From the IBM PC Division to Lenovo

Frédéric Raes
Country General Manager
Lenovo Belgium Luxembourg

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Agenda
1. Lenovo : who are we ?
2. The history of Legend
3. The making of the IBM-Lenovo deal
4. Why ?
5. Success factors for the New Lenovo
6. The merge and the deployment of New Lenovo in 67 countries
7. Managing the cultural gap
8. 1st year achievements
9. Lenovo in BeLux
10.Plans and expectations for 2006 and beyond
11.New management style and mindset
12.China, Europe, Belgium, Etc.

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From the IBM PC Division to Lenovo
Lenovo – who are we ?
 The 3rd largest manufacturer of PCs worldwide according to iSuppli
1. Dell = 17.3% of worldwide market share
2. HP = 15.5%
3. Lenovo = 7.4%
4. Acer = 4.5%
5. Fujitsu-Siemens = 3.7%

 The makers of the ThinkPad

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From the IBM PC Division to Lenovo
Lenovo Group and IBM PC Division in 2004
Lenovo Group Ltd. IBM PC Division

• Founded 1984 • Established in 1981, created the PC

• FY04: Revenue, $3B
Net Profit, $135M
• 10,000 employees
• #1 market share in China for 7 years
(27% market share, source: IDC)
• #1 IT company in China
• Small Business and Consumer
market strength
• Market capitalization: approx. $2.6B
• $9B 2003 Revenue
• 9,500 employees
• #2 in WW commercial notebooks
• Leader in enterprise PC design and
business productivity
• Enterprise and Mid-market strength
• ThinkPad notebooks have won over
1,000 industry awards
• 100-million PCs shipped

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From the IBM PC Division to Lenovo
A Perfect Fit Between Complementary Organizations

Premium Global PC Brand #1 IT Brand in China

– Most-recognized technology brand – Most recognized technology
globally brand in China

Enterprise/Mid-market Expertise Consumer/Small Business Expertise

– Leader in business productivity & – Differentiated consumer/small
lowest total cost of ownership business and extensive retail network

Notebook Leadership Efficient Operational Platform

– Leading-technology enhanced – Low cost infrastructure and
notebook product offering manufacturing scale

Global Sales, Financing,

Fulfillment and Service Network
– Global sales network with financing,
fulfillment and service support
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From the IBM PC Division to Lenovo
The Legend Behind Lenovo

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From Legend to Lenovo: 1984 to 2005
初创时的联想

Legend in 1984 Lenovo before IBM acquisition

Founding members: 11 researchers Over 10,000 employees
Initial investment: RMB 200,000 Revenue 2003: HK$ 23.2
(US$ 25,000) Bn (US$ 3 Bn)

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From the IBM PC Division to Lenovo
 The early days of a TECHNOLOGY company
1. Founded in Beijing in 1984
• The New Technology Developer Inc. is founded by the Chinese Academy of Sciences
• 1985: distributes PCs from IBM – 1987: distributes AST PCs and HP PC’s and printers
• 1987: successful roll out of the Legend Chinese-character card
• 1988: Chinese-character card gets National Science Technology Progress Award
• 1988: Starts selling products and services to large corporate & public clients in China.

1. Hong Kong branch in 1988

• Legend could not get license to manufacture their own PC in China
• Problems in Hong Kong: visa, language, clothes, cost of living, salaries
• But Hong Kong = window to the world – learn about the business world
• Joint ventures – become sole distributor of AST products in China  AST #1 in China
• Acquires Quantum Design -> starts making motherboards  will become #5 worldwide

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From the IBM PC Division to Lenovo
 The crisis of the mid-90s
3. Legend starts making PCs in 1989
- Las Vegas 1988: decision to make a high-performance, high-quality PC, and to present
it 4 months later in Hanover – where they sell tens of thousands in 4 days
- 1990: license is granted to manufacture PCs and Legend establishes a strong
distribution channel for Legend and imported brands
- 1993: Legend Science and Technology Park opens in Huiyang (Guangdong)

