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Lenovo assignment

The Company in its Historical and International Setting B.Sc. in International Business

China #4:

Danni G. Gregersen

Finn Jannik Schmidt

Maria Rahamägi

Mohammad Umar G. Gulzar

Morten-Bo Paulsen

Copenhagen Business School

26/09/2011

Lenovo

26/09/2011

Abstract

The first objective of this paper is to give an overview of Chinese capitalism and its development. Furthermore, the paper aims to explain how Lenovo became a market leader

and to which extend this was due to the development of the Chinese capitalism. Moreover, it identifies Schumpeterian “creative responses” and points out how these give reasons for Lenovo’s survival and growth in a competitive global market.

Chinese capitalism has moved, since its induction by Xiaoping’s reforms in 1978 from degree four on McCraw’s scale of government intervention towards degree three. The down-rating in government intervention reflects the movement from a communist society towards a market- based economy, which can also be reflected in Lenovo’s history.

The reforms and the movement have among other things had a great impact on Lenovo becoming a market leader. Finally, the paper shows how the Chinese capitalism has moved through various phases of government intervention and how the placement on McCraw’s scale has to be adjusted throughout this progress.

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Contents

Abstract

2

Introduction

4

Background

5

China’s history in short and a clear definition of Chinese capitalism

5

Communism

5

Xiaoping

5

Theory

6

McCraw’s Scale

6

Schumpeter the entreprenuer

7

The present nature of Chinese capitalism

7

Lenovo into a market leader through adaptive and creative reponses

11

Introduction

11

From domestic distributor to global manufacturer

11

Schumpeterian responses creative and adaptive

13

Chinese movement through various degrees

18

Important „Schumpeterian decisions“ ..............................................................................................

18

Lenovo reflects the Chinese variation of capitalism

21

Conclusion

22

Schumpeterian

23

China and

24

Literature List:

25

Web articles .......................................................................................................................................

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Introduction

The financial crisis has hit the Western capitalist economies very hard and most of these find themselves now in economic depressions. However, this tremendous crisis has not been able to shock the Chinese economy, which has still an extremely high annual growth rate. China continues to grow, already to the second largest economy of the world in 2010 after USA.

What makes China especially interesting is the fact that the country has been able to combine their communistic political conviction and change the economy from a closed plan economy into an economy with more and more capitalistic characteristics. What is more, the communistic roots give Chinese capitalism a number of benefits compared to old capitalistic countries. For example the fact that Chinese managements are able to make decision faster as they are less tied to the shareholders. However, the Chinese rise is not over. On average the income level in China is increasing but this hides an increasing inequality between the rural and the urban areas. China has over four times America’s population; it only has to produce a quarter of America’s output per head to exceed America’s total output and it has been estimated that by 2016 the Chinese economy will surpass the US economy and thereby become the biggest economy in the world. China is an emerging economy and is therefore an interesting country that is likely to change the world order in the future. At least, a lot of economists talks about the economic power moving to the east.

It is interesting to look at the Chinese variation of capitalism because it is so contrary to the Western capitalism. A common Western belief is that a free market, political freedom and limited power of the state are the best combination to secure growth. However, the Chinese variation of capitalism has shown that the Western belief is not necessarily the only answer. It is also interesting to see how Chinese companies act in the Chinese variation of capitalism where many of the world’s biggest multinational enterprises (MNEs) have now emerged.

This paper shows what characterizes the present nature of the Chinese capitalism and illustrates where on a McCraw’s scale between laissez-faire”, with minimal state intervention and “thorough state management and decision-making for the whole economythe current Chinese economy is placed. It also examines the fact that China has moved through various degrees throughout the history. Later on, this paper turns its focus to Lenovo and describes

how Lenovo became a market leader by 1997, only six years after its first computer was manufactured. In this context it is interesting to look at the possible creative and adaptive responses, according to Joseph Schumpeter, made by Lenovo. Furthermore, this paper

looks at how these “Schumpeterian decisions” secured Lenovo’s growth and survival in an

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ever changing and extremely competitive industry. In the end the paper combines the development of Lenovo and reflects it to the development of the Chinese capitalism.

