Why Lenovo-IBM is a tough sell

Two years ago, I got an inside look at operations at Lenovo Group, the Chinese computing giant that is forming a joint venture with IBM to sell PCs worldwide.

Military marching music blared out of loudspeakers that ringed the corporate headquarters. It was 2 p.m., the beginning of the mandatory afternoon exercise break for the assembly line employees. "Here it is," I thought, "the legendary willpower and unity of Chinese organizations." I expected to see employees popping off jumping jacks while wielding soldering guns.

Instead, the workers mingled around a courtyard, smoked cigarettes and in general seemed impervious to the motivational siren songs broadcast by upper management. It warmed my heart--people truly are the same everywhere you go.

Formerly known as Legend, Lenovo has consistently been predicted to become one of the first companies from China to go worldwide. It sells some PCs in Europe, but to date its operations have mostly stayed in China.

The pending deal with IBM will make those global plans will materialize overnight. Under the terms, Lenovo will buy the PC unit, but IBM will lend it its name and make Lenovo a preferred provider. Pulling such a deal off, however, would be fraught with difficulty.

First, let's take a look at the factors in Lenovo's favor. For one thing, the company often behaves more like a Western corporation than an Asian conglomerate, adapting rapidly to changing circumstances.

Founded in 1984 by researchers from the Chinese Academy of Sciences, Legend first existed as a distributor in China of PCs from overseas. It subsequently moved into making PCs, consumer electronics, printers, storage and, more recently, supercomputers. It also has its own retail stores in China.

Lenovo has shown an uncanny ability to extract expertise from its many technological partnerships. It learned how to make PCs from AST Research and Acer, two of its distribution customers. Lenovo subsequently stopped distributing both brands. In 2001, America Online and Lenovo invested $100 million in a joint venture to develop online properties. Lenovo has since bought out AOL's interest at a discount.

Just as importantly, the company knows it can't simply rely on latent nationalism or local low-cost manufacturing to woo customers in China. When it began to lose market share to multinationals like Dell in the first part of the year, Lenovo immediately cut prices.

In addition, technology giants such as Samsung and Acer have paved the way for broad acceptance of manufacturers from Asia.

But here's the snag: Samsung, Sony and Acer sell to consumers and small businesses. IBM sells notebooks and desktops to big companies, and corporate computing doesn't travel easily across borders.

Fujitsu Siemens Computers is the fourth-largest PC maker in the world, but good luck finding any of its products in the United States: The company sells its boxes in Europe and Asia. Samsung bought AST and tried to break into North America a few years back, but the effort floundered.

The problem is that corporate customers want a safe, predictable and fairly inexpensive choice. Selling corporate America on a new technology is like giving your dad the latest fashions at Christmas: Chances are he'll be back in his jogging suit in two weeks. Advanced Micro Devices makes chips that win awards, but they don't end up in business desktops, because the Intel processors the IT managers have tested work just fine.

And IBM customers are the most conservative of the lot. They know they can call Armonk, N.Y., and get answers pronto if something goes wrong. Yes, IBM outsources laptop and desktop manufacturing--but it is Big Blue itself that has to answer for the products.

How comfortable are business customers going to be with a joint venture owned mostly by a company based 10 time zones away? More likely, they'd rather call Round Rock, Texas, home of Dell. In addition, IBM will likely be uneasy about having its brand name of products coming out of a group it does not fully control.

Another problem stems from the nature of joint ventures. They usually don't work. Typically, one company has to become a passive partner (AMD and Fujitsu's flash venture Spansion), or direct competition between partners has to be an extremely remote possibility (EMC and Dell), for a venture to have a chance of success.

IBM and Lenovo are going to have to exchange customer lists and let the one perform a service that it used to do itself. A lot of trust will be required. Remember how people worried whether the Hewlett-Packard culture would mesh with Compaq's. Here, the cultural gulf is a lot wider and, to top it off, the two parties will literally not speak the same language. The new Lenovo will consist of roughly half English speakers and half Mandarin speakers.

As the old saying goes, no one ever got fired for buying IBM. But no one ever got hired for buying Lenovo.