In China, PC giant Lenovo rises to challenge Hewlett-Packard

DA SHAN, China — Long before Lenovo catapulted out of nowhere to threaten Hewlett-Packard’s (HPQ) position as the world’s No. 1 computer company, its executives understood that to win globally they had to win in Chinese hamlets like this, where donkey carts veer to avoid chickens crossing the streets.

This remote town of 50,000 hardly seems worth the effort in a nation of 1.3 billion people. But the company set up a store here and launched its “Dreams Come True” campaign with laptops priced as low as $300 as part of its larger strategy to dominate every corner of its home turf, the world’s second-largest economy.

Lenovo is now the second-largest computer-maker in the world and the fastest-growing computer-maker among the top four vendors for the past 10 quarters. And it is positioning itself to replace HP at the top of the PC universe, analysts say.

In the first quarter of 2012, Lenovo’s global sales soared 42 percent, capturing 13.4 percent of the market — while HP inched along with 3.2 percent growth and 18 percent of the global market, according to IDC. For its just-completed fiscal year, Lenovo reported a 37 percent increase in revenue to $29.6 billion. Forty-two percent of those sales came from China — including donkey towns like Da Shan, some 185 miles from Beijing.

“Even today, in the villages we use bicycles or donkey trolleys to ship products,” said Yang Yuanqing, 48, chairman and CEO of Lenovo who once delivered HP computers on a bicycle. His competitors, he added, “don’t know how to do business like that.”

Though the government-sponsored Chinese Academy of Sciences owns 36 percent of Legend Holdings, which in turn has a 34 percent stake in Lenovo, Lenovo says the government plays no role in its operations. Half of its 10-member executive committee comes from outside China, and it has an international workforce of 27,000.

Legend, born in the 1980s as China was recovering from the self-destructive Cultural Revolution, charted a course that borrowed from the playbook of U.S. multinationals, making smart acquisitions — specifically, the purchase of IBM’s PC division and ThinkPad laptop brand.

It has also been helped by Hewlett-Packard’s blunders. After announcing last year it was considering a plan to abandon its computer business, the Palo Alto company backtracked. “Lenovo stepped in and went after all of HP’s big accounts,” said Creative Strategies President Tim Bajarin.

Now Lenovo is poised to be the first global Chinese consumer tech brand.

Yang calls Lenovo’s strategy “protect and attack.” It aims to defend its home China market by leaving no city, town or village untouched by its marketing reach, while attacking emerging markets and the United States. In China, it is positioning itself as the homegrown version of Apple (AAPL), rolling out tablets, smartphones and smart TVs and blanketing the nation with some 15,000 stores — or about 14,700 more outlets than Apple has worldwide.

In Beijing’s Zhongguancun electronics district — a massive cluster of multistory buildings jam-packed with gadget stores — Lenovo’s brand is everywhere. Lenovo stores hang orange banners and resellers of its products literally bump into each other. Lenovo ads fill a building-size electronic billboard. While Apple has obtained near-cult status in China, Lenovo has carved out a special place in the hearts of Chinese consumers.

“As a Chinese, I am very proud of it,” said college student Gao Dan, 22, as she browsed a Lenovo store. “I hope Lenovo can successfully compete with Apple.”

The 2012 Computer Reliability Report ranked Lenovo No. 1. Meanwhile, the company’s hardware has won design awards.

“They used to build ugly stuff,” Silicon Valley analyst Rob Enderle said. “Now a lot of their stuff is absolutely beautiful.”

As a result, Lenovo commands 32 percent of China’s PC market — and as much as 60 percent of rural areas.

“No matter where you are in China, within 30 kilometers you can find a Lenovo store,” said Chen Xudong, president of Lenovo China. “That is our vision.”

That vision now also includes Lenovo products getting top display in Best Buy. In 2010, Yang personally recruited former Apple and Hewlett-Packard marketing executive David Roman, who oversaw HP’s successful “The Computer Is Personal Again” campaign, to be Lenovo’s chief marketing officer.

“This is a new type of company coming out of these emerging markets,” Roman said.

Indeed, the company draws its inspiration from teams strategically placed around the globe. Its ThinkPad engineers are based in Raleigh, N.C., as well as in Yamato, Japan. And the company has a large group of engineers in Beijing. George He, Lenovo’s chief technology officer, refers to this as Lenovo’s “innovation triangle.” He plans to add a small operation in Silicon Valley this year.

Yang moved to Raleigh for a while to better understand U.S. culture. Last year, the company launched its biggest-ever branding campaign, “For Those Who Do.”

Still, Lenovo faces a daunting task cracking the U.S. market. In the first quarter of 2012, it had less than 7 percent market share in the United States, up from 5.5 percent a year ago, according to IDC.

The company, while strong among business customers, is relatively unknown to American consumers, said Leo Wang, an analyst with Shanghai-based China Market Research Group. “They are taking the (consumer) market more seriously, but that’s not necessarily a guarantee that they will do better,” he said. Despite the Computer Reliability Report’s high ranking, some of the company’s products have had durability problems, he added.

But Lenovo has already overcome one daunting obstacle in the United States — its merger with IBM’s renowned PC division, acquired in 2005 for $1.75 billion. Chinese media referred to the deal as a snake trying to swallow an elephant. Congressional Republicans warned the deal could threaten U.S. security.

Yang has long dismissed concerns that the government plays an active role in Lenovo’s operations.

“We are a public company, not a private company,” Yang said, in a not-so-subtle reference to Huawei, a private Chinese company whose founder once was in the Chinese military and has been blocked from mergers in the United States over national security concerns.

Contact John Boudreau at 408-278-3496. Follow him at Twitter.com/svwriter.