4. The mid-90s crisis

- 1992: 70% of PCs sold in China are from Chinese manufacturers but Beijing and
Washington enter a bi-lateral negotiations  duties on PC imports fall 50%  20%
- American-branded PCs can compete on price, and in 1993 take 67% of the market
- Legend’s react by adjusting costs, but also strategy and decision making
• Integrate technology, supply/manufacturing and marketing in decision-making
• Tailor machines to the needs of the Chinese users better than US competitors can
• Establish a separate, loyal distribution network, with a strong partnership

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From the IBM PC Division to Lenovo
 Year Market
Growing to the Top share
1997 10,7%
1999 20,1%
 1994: listed on Hong Kong Stock Exchange 2000 26,3%
 1995: 1st Legend Server
young PC users name Legend their favourite national PC brand
 1996: 1st Legend notebook
 1997: market leader in China, now strongly profitable
 1998: introduction of a modern IT system based on SAP
 1999: 1st Internet PC (1-touch internet access)
 2000: becomes one of the constituent stocks of the Hang Seng Index
Business Week ranks Legend 8th on list of global IT companies
 2001: joint venture with AOL for consumer interactive service business in China
 2002: enters the mobile handset and the IT management consultancy businesses
 2003: Legend becomes
 2004: becomes an Olympic Partner

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From the IBM PC Division to Lenovo
Lenovo is a Top Olympic Partner
Mar. 26th 2004
 Lenovo is a Top Sponsor to the Olympic
Winter Games in Turin and the Olympic
Games in Beijing

 Computing Equipment Provider to both Turin

Olympics and Beijing Olympics

 Top Sponsorship buys certain rights e.g.

- Use of logos
- Hospitality provisions
- Access to National Olympic
Committees and athletes

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From the IBM PC Division to Lenovo
 Reasons behind Legend’s success
1. Lowest costs in the industry, best inventory management, but that is far from all

2. Strategy of being both the cheaper and the faster

= 1st to recognise the potential of the Home PC market in China
= 1st to build manufacturing capacity to benefit from greater economies of scale
= constantly introduced new product generations  taking advantage of component cost
reductions faster and never giving competitors a break

1. Disciplined execution of the channel policy, that created a very strong and loyal channel

2. Decision not to copy competitors from USA / Taiwan, but to win in China by developing the
ability to beat competitors with products better tailored for local users

3. Synergies between the 4 divisions (research, PC, telephony, internet)

 products with more functionalities, more performant and easier to use

4. Very strong partnerships with Intel, Microsoft, IBM, HP, Texas Instrument  learn

5. Ability to deal with shareholders: Chinese leader  transparency and governance model

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From the IBM PC Division to Lenovo
 1999: the Tianxi (the Internet PC)
 Legend was first to spot the emergence of a home market for PCs: the spoiled “little emperors”
were becoming teenagers – But Chinese families needed a lot of hand-holding

 1995: 1st Home PC for with strong multimedia functions + training classes for families

 By 1999 Legend has developed a clear vision how to enter the Chinese Internet market
1. Use the Internet to drive the sale of PCs and new hardware products
2. Use its commanding position in the PC market to dominate the Internet

 Legend launches the Tianxi, with “one-touch-to-the-Net” and a large promotion campaign
- Hardware buttons to launch most internet and user support functions
- Strong partnership with China Telecom  ready to connect in 2000 towns
- Digital pen to help writing Chinese-character e-mails
- Later additions:
• Legend’s easy-to-use web portal
• Notebook and Pocket PC versions, with single dial up country-wide

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From the IBM PC Division to Lenovo
Food for thought
 Success came despite a very unfavourable political and economic environment

 The immediate impact of the US invasion was dramatic and several local
manufacturers disappeared but in retrospect most of the reasons behind Legend’s
success can be traced back to the reforms that have followed the disastrous year 1993

 Foreign competitors underestimated Legend’s strategy and strength and failed to react
until it was too late because they did not understand what Legend was doing

 Not only Legend did win, but also the Chinese consumer who got better products at
better prices, foreign firms could not dump second-class products into China any more

 Legend’s successes and its constant media attention changed the perception of
Chinese consumers that foreign products are more reliable and of a higher quality.

