The lenovo affair

In the mid-1980s, China's shift from state-controlled industry to a market economy created tensions between the government and businesses. The Computer Institute, where Liu Chuanzhi and Lianxiang were based, felt the impact, losing government projects and funding. Despite the uncertainty, they took action. With over 100 employees, they decided to import PCs, equip them with a Lianxiang Han-card, and sell them as a package. However, they lacked an import license.

Resourcefully, Liu Chuanzhi partnered with the Bank of China Group's Hong Kong branch, which had the necessary license, to form a mutually beneficial arrangement. Lianxiang began to earn commissions from PC sales across China, but Liu Chuanzhi saw the limitations of this model. He secured permission to establish a trading company in Hong Kong, aiming to generate capital and experience, move into manufacturing, and list on the Hong Kong Stock Exchange by February 1994. This aligned with China's push for international business engagement.

In 1989, Hong Kong Lianxiang, led by Liu Chuanzhi, secured a HK$50 million loan from Mitsui Bank. The funds were used, in part, to strike a deal with AST, a Hong Kong-based personal computer manufacturer. Lianxiang invested US$10 million to acquire 3,000 AST computers, effectively monopolizing AST's production for a year. Additionally, Liu Chuanzhi purchased Quantum Company for HK$10 million from a Hong Kong businessman. This acquisition allowed Lianxiang to develop and manufacture its own computer motherboards, a strategic move aimed at leveraging AST's computer supply to kickstart Lianxiang's own computer manufacturing venture, which proved highly successful. Liu Chuanzhi often compared his overseas strategy to the quality of Chinese wines, emphasizing the importance of offering top-quality products at competitive prices and smartly positioning them in the market.

As Lianxiang began to gain traction in the local market, a series of internal issues reached a critical point. The company's structure had evolved organically rather than through deliberate design, leading to a peculiar mix of elements from its origins at the Computer Institute and adaptations to manage rapid growth. This resulted in internal conflicts and power struggles. Liu Chuanzhi, the company's leader, had to navigate through these challenges, implementing personnel changes and establishing formal management rules to replace the previously informal, and often ambiguous, guidelines.

Despite these internal challenges, Lianxiang was growing significantly. By 1990, the company's revenue reached RMB 326.8 million, with RMB 9.4 million paid in taxes. It expanded its manufacturing beyond Hong Kong, adding two facilities in China, and was selling thousands of motherboards and Han-cards internationally. Lianxiang's Q286 computers received RMB 12 million worth of orders at the National Exhibit. However, the company faced issues with quality control, scaling up production, and over-reliance on imported components, which led to fragmented purchasing channels and potential financial risks.

In the early 1990s, amidst a backdrop of economic reform debates in China, Deng Xiaoping was rallying reform-minded individuals in the south, while in Beijing, Liu Chuanzhi was motivating his team with a warrior-like zeal. The nation was embroiled in discussions over whether its future lay in socialism or capitalism, planned economies or market dynamics, and what should be prioritized: peaceful evolution or economic development. This period saw the media actively engaging in these debates, with government officials often remaining non-committal until clear directives emerged from the leadership. During this time of uncertainty, the Chinese government made a significant move by announcing a reduction in taxes on imported computers in 1992, signaling a deregulation of the industry and an opening up to global market forces. Additionally, the government pledged financial support to domestic computer brands, a policy from which Lianxiang (later known as Lenovo) would not benefit directly due to its focus on international sales.

In 1993, Liu Chuanzhi faced the volatility of the Chinese computer market head-on by restructuring his company's management. He established a dedicated Computer Administration Department, a decisive move that consolidated the roles of over 400 employees and four Vice-Presidents into a single unit. This streamlined approach was aimed at enhancing efficiency and focus amidst market uncertainties.

Under the leadership of Yang Yuanqing, who was appointed to head the newly formed department, a pivotal strategy emerged. Recognizing that foreign computers were priced beyond the reach of many Chinese consumers and often included unnecessary features, Yuanqing proposed the development of the E-series. This new line of computers was designed to be affordable, catering specifically to the economic capabilities of Chinese households.

By the end of 1995, Lianxiang had carved out a 6.6% share in the competitive Chinese computer market, trailing behind giants like Compaq, AST, IBM, and Hewlett-Packard. Despite the industry's declining profits, Lianxiang's achievement of selling 105,780 computers, more than any other domestic company, was significant. However, the company faced challenges, particularly with its Hong Kong operation losing HK$190 million due to internal conflicts. This financial strain threatened the closure of the Hong Kong business, which was a major player in the global motherboard market with a 10% share. The situation worsened as the company encountered a cashflow crisis, leading to a drastic fall in its share price. To salvage the situation, Liu Chuanzhi secured a HK$500 million loan, using Lianxiang's majority ownership as collateral, and initiated a management overhaul to stabilize the business.

Liu Chuanzhi, the visionary behind Lianxiang, emphasized the importance of leveraging local advantages for the company's success. He compared Lianxiang's strategic use of resources to the precise irrigation methods of Israelis, as opposed to the less efficient American approach. This philosophy led to a pivotal decision in the spring of 1998 when Liu reversed his initial strategy of expanding overseas. He recognized the potential of the burgeoning Chinese market and saw the wisdom in focusing on domestic growth instead of aspiring to become another IBM.

Lianxiang's commitment to the Chinese market paid off. In 1998, they experienced a 75% increase in computer sales, formed partnerships with major companies like Guanqun and IBM, and received recognition from Time magazine. However, the Asian financial crisis of 1998 posed challenges, slowing China's economic growth and affecting sales. Despite these difficulties, Lianxiang adapted by modernizing its management systems and preparing for future growth.

Lianxiang, a leading private computer company in China, had over 10,000 employees and was gaining recognition for its profitability by the year 2000. In February of that year, the company raised HK$2.807 billion through a new share issue, with plans to invest 85% of the funds in its Internet strategy. This move was well-received, and by March, Lianxiang's market valuation soared to HK$80 billion, ranking it among the top ten on the Hong Kong Stock Exchange.

The company's success prompted founder Liu Chuanzhi to consider stepping back, leading to the question of succession. Two candidates were identified: Yang Yuanqing, head of Lianxiang Computer, and Guo Wei, who led the sales and e-commerce divisions. To avoid potential conflict, Liu proposed splitting the company into two entities, Lianxiang Computer and Digital China, which took effect in 2001. Both companies were listed on the Hong Kong Stock Exchange, with Lianxiang Group holding majority shares in each.