Background

China’s history in short and a clear definition of Chinese capitalism

Communism

After establishing the People’s Republic of China in 1949, Mao Zedong managed to organise the administration and rebuild the economy that had suffered from decades of war in just five years. The new state nationalised the country’s banking system and brought all currency and credit under centralised control. It regulated prices and boosted government revenues by collecting agricultural taxes. By the mid-1950s, the communists had rebuilt and expanded the country’s railroad and highway systems, boosted agricultural and industrial production to their pre-war levels, and brought China’s industry and commerce under direct state control. After the land reform, agricultural collectives were reorganized into enormous communes, where wages were calculated according to the principle „to each according to his needsand side-line production was banned. Procurement prices were too low to cover the production costs, and ceilings were set on the amount of grain that producers could keep for consumption. Over-ambiguous targets and thus falsified production figures let the officials live in an unreal world of production increases. The Great Leap Forward had become a giant step backwards.

By the 1960, the situation had come so serious that Mao had to step side-lines. By then, large areas of China were in famine, people were exhausted and GDP had declined about one-third. For the next several years, agricultural and industrial production returned to normal levels and labour productivity began to rise.

Mao reasserted his power in 1966 and started to „put China back on track“. Universities and schools were closed, intellectuals were harassed and any sign of capitalism was enough to condemn someone as a foe of the Communist Party. By 1969 the country was back in anarchy and the economy was again going downwards.

Xiaoping China’s next leader Deng Xiaoping,

who replaced Mao after

his

death

in 1976,

started

quickly reforming the country. Communes were broken up and replaced with leasing systems, state procurement prices were raised and the Communist Party China (CPC) left many prices of agricultural goods to be dictated by the market. Farmers were allowed to

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produce on their own and sell the surplus on the newly freed markets to retain any profits they might earn, which gave them an incentive to produce more efficiently, so by the end of the decade the production had grown by roughly 30 per cent. Deng also attacked China’s food shortages by encouraging families to adopt the one-child policy.

Along with the changes in the countryside, China started to open up to the rest of the world. Four special economic zones were created, which attracted foreign investors with tax incentives, foreign exchange provisions and a lack of regulation. By the late 1980s the government began to open the doors even more aggressively by giving foreign investors more control of factories, long-term land leases and permitting dual exchange rate. In 1984 the state applied the dual-price system also to many other industrial products. By 1988, both industrial and agricultural production had reached to new heights, with the first one increasing a fifth annually, although state budget continued to support loss-making SOEs. In 1989, the government proved the ability to keep its economy under control with wide-scale retrenchment, which saved the country from inflationary spiral. Due to the reforms, foreign direct investment to China rose to $11.2 billion by 1992, two and a half fold increase

compared to the previous year. Along the way, however, the “rectification” program

unleashed a violent series of political events, by which the Chinese Communist Party signalled that despite the liberalising reforms it had no intention of letting loose the reins of control.

With

these

reforms

Chinese

communism

was

in

gradual

transformation

to

Chinese

capitalism.

 

Theory

In this section of the paper we describe the theories which create the foundation of the

paper. The paper mainly consists of two important theories, McCraw’s scale and Schumpeter’s entreprenuer theory. The two theories are briefly described in the following.

McCraw’s Scale

McCraw’s scale is a scale of four degrees (McCraw 1997):

  • 1. Laissez faire, with minimal state intervention

  • 2. frequent, uncoordinated state intervention in a mostly free market

  • 3. systematic state guidance of private decision-making

  • 4. through state management and decision-making for the whole economy

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This scale can be used in order to analyze a country’s nature of capitalism at a certain time. The fourth degree is a plan economy where supply and demand are not controlling production. Instead the production is guided by the state. This degree is, for instance, where a communist state would be placed. At the other end of the scale is the “laissez-faire” degree where the state intervention is at its minimal. On this degree it is supply and demand that control the market. In between we have frequent but uncoordinated intervention in a mostly free market.This is the degree most capitalist countries have. Furthermore, there is the systematic state guidance” left. In this degree the state plays a big role but supply and demand still control many markets. State ownership is normal in this degree. In this paper we have used this scale in order to analyze the present nature of Chinese capitalism.