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From the IBM PC Division to Lenovo
 Quality – Part of Lenovo’s Heritage
Lenovo won 2 awards
from the prestigious
Legend Commercial Kaitian6800, Intel Innovative PC Award, 2002
German Design Institute
(Nov. 2005)
Legend Consumer Tianlin9220, Intel Innovative PC Award, 2002

NGPC ： Winner of Legend Consumer Tianjiao,

Germany IF, 2002 Best multimedia desktop by
HK HIGH TECH, 2002

Legend Consumer Tianjiao E, 3rd Chinese

Enterprise “Product Innovation” Sliver Medal,
Legend Consumer TianjiaoA, Golden 2003
award of China Product Innovative
Design, 2002
Legend Mobile ZhaoyangE360,
Japan Int’l ID Grand Award——“G-
mark” , 2003

Legend Commercial Yangtian

Legend Consumer Fengxing, China Design
M6000, Intel Innovative PC Award,
Award of 1st HK Asian Most Influential Design
2003
Contest

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From the IBM PC Division to Lenovo
Legend / Lenovo is a
• High-tech
• High-innovation
• High-quality
Company

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From the IBM PC Division to Lenovo
The Making of the New Lenovo

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Why ?
 No future for the PC Division within IBM
- Bringing corporate margins down
- Infrastructure costs
- Had stopped devices <500$ (PDA, thin clients)
- PC = commodity versus IBM = value and services addressing complexity
 PCs require economies of scale
- IBM PCD + Lenovo  a top global player with volumes to compete
 Complementarity, no redundancy
 Legend wanted to be global
 IBM wanted to have a strong partner to keep access to PCs

 Power of the ThinkPad brand

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From the IBM PC Division to Lenovo
 The Making of the IBM-Lenovo Deal
 Summer 2002: IBM CFO John Joyce goes to China in hopes of selling the company's ailing
PC unit to Legend. But IBM PCD had lost nearly $400M the previous year  Legend refuses.

 18 months later: Lenovo is now hungry to become a global player and IBM has radically
restructured the PCD. Costs have been slashed, much of manufacturing is now outsourced.

 IBM also seeks a bid from private equity giant Texas Pacific Group to put pressure on Lenovo.

 April 2004: Legend’s board + consultants from McKinsey and Goldman Sachs, conclude that if
Lenovo can recruit IBM's top execs to help manage the company, the merger can succeed.

 Summer 2004: during secret talks in N.C.: Yang and Palmisano agree to make it more than
just a simple sale of assets: both companies will form a strategic alliance.

 December 2004: between the 2 bids (Lenovo & Texas Pacific) Palmisano chooses Lenovo:

- IBM will sell Lenovo PCs via its sales force and distribution network, will provide services
and financing for Lenovo PCs and will allow Lenovo to use the IBM name for 5 years,
- Lenovo, still partly owned by the Academy of Sciences, will be a help to IBM in China.

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From the IBM PC Division to Lenovo
 Transaction Summary
• Lenovo acquires IBM PC operations
• IBM: ownership stake, long-term alliances with the new Lenovo in sales, services and financing

Ownership
The new Lenovo Chinese Employees’
Academy of Shareholding
Sciences 65% 35% Society
IBM Lenovo

Lenovo Public Private

IBM
Holdings Shareholders Equity Firms

IBM Sales 46% 13% 35% 6%

• Texas Pacific Group
• General Atlantic
IBM Services • Newbridge Capital

IBM Financing
Lenovo Group Ltd.
(HKSE Listed)
IBM IT

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From the IBM PC Division to Lenovo
Implementing the deal
 Chairman = Yang Yuanqing (ex-CEO of Lenovo)
CEO = Stephen M. Ward (ex-head of IBM's PCD).
 Headquarters are near IBM's outside New York.

