A Legend in the making

China's Legend Group has transformed itself into one of the world's fastest-growing technology conglomerates, but can it leap from being a local leader to a player on the world stage?

Lights, camera, legislation

By Michael Kanellos
Staff Writer, CNET News.com
August 12, 2002, 4:00 a.m. PT

BEIJING--It's one of the few PC companies today with profits and growth in market share. Its close allies on various projects--Microsoft, Intel, Texas Instruments, America Online--reads like high-technology's A-list.

But one important difference separates the company from the pack: It's based in China, one of the world's hottest markets for technology.

The Legend Group, which once existed only as a wholesale distributor for U.S. and European brands, has transformed itself into one of the world's fastest-growing technology conglomerates, with its hands on everything from desktops and servers to cell phones, retail franchises and information technology services. Many businesses in China that it's involved are expected to grow by double digits through 2006 and beyond.

The rapid rise of Legend contrasts markedly with the stagnating state of PC makers in the United States, which last month reported that worldwide shipments had declined nearly 1 percent in the second quarter of this year. Although no one is calling it an immediate threat to Dell Computer, competitors are following Legend's moves with a mixture of envy and nervousness.

The numbers show why. Legend grew shipments by 24.2 percent in 2001, Gartner analyst Charles Smulders said, and the company pulled in $2.7 billion (HK$20.9 billion) in revenue and $134 million (HK$1.045 billion) in profit for the fiscal year ended March 2002. Only Sony at 25.2 percent grew faster, he noted, while Dell grew by 18 percent, "and everybody else was negative" in 2001.

"I believe Legend's success lies in the catering of their products toward the market," said Dennis Lam, a financial analyst with Hong Kong's Kim Eng Securities. It benefits, he said, from "the amount of retail locations and a great distribution network, a great brand name, great customer service reputation, and a dominant market share, especially on the consumer side in China."

In some ways, however, Legend may face far greater challenges ahead as its domestic success reaches an eventual plateau. As Dell and Hewlett-Packard experienced in years past, Legend will likely have to look beyond its borders to keep booming, and industry analysts wonder whether the company can leap from being a local leader to a player on the world stage.

And going abroad won't be easy. The company's growth has largely been fueled by two factors: the explosive demand of technology in China--a historical anomaly that won't repeat itself anytime soon--and the enviable fact that the company is the local favorite.

"They are certainly aggressive in price, but they are operating in a private market," Smulders said. "They have a stronghold at home, but that doesn't really extend to other markets."

First moves into Europe
Still, the groundwork has quietly begun. Last fall, the company started selling consumer PCs in Hong Kong for the first time, and laptops under its QDI brand name in Spain, Germany, Italy and Greece. QDI motherboards have also become a leading brand in Europe.

Perhaps more promising, the company has already taken steps toward becoming a contract manufacturer, a path to success paved by Quanta, Acer and other Taiwanese giants.

Last September, Legend and Taiwan-based Gigabyte, one of the world's largest motherboard makers, signed a $30 million U.S. joint venture for contract manufacturing. Under the deal, Gigabyte will provide design expertise and sales contacts; Legend is to concentrate on running low-cost factories. The venture will initially focus on boards but likely expand, the companies said.

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Legend even opened a U.S. research site last year in San Jose, Calif., staffed with American and Chinese engineers.

The company has not been immune to global economic problems, seeing its growth rate slow to 5 percent in the second quarter of 2002 because of a decline in Asia-Pacific PC sales. But even in these relatively tough times, it was still able to move into the top 10 of PC manufacturers worldwide with a 2 percent market share, rising from from 13th place at the end of last year, according to Gartner.

The imbalance between Asia-Pacific growth and declines everywhere else will continue to push the company up the charts. Legend is on the verge of passing Gateway in overall shipments worldwide and will begin to close in on Toshiba, according to market researcher IDC.

The technology slowdown has prompted the company to play down global expansion at the moment. But the outward push is inevitable.

"Speaking for the next two to three years, we will focus on mainland China," said Qiao Jian, vice president of marketing. At the same time, she said, "Legend's mission is to be an international company in 10 years. We are thinking of doing some branded sales in Southeast Asia."

That time frame might seem ambitious to outsiders, but not to those familiar with the company's history. If anything, the company has shown it learns quickly.

Evolution in a hurry
Founded in 1984 by researchers from the Chinese Academy of Sciences, Legend first existed as a distributor of foreign information technology products. AST Research, once a fairly strong brand, essentially taught the company how to build PCs, according to Kitty Fok, research director at IDC.