Schumpeter the entreprenuer

Joseph Schumpeter (1883-1950) presented a theory which suggested that the entreprenuer plays a big role in the economic development (Joseph Schumpeter 1947). The entreprenuer creates both adaptive responses and creative responses. The creative reponses causes „creative destruction“ as it destroys the way certain things used to be done until then in a certain industry. The creative response can not be predicted and is something that creates new pratices outside the existing practices of the industry.

Schumpeter acknowledges the inventer, innovator, etc. however Schumpeter favours the entreprenuer who actually gets things done. Hence, Schumpeter was much more interested in the one who commercialized a product, not in the one who invented it. An example is the steam engine, which was invented in the 16th century but not commercialized until the early 18th century. Until an idea is commercialized it does not matter in an economic perspective.

It is worth mentioning that according to Schumpeter it is essential that the entreprenuer has motivations for doing what he/she does. The ability to retain profits is very important in this context.

The present nature of Chinese capitalism

Looking at the present nature of capitalism, China must be seen as a state in transition and the current situation is difficult to define. After the harsh reign of Mao Zedong (1949-1976) the country started its transition in 1978, when Deng implemented the first reforms, and [it] received a decisive push from 1992 onwards1 , with the reforms of the 1990s.

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The implementation of capitalism by a communist party into a communist system is compulsorily a difficult process. The CPC has often been stuck between maintaining communist values and keeping up the implementation of capitalism. This contradiction might get clearer by a concrete example: The Chinese president said in the National People’s Congress that "the priorities now are promoting equality in education opportunities, adopting progressive employment policies, narrowing income gaps and building social security networks."9 Promoting capitalist reforms and keeping up the extraordinary growth brings does not allow these priorities though and increasing inequality between the benefitting developed urban areas and the underprivileged rural regions is one of the consequences this growth has. Urging further reforms and heading the country towards being more capitalistic, is clear evidence that “China’s communists have long since given up on true communism2 . The reforms have promoted privatization, Foreign Direct Investment, private property and many more capitalist characteristics; most of these are only advantageous for the already developed emerging cities along the Chinese coast. To give an example of an achievement reached by the reforms the Chinese private sector now accounts for approximately 70 % of gross domestic product 3 today. However, the country is only midway through the process and there are more reforms likely to be made. For instance, “the capital markets and securities markets still are underdeveloped, because 70% of shares of almost all listed companies are not tradable.”3 The fact that “an experimental program was announced to make the non-tradable shares tradable”3, illustrates that the CPC also intends to implement further liberal, capitalist characteristics into the Chinese type of capitalism besides trying to decrease inequality which underlines the contradiction. Participating in the global trade made China join the WTO in 2001, which has enforced China to become more liberal and capitalistic in terms of their tariffs, quotas and licensing requirements. The Communist Party China makes use of any measures in order to preserve the economic upward movement and ensure the social stability.

The Chinese history with long periods of war and the Japanese occupation are still in the people’s minds, which reason the thankfulness for the stability that the CPC has brought the Chinese in the last decades. Hence, stability is China’s highest valued “commodityand has had a great influence on the development of Chinese capitalism and thereby also explains the capitalist environment today. For instance, the fact that China has pegged their currency, the Yuan, to the American dollar and are not willing to let it float which would adjust its value can be explained by the importance the CPC see in keeping up the economic stability. In his

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report for the American Congress, the American economist Wayne M. Morrison mentions China continues to “manipulate” its currency in order to give its exporters an unfair trade

advantage.” 4 An adjustment of their currency would disable the Chinese from keeping their exports at the current level. The increasing exports have earned China the title of the world’s largest exporter 5 and are essential for their economic growth. Decreasing exports would affect the growth rate, which then would threaten the country’s stability. This shows how the

fear of instability, impacts the Chinese decision-making and thereby the present capitalist environment.

