Can China's Legend go global?

One of the world's hottest PC companies has a balance sheet worth envying, a dominant position in a fast-growing market, and a history of good service and innovative technology. But if you haven't heard of Legend Group, you have an excuse. For the past 19 years, the company has confined itself to China. As the country transforms and opens, though, its No. 1 PC maker is coming into the spotlight, and its ambition is to become a global force to rival IBM, Dell Computer and Hewlett-Packard.

"Legend is one of two or three [tech] powerhouses in China," Wharton management professor Bruce Kogut said.

At home, Legend has the smooth moves and popular charm of a Jackie Chan. The company dominates the swiftly growing Chinese PC market, with a 27.7 percent market share as of 2002, according to research firm IDC. Legend's nearest competitor, Founder, only has a 9.4 percent share. And the largest foreign PC company in China, Dell, clocks in with a mere 5.8 percent share.

Throughout China, Legend's name is synonymous with high quality, good service and value--not just the low cost you'd expect from a Chinese manufacturer.

"Legend's strategy has been one of essentially meeting the requirements of the Chinese market, which according to the company are different from the requirements of the West," said Wharton management professor Marshall Meyer. That means customizing firmware and the look of their hardware enough to command a premium price, he added.

China's PC market is growing so quickly that it's slated to outpace Japan and become the world's No. 2 market within the next few years. Legend's strengths have enabled it to grow market share as well as sheer units: Whereas the market as a whole grew 20 percent year over year during the third quarter of 2002, Legend asserts that its sales grew 21 percent. Even faster growth in the notebook and server realms helped Legend boost its earnings for the third quarter of 2002 to 44 cents per share (3.41 Hong Kong cents) from 34 cents per share in the third quarter of the previous year. Gross profits for the third quarter of 2002 were about $32.8 million.

Nothing concrete
But Legend's triumph isn't secure. Dell and IBM may only have about 10 percent of Chinese PC sales between them, but they have been hacking away at the Chinese enterprise market. And Legend's expansion plans for moving beyond China are shrouded in mystery. "Legend is still trying to make long-term plans for its international strategy. They want to go there, but don't have anything concrete for now," says Tien Yu Sieh, an analyst for Merrill Lynch who covers Legend.

China's PC market is growing so quickly that it's slated to outpace Japan and become the world's No. 2 market within the next few years.

Legend got to where it is today thanks to a uniquely Chinese combination of business excellence and aggressive protectionism. Speaking about the origins of the company in an interview with McKinsey Quarterly in 2001, Legend Chairman Liu Chuanzhi said that when China introduced its market reforms in 1984, he grew excited about setting up a computer company. Initially, Legend was a distributor of foreign PCs; it started making and selling its own in 1990.

"as="" a="" distributor="" for="" western="" brands,="" legend="" discovered="" that="" the="" average="" chinese="" couldn't="" use="" computer="" because="" software="" required="" sophisticated="" knowledge="" of="" english,"="" meyer="" said.="" "people="" wanted="" turnkey="" systems,="" so="" started="" making="" systems="" different="" markets="" in="" china.="" and="" while="" emphasizing="" cost,="" their="" margins="" were="" pretty="" good."="" <="" p="">

By 2000, Legend stood in the now-open Chinese market as a $2.2 billion company with more than $40 million in annual profits. In the first half of its current fiscal year, which ends in September, Legend's revenue was $1.3 billion, up 20 percent from the same period in the previous year.

Whether or not the Chinese government is still protecting Legend is a matter of debate; some analysts say government and education contracts tend to be steered toward local players, while others disagree. All agree on one thing, though: Legend's national sales network and brand name are, well, legendary. "Any preferential treatment for local players is probably...a function of Legend's strong nationwide presence for both sales and after-sales support," said Sieh.

And Legend is no "white box" maker; the company produces world-class computers, analysts say. The company built its name on bringing Chinese language solutions to PCs; now, it is pushing its own alternative to Microsoft's Media Center PCs, which Legend calls "dual-mode" computers. Combining the functions of PCs and home electronics, "we believe these dual-mode new products and technologies will stimulate new demands in the market," Legend Chief Financial Officer Mary Ma wrote in an e-mail to Knowledge@Wharton.

"Legend makes great products, so don't underestimate the value of its technology," said Mark Margevicius, research director with the Gartner Group. "The company has come up with some really innovative designs and styles."

Ding, Dong, Dell
Legend may be today's leader, but it's finally facing some serious competition, especially from Dell. The U.S. PC maker is pushing hard into the Chinese enterprise market, and its efforts have paid off. Dell increased its market share in China from 4.3 percent to 5.8 percent over the course of 2002, according to IDC. Dell is offering compelling products at reasonable prices and, just as important, is leveraging its name with businesses aware of what's going on in the West, Margevicius said.

Whether or not the Chinese government is still protecting Legend is a matter of debate.

When asked about Dell, Ma runs down a long list of Legend's competitive advantages: brand strength, knowledge of the Chinese market, its network of over 3,500 sales points and its top rankings in service. Aware that much of U.S. PC manufacturers' profits come from services rather than from hardware, Legend is making sure that base is covered as well. "Legend is committed to transforming into a service-oriented company," Ma said.

Legend has an unassailable brand name in China, but there's an even bigger world out there. With its QDI subsidiary now selling motherboards to white-box manufacturers in Europe and Asia, Legend has been stabbing at the global market. But so far, the Chinese company hasn't tried to extend its brand into the Western world.

There are plenty of reasons to do so. About 40 percent of the world's PCs are sold in the United States, Margevicius said. And China is a cutthroat market. "It's not unusual for Chinese companies to turn to external markets because competition in China is ferocious," Meyer said.

In February, Ma said the company aims to increase its out-of-China sales from the current 7 percent to 25 percent to 30 percent by 2006. But the company is still figuring out exactly how to do that, according to Merrill Lynch's Sieh. Legend has already started selling PCs in Hong Kong. On Feb. 15, Yang Yuanqing, CEO of Legend, told The Economist that the company wasn't planning to enter the U.S. market any time soon. But Ma said Legend is open to testing the waters on this side of the Pacific.

In her e-mail to Knowledge@Wharton, she clarified that while Legend has a "long-term aspiration of becoming an international company," the Chinese market will keep the company busy for a while. After all, China is growing fast, and the U.S. PC market is stagnant; in fact, even as Legend boomed in 2002, the QDI motherboard unit's sales fell, according to the company's quarterly report.

"Our focus will still be on China in the coming few years," Ma said. "We will be exploring international markets in the meantime. Selling PCs in Hong Kong is certainly an example of a market test." Wherever Legend heads now, it certainly is a player to watch. "It will be exciting to see how the global strategy plays out," Meyer said.

 
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