Lenovo’s Huge Deals Show How China Lags Behind

But Chinese companies have the cash and aggressiveness to catch up

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China’s Lenovo has been on a big buying spree. Last week, it snapped up IBM’s low-end server business for $2.3 billion. Then the PC giant followed that up with a $2.9 billion grab for the Motorola handset business from Google. That’s $5.2 billion of acquisitions in a few days. Not bad.

Why the binge? The deals tell us quite a bit about where Chinese industry finds itself right now. Though China is a manufacturing behemoth and the world’s top trading nation, it also finds its competitive position in the global economy changing rapidly. The low costs that had been the foundation of Chinese industrial competitiveness are history as wages rise. So now Chinese companies will have to compete head-to-head with their international rivals on technology, managerial skill and branding.

Some Chinese firms are doing just that, such as telecom equipment maker Huawei. But overall, Chinese industry lacks the know-how and brand power to fight it out with the world’s top players, and getting what they need could take time and investment.

That’s the backdrop for Lenovo’s purchases. Lenovo, which stands among China’s best-managed and most global enterprises, is tops in the world PC market. That’s no small feat—but it is also kind of like saying you’re the No.1 ice salesmen when your customers are buying refrigerators. PC sales have been contracting as the world’s consumers shift to more mobile smartphones and tablets. Lenovo makes those products, too, but it’s far behind Apple and Samsung and its managers know it. The Motorola deal is an attempt to catch up by absorbing some brands, market share and technology. A potential turbo-boost, you could say, to close the gap.

Lenovo has managed just such a maneuver before. In 2005, the company famously bought IBM’s PC unit. Back then, Lenovo was an up-and-comer in the PC industry but still lacked global scale; IBM’s operation was troubled but still possessed some nifty technology, solid products, brand power, and most of all, an international sales network. The rationale among Lenovo’s managers at the time was that buying that global presence was cheaper and easier than building it. Though the match suffered its trials, Lenovo eventually made it work and launched itself to the top of the market.

Can Lenovo repeat that success with its Motorola deal? The acquisition does bring some clear advantages to the Chinese firm—Lenovo right now has no presence in smartphones in North America. But at the same time, the fact that Lenovo believes it needs this deal to catch its rivals is an indication of two important trends: First, that Chinese firms don’t feel they are capable of competing with the biggest players, at least in the near term, without infusions of outside brands and market share. And second, that Chinese companies have the cash and assertiveness to go out and get what they feel they need to better compete. The Lenovo deals are just two of what may prove a surge of such acquisitions by ambitious Chinese companies.

3 comments
PeaceOnEarth
PeaceOnEarth

Hmm...Lenovo bought IBM’s low-end server and Motorola handset business for know-how? Aren't Chinese companies making those for IBM and Motorola already?

Beersheva
Beersheva

To advance to the next level, China needs innovation. It will buy and steal to get it. What it won't do is promote free thinking in its education system.

GuoLiang
GuoLiang

@Beersheva  

Free thinking comes with economic advancement. What's needed now is stability and growth.