The challenges of starting a business in China can be clearly seen from the experiences of two computer companies, one Chinese and one Western
Lenovo is arguably China's most important company, rising from obscurity 20 years ago to become the world's third-largest manufacturer of personal computers. Its purchase, for $1.25 billion in late 2004, of IBM's PC division, which boasted four times its own volume of sales, still ranks as one of the most daring overseas acquisitions by a Chinese company.
Yet there was nothing inevitable about Lenovo's ascent. Its founder Liu Chuanzhi was determined and politically shrewd. But as Ling Zhijun, a respected Chinese journalist, chronicles in this exhaustive new account, Mr. Liu and his colleagues—most of whom started in business in their 40s—had no experience of running a private company, no idea about modern computers (the first mainframes had to be cooled with ice cubes and a fan) and a formal education that had been cut short by the Cultural Revolution. As they built Lenovo, whose Chinese name is Lianxiang, they had to teach not just themselves, but a generation of Chinese bureaucrats how to run and regulate a private corporation.
Mr. Ling's impeccably sourced, fly-on-the-wall account of the company's struggles is fascinating. Lenovo depended on the protection and goodwill of the Chinese Academy of Sciences, which also became its biggest shareholder. However, despite Lenovo's subsequent stock market listing in Hong Kong and its skill in sidestepping ludicrous government rules against everything from differential pay and bonuses to control of the supply chain, the book attributes Lenovo's success a little too often to its state shareholders. Ownership of private assets is highly sensitive in China, and previous attempts by the government to reclaim ownership of effectively private companies have often proved disastrous—bankrupting Kelon, a fridge-maker, for example. With luck, Lenovo will escape this fate.
Mr. Ling gives most of the credit for Lenovo's success to Mr. Liu, who pushed boundaries while staying just the right side of the ideological line—and by doing so, changed the way China does business. Mr. Liu launched incentive schemes and share options to motivate Lenovo's staff—handing out suitcases of cash and risking imprisonment to sidestep the government's 300% tax on bonus payments. The tax was subsequently scrapped. He pushed for a handful of employees to own their own homes—a revolutionary initiative in 1992—prompting China Construction Bank to announce the nation's first- ever personal loans and newspaper headlines to cry: “How can young people live in three whole rooms?” Lenovo was the first Chinese company to create advertisements that did more than just name a product and its price—so introducing brand building to China. And Mr. Liu accepted China's limits. Though politicians and his own engineers urged him to develop a “Chinese chip” and fight Western competitors on quality, Mr. Liu resisted. Seeing that Chinese science lagged behind, he focused instead on cutting prices and copying Western technology and sales methods.
Mr. Ling's book is, however, a history. Despite its title, it offers no new detail about the IBM purchase that propelled Lenovo onto the world stage. Most mergers between Chinese and Western companies stumble. Insiders suggest this one may be faring better than most under William Amelio, the former head of Dell's Asia-Pacific division. It is too early to know for sure and Lenovo's history may be a poor guide to its future.
Both books suggest that China has the raw material—smart, driven, educated people—it needs to push its high-tech ambitions. Yet managing those people while navigating an opaque bureaucracy and an unpredictable business environment matters just as much as writing code or designing hardware—and will determine whether China can move from the world's workshop to becoming a serious force in global technology.
