particular
concern was Dell’s introduction of a direct sales model in China. Legend also had to deal with the rise
of other Chinese manufacturing giants, such as appliance maker Haier, introducing their own-brand
PCs. Finally, upstarts and grey-market clones challenged Legend’s positioning as company providing
affordable PCs.23 In response, Legend beefed up its marketing efforts, bringing in famous Chinese
personalities as brand spokespersons. In 2002 Legend spent $6.6 million on advertising for the home
PC segment, half Dell’s advertising budget for China.24
Legend nevertheless aimed to become a global Fortune 500 company by 2010 and managers
identified two options: globalization or localization. They saw the choice as either specializing in a
few product categories to develop a global IT brand or increasing the range of their product
categories and adding a service business to grow primarily in the rapidly expanding Chinese market.
Many Legend managers concluded in 2002 that their competitive edge over multinationals was based
on local competencies and that the company was not ready to deploy resources internationally to
develop a global brand.25
Beyond China
However, by 2003, Legend faced increased domestic competition and sensed a growing global
opportunity. In spring 2004, the company found that the Legend name was already a registered
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Lenovo: Building a Global Brand 507-014
5
trademark in several Western countries and searched for a new name to use outside China. The firm
prepared for international expansion with the announcement of the new Lenovo name and logo.
Lenovo was derived from “Le-” for Legend and “–novo” signifying “new” or “innovative.” The
name was easy to pronounce in many languages and available for brand registration in major
markets. First used just as a brand name in foreign markets, the company adopted Lenovo Group
Limited as the company’s official English language name, retaining the original Chinese name for use
in the home market.
In an announcement reported worldwide, Lenovo in March 2004 joined the Olympic Partner
Program, the International Olympic Committee’s (IOC) highest level worldwide marketing program.
“Engaging the world” was the slogan Lenovo used at its IOC signing ceremony. Under the
partnership agreement, Lenovo became the exclusive provider of computing equipment and services
for the Turin Olympic Winter Games in 2006 and the Beijing Summer Olympic Games in 2008.
The $80 million price of admission was a significant investment for a company with sales of
around $3.2 billion. Although Lenovo would be able to benefit from using the Olympic logo for
marketing and promotions and have access to exclusive worldwide marketing opportunities, the
company would have to spend at least twice the sponsorship cost on advertising to leverage the
investment. These advertising expenses would be spread over five years, and the company expected
about half of the sponsorship cost to be paid in kind through products and services.
The Deal
A few months after negotiating the Olympics sponsorship, Lenovo in December 2004 acquired
IBM’s Personal Systems Division—essentially annexing all of IBM’s PC operations—for $1.75 billion,
paying $650 million in cash and up to $600 million in common stock, and assuming $500 million in
IBM liabilities. Lenovo management forecasted annual operating synergies of $200 million
26 As part
of the agreement, IBM continued to own 18.9% of the new company. The Chinese government owned
46% of the new entity through Legend Holdings. In 2005 private investors (mostly private equity
firms, including Texas Pacific Group, General Atlantic LLC and Newbridge Capital LLC) took about
10%, leaving IBM with 13.2%, the original founders with 14.7%, and the public with 34.7%. The China
Academy of Sciences held a 27.3% share as passive investor with no board seats.
For IBM, this deal was an opportunity to shed an unprofitable operation and concentrate on
consulting services (including outsourcing of enterprise IT operations) and middleware solutions
(software often bundled with server hardware). Deepak Advani, an IBM veteran who became
Lenovo’s chief marketing officer, explained the IBM rationale: “We had to decide what the right longterm play for IBM was. PCs were more and more at the fringe, with IBM moving more and more into
services. A potential acquisition by Lenovo was an option, as was spinning out the division to a
private equity firm. IBM and Lenovo decided to do the deal.” A few years prior, a Lenovo manager
explained, IBM had approached Lenovo for a potential similar transaction, which Lenovo had
declined on the basis of the PC division’s poor shape at the time. When IBM approached Lenovo
again, it was Lenovo CFO Mary Ma (considered by Fortunate Magazine to be the world’s 27th most
powerful businesswoman in the world in 2005) who reviewed the deal and subsequently
recommended to the top management team that Lenovo go ahead with the transaction.
As part of the deal, Lenovo gained the right to use the IBM on its products for up to five years,
along with two major product offerings: the well-established IBM ThinkPad laptop and ThinkCentre
desktop brands.27 The IBM logo could only be used on IBM Think-family products. For any type of
advertising, the IBM logo could only be shown on the product within the ad, not as a separate logo in
