Foolish Book Review: "The Lenovo Affair"

Although George Orwell thought 1984 would be a dark day for freedom, it was actually a key year for Chinese capitalism and its technological prowess. Liu Chuanzhi co-founded Lenovo (LNVGY.PK) that year, and he didn't quite know what a "company" was. But as seen in Ling Zhijun's The Lenovo Affair, Chuanzhi was a quick study and built a global powerhouse that competes against biggies like Hewlett-Packard (NYSE: HPQ  ) and Dell (NYSE: DELL  ) . Let's take a look at the amazing story of Lenovo and see if Zhijun's book does it justice.

A Chinese star is born
One of the first decisions was coming up with a name. It was "Chinese Academy of Sciences Computer Technology Research Institute New Technology Development Company." Catchy.

So what did this new Chinese company do? Its first move into commerce was to resell color TVs, which was actually a good business because of the government-influenced markups.

Yet Chuanzhi soon realized that this business did not have long-term viability. Noticing the growth of companies like Microsoft (Nasdaq: MSFT  ) and IBM (NYSE: IBM  ) , he decided that the personal computer was the future for Lenovo. To this end, the company launched the Han Card system, which made it much easier to input Chinese characters and was a big revenue driver. By leveraging this technology, the company eventually became a major PC manufacturer.

This is not to imply that Lenovo prospered without help. The company had a strong relationship with the Computer Institute -- a government-backed research center in China -- which gave Lenovo access to its offices, research, and talented engineers and scientists.

Despite all this, Chuanzhi had to spend lots of time educating his employees about strange things like customers, incentives, profits, and growth. Back then, it was not uncommon for employees to quit and return to their government posts.

Even though Lenovo almost imploded on several occasions, the company kept learning from each mistake. By the mid-1990s, it had a highly efficient operation and a dominant share of the PC market in China. There was also a major focus on making its machines easy for customers to use. Back in those days, it was painful for Chinese users to log onto the Net. Lenovo's approach was to have just "one button" access.

Going global
Like most other tech companies, Lenovo got caught up in the Internet bubble mania and made several bad investments. After taking write-downs and laying off employees, the company realized it needed to focus on PCs and to expand the business on a global basis.

In 2005, Lenovo made a big bet when it bought IBM's PC business. It wasn't an easy decision; the division was losing money and it was obvious that there would be problems integrating the two cultures.

It's really too early to judge the success or failure of the deal, but Lenovo has undergone a radical transformation. The current CEO is from the U.S.; about a third of the board is composed of foreigners; there are private equity investors like the Texas Pacific Group; the headquarters is in Raleigh, N.C.; and there are labs in China, the U.S., and Japan. One has to wonder: Is this even a Chinese company anymore?

Foolish bottom line
It's an amazing story that hasn't received much attention in the U.S. Unfortunately, the book falls short in many ways. It's often hard to follow the author's chronology and Zhijun has a tendency to provide too much detail. At the same time, he devotes only nine pages to the IBM deal, which makes for a kind of anticlimactic final chapter. Some of the Chinese names and phrases proved tricky, to say nothing of the grammatical errors and sparse index.

This book offers a fine history of Lenovo and technology in China. But be prepared to spend a good amount of time getting to the important points.

For related reading:

Dell is a selection of both the Inside Value andStock Advisor stock-picking services.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 2,817 out of 29,306 rated players in CAPS.


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