 The 30-member executive staff is split down the middle.

 December 2004 to April 2005: mixed project teams sides work on the fast start
- to avoid disruptions, New Lenovo will begin with 3 separate business units: China
PCs, China cell phones, and international operations (= former IBM PCD)
- But then will quickly integrate all supply-chain operations.

 Project is run as 3 parallel 4-month efforts

• Carve out from IBM
• IBM proceedings without PCD
• Lenovo proceedings without IBM
- with project teams
• Per function (sales, finance, administration, order management, etc.)
• By region and country
- 2 waves (large countries 1st of May, smaller countries 1st of August)

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From the IBM PC Division to Lenovo
New Lenovo Executive Team
Jun Liu, Ravi Marwaha,
Fran O’Sullivan, COO COO Lenovo China Worldwide Sales
Lenovo International

Shaopeng Chen,
China

Scott Smith, Milko Van Duijl, Andrew

AG EMEA Sotiropoulous, AP

George He, Peter Hortensius

Corporate Research & Worldwide Development
Technology

Deep Advani, Mark Enzweiler

CMO and Acting VP, Worldwide
Corporate Strategy Business Partner Sales

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From the IBM PC Division to Lenovo
 The New Lenovo on May 1st , 2005

Paris Hungary
New York
RTP Beijing Japan
Mexico Shanghai
Shenzhen Huiyang

● Principal Operations
● Research Centers
● Sales Headquarters Sydney
● Manufacturing Centers

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From the IBM PC Division to Lenovo
 Achieved in 1st year of new Lenovo
 Launched Lenovo in 65+ countries, with no disruption in deliveries and support
 Retained a huge majority of our customer base
 Delivered on promise of continuity in product strategy, quality, design, roadmap
 Established 2 innovation centres (Raleigh (NC) and Beijing)
 Retained 98% of our employees; launched cultural gap reduction programme
 Delivered 2 profitable quarters, with ex-IBM PCD profitable
 Increased customer satisfaction, becoming #1 for mobiles (TBR)
 Introduced new products including the very successful X41T tablet convertible
 Increased operational efficiencies by combining the Think and Lenovo divisions
 Gained share globally despite absence from consumer segment in Europe, NA.
 Gained share in the 4 key emerging countries: China, India, Brazil, Russia
 Doubled the revenues of the mobile telephony division

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From the IBM PC Division to Lenovo
Lenovo’s 6-point plan for increased competitiveness

 IBM
- Most recognised global IT brand
- Reputation of quality 1. Cost and expense competitiveness
- Leader in Laptop technology
2. Product line expansion
- Leader in business productivity
3. Brand development and demand
 lenovo generation

- Most recognised IT brand in China 4. Sales model and sales execution

- Reputation of quality
5. Investment in emerging markets
- Leader in consumer / small business
- Low cost infrastructure and 6. Integration of businesses
manufacturing scale

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From the IBM PC Division to Lenovo
Lenovo in Belgium and Luxembourg

 Lenovo (Belgium) sprl / bvba

 Lenovo (Belgium) Luxembourg Branch

 About 20 people – sales team working mostly in home office

 Main responsibility: sales, channel management, marketing
and communications

 Order desk and administration: Greenock (Scotland)

 Product marketing + www.Lenovo.com: Basingstoke (England)
 Warranty, Technical Support: IBM + 2nd level support: Greenock
 Finance and accounting: Singapore
 Human Resources: Budapest
 European HQ’s: Paris

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From the IBM PC Division to Lenovo
 The Values of Lenovo Group, Inc.