It wasn't the best move for AST. After Legend entered the PC business in 1990, it subsequently stopped distributing AST computers, one of China's most popular brands at the time. In the mid-1990s, Legend signed an agreement with Acer to distribute that company's PCs to consumers, paving the way for the upstart to develop its own lines in that market.

Legend's deals have proliferated along with China's growth. In 2001, AOL and Legend said they would each invest $100 million in a joint venture dedicated to creating new online services. Alliances have been struck with Asian cell phone makers, notebook manufacturers, LCD makers, printer manufacturers and digital camera suppliers that have helped Legend cement its position or get into these markets in the past two years.

Many leading component suppliers have also formed or tightened partnerships in recent months. Among them are Siemens and Texas Instruments in cellular parts, IBM in storage technology, Microsoft in software and Intel in server technology.

"They only partner with a very strong multinational and then learn what they can," Fok said.

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Though some analysts have pointed out that the company has benefited by strong ties to local buyers and low operating costs, Qiao asserts that Legend has also succeeded by studying the local market better than others.

Teaming with private enterprises has also helped the company achieve an edge over local competitors. Rival Great Wall has largely remained an operation owned and run by the government.

For example, she said, in 2000 Legend became the first Chinese company to automate Internet access through a link on the desktop. Before that, Chinese consumers had to go to the post office to get a number for a Net account.

Not confined to hardware
More recently, the company has gone on an acquisition spree to get into software and services. In March, the company acquired 51 percent of Han Consulting, a technology consulting firm for medium-sized to large enterprises, and a month later formed a joint venture with AI Software to develop services for insurance and finance customers.

"Ninety percent of our revenue still comes from hardware, but in the next three to five years we think that 20 percent of our revenue will come from software," Qiao said. "Legend is transforming into a service-centric company."

Diversifying into other business will likely help the company skirt some of the competitive realities of the PC market, which are occurring in China despite an expected growth rate of around 18 percent for the next five years, according to IDC.

Generic "white box" PC makers are eroding profits in the consumer segment, and multinational manufacturers are expanding in China, which will reduce some of Legend's cost advantages. Chinese factory workers make about $1 a hour, according to estimates from Deutsche Bank, and engineers are comparatively inexpensive.

In the business market, the company still can use local connections, but that won't help in exports or in attempts to sell to Western companies moving to China. Brand names often don't travel well, requiring millions of dollars and years of advertising to cement.

As a result, the contract manufacturing alliance with behemoth Gigabyte may begin to loom larger as time goes on.

"Just look at the experience of the Taiwanese technology companies, almost none of which have built brands overseas," Legend Chairman Liu Chuanzhi said last year in an interview. "I think we could take the path of Taiwanese companies that are original-design manufacturers, or we could cooperate with Taiwanese companies."

Securities analyst Lam, on the other hand, believes the power of Legend's brand within China's borders should not be underestimated--regardless of what it sells. Even if the nation's economy slows, its markets will still be growing faster than those of its counterparts around the world.

"Legend's strength, I believe, is their brand and localization, which will help them sell products and--more importantly--services going forward," Lam said. "PC demand in other parts of Asia or the world is stagnating. China remains one of the markets with the greatest potential." 


Going public
Founded: 1984, as a distributor.
Businesses: Primarily PCs, but has expanded into consumer electronics, Internet access, cell phones, consulting and software.
China market share: No. 1 PC seller in China, with 26 percent of the market in first quarter of this year.*
Wordwide market share: 2 percent.**
Revenue: $2.7 billion for fiscal year ended March 31, 2002.
Net profit: $134 million for fiscal year ended March 31, 2002.

Sources: Information provided by Legend, unless otherwise noted. *IDC. **Gartner.


Going public
Reflecting the disparity between the Chinese and Western stock markets, Legend spun off its distribution business last year for an initial public offering on the Hong Kong exchange.

The spinoff of China Digital reduced friction with customers, company executives said, as Legend often sold products that competed with its distribution partners. Legend also trades publicly on the Hong Kong bourse.

The move underscores the evolution of Legend, which was founded as a distribution company for foreign technology products. Digital China specializes in distributing products such as Toshiba notebooks and HP printers throughout China.

Its 39-year-old Chief Executive Guo Wei is one of two leading candidates to become chairman of Legend. The other is Yang Yuanqing, who took over as Legend's CEO last year as part of the split.


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