Dedication to every client’s Serving customers

success
Innovative and “can do” spirit
Innovation that matters – for our
company and for the world Accuracy and truth-seeking

Trust and personal Trustworthiness and integrity

responsibility
in all relationships
Customers
Innovation
Integrity

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From the IBM PC Division to Lenovo
Managing the Cultural Gap – Early Stories
 Findings: the cultural gap is huge and it’s hard to predict when glitches will pop up
- The Chinese don't tolerate being late for meetings, while IBMers are often late.
- When Yang, Ma, and eight other Lenovo execs landed at John F. Kennedy
International Airport in New York for their first planning meetings, nobody met
them. Not good: In China, visitors are greeted and taken to their hotels in limos.
- Yang brought it up at a meeting, and Steve said, 'We'll fix that."‘
- Initially, Yang favoured dual headquarters, U.S. and China. It was a point of
national pride. Ward disagreed, saying there should be a single one, in New York.
- After a couple of days, Yang came around: "Steve made a lot of sense, putting
headquarters in New York tells our global customers that we're a global company."

 Immediate decisions after deal was signed

- Educate project members on each other’s culture
- Declare English Lenovo's official language.
- Appoint Ward as Lenovo's CEO, Yang Yuanquin as Chairman

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From the IBM PC Division to Lenovo
From the Lenovo Intranet – On the Cultural Gap
On running cross-cultural meetings:
 Equal opportunity conversation: be sure to engage everyone in the room.
 Seating arrangemen: avoid having Westerners on one side and Chinese on other. Poor
seating arrangement can create negative perceptions + inhibit comprehension.
 Pause: take frequent breaks during presentations to ensure comprehension and give
time to formulate an answer.
 Name names: use nametags + when meeting the people for first time, reference people
by their full names, not just "Going back to Bill's point..."
 Be prompt: many US meetings start 10/15 minutes late. Most Asian cultures are very
prompt. If the meeting is scheduled for 10 a.m., begin at 10 a.m.
 Speak slowly
 Highlight the main points
 Repeat the main points with different words
 Avoid large meetings: challenging for non-natives: they move fast, people talk over
each other, individuals are afraid to ask questions for fear of looking stupid.
 Send written recap: after meetings, send a note to summarise key points and
decisions: individuals studying English have better reading comprehension.
 Use visuals

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From the IBM PC Division to Lenovo
The World seen by Lenovo (from China)

1. China
2. Other emerging countries
1. India
2. Brazil
3. Russia
4. Middle East
3. Mature countries
1. North America
2. Western Europe

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From the IBM PC Division to Lenovo
China, Europe, Belgium, etc.
WTO (2003) To AP From AP Delta
NA 249 533 -284
EU 308 417 -109

 China as a competitor
- Manufacturing – technology & innovation – reservoir of young, talented people
- Costs – drive to achieve – speed of execution – learning skills - quality
 It is worse for the South
- Available capital
- Chinese product invasions – Local companies can’t compete – Western companies less and
less
 China as a consumer market
- Distribution challenge – distances, cultures  local partners
 EU’s strategies to compete
- Low costs capabilities – focus on services (but India ?) – skills and education
- Ability to execute and be flexible - SOX

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From the IBM PC Division to Lenovo
Future Success Factors for New Lenovo
Compete successfully against Dell, HP and new entrants

 Create strong image of quality and innovation outside China

 Build more economies of scale and purchase power, gain share
 Become the leader in fast growing (= emerging) regions
 Successfully enter Consumer market in NA, EMEA
 Protect and keep developing successful IBM brands ThinkPad, ThinkCentre
 Combine two cultures into a single company
 Reduce structural costs outside China

So far, so good – future will tell

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From the IBM PC Division to Lenovo
Management Styles
 So far, Chinese management keen to
- learn
- set clarity
- drive change
- more than to be hands on
 Speed of change and drive to achieve – in 7 months:
- Global organisations – fully mixed
- Drive to emerging countries
- Supply chain
 Reputation of management style = clarity of directions
 Lenovo is empowerment and delegation - not typical ?

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From the IBM PC Division to Lenovo
Pride at working for such a company

 Past record of achievements

 Leaders’ ability, dedication and vision
 Capacity to learn, adapt and execute
 Values
 Contribution to Chinese history in the making

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From the IBM PC Division to Lenovo