Furthermore, the influence the growing regional disparity has on the governments’ decision- making are another evidence that proves the valuation of stability. “Between 1990 and 2005, China’s Gini coefficient rose from 0.257 to 0.447” 6 , seriously endangering the social stability in China. However, as “the country’s phenomenal growth and increasing global heft are based on a steady […] transition to capitalism,” 7 and a slowdown or even stagnation of the country’s growth rate would mean an even greater threat for the country’s stability, “the Communist Party was not willing to slow down growth to address inequality, or to leave the balance purely to market forces.” 8 This shows again, the huge interest the CPC and the People’s Republic of China has in the country’s stability and how it influences important political decision-making. The current growth rate is to a great extend caused by the capitalist reforms and the slow liberalisation of the Chinese economy. This process of transition will stop at some point though. The Chinese are aware that they find themselves in

times of transition and the current growth rate will not last forever which is why China’s president promised at the National People’s Congress (NPC) to “focus more on sustainable development than rapid economic growth.” 9

Although the Communist Party China builds up a Chinese capitalism upon a communist system and embeds many capitalist characteristics in it, the state still intervenes a lot to regulate and control the market. The CPC is extremely focussed on keeping the role of the directive actor. They give the pace of moving from a plan economy towards a market-based economy and the only liberalise the economy to the degree they think is best. The state-

cteristics.pdf, p.14, 20/09/2011

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owned enterprises that emerged under Mao’s communist regime and that were characterized as inefficient, over-staffed and not profit-driven have become more efficient, less indebted and through implementation of managers much more profit-driven. Nevertheless, just as back at Mao’s times, the CPC uses them as state tools to keep the economy on track. Despite the fact that China has still a lot of government intervention, they achieved to enter the WTO in 2001. 10 The entry in the WTO was a push towards more liberalization. With the entry in the WTO, China clearly signalised their global orientation and adapting to international agreements signalised the increasingly important role China is going to play in the global economy. Joining the WTO and adapting to the international rules of exchange, China is facing the global competition now much more than before, and the CPC has had to engage privatization of the SOEs to increase their competitiveness, so that the Chinese economy has been able to maintain their extraordinary growth rate.

The present Chinese capitalist environment is very difficult to place on the McCraw’s scale of government intervention. On the one hand, China is still a communist one-party state, governed by a party, which intervenes in the economy to regulate and control the market. According to these facts, thorough state management guides China and the state has the power of decision-making for the whole economy, which would mean the Chinese capitalism had to be placed on the scale at degree 4. However, on the other hand, the CPC has dropped most of their communist ideals and keeps transmitting the country by various reforms into a market-based capitalism. Presently, the Chinese capitalism fulfils most of the criteria that characterize capitalism such as labour as a commodity, private property a financial system and a currency. The government promotes privatization and makes itself dependant of international laws, which is clear evidence for a decrease in government intervention. The transition towards a common market; for example through a reform in the banking sector which is likely to occur soon, keeps moving the Chinese economy towards capitalism with a systematic state guidance of private decision-making, McCraw’s degree number 3. Nevertheless, the degree of liberalization is still under complete control of the CPC and the economy is only as free as the party intends it to be. Theoretically, the Communist Party China could rapidly decrease the degree to which the economy is liberalized, change laws and abolish the law that allows; for example the property rights, which ensure a capitalist economy. This is of course, not very likely to happen, but it is important to point out that the whole Chinese capitalist system originates from the government’s reforms and guidance. Although these reforms have been pushed through and the Chinese capitalism is more and more liberalized and taken towards a free market-based

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economy, political freedom is still not given and probably will not be in the close future, which

is why China is currently placed on the McCraw’s scale of government intervention between

degree 4 and 3. Due to decreasing government intervention it is moving towards degree 3 though. Without political freedom, which would guarantee economic freedom, property rights and allow competition of law, the Chinese capitalism cannot move any further than degree 3

on McCraw’s scale.

Lenovo into a market leader through adaptive and creative reponses

Introduction

There are many reasons why Lenovo has become one of the most dominant market leaders

in China as well as in the rest of the world. One of the most important events in the Lenovo’s

corporate history was the acquisition of the IBM personal Computing Division in 2005, which enabled the company to become a competitive computer manufacture both domestically and internationally. Furthermore, throughout Lenovo’s history the state has been a major stockholder in the company and like other Chinese State supported enterprises the Chinese government has supported and protected Lenovo by indirect subsidiaries and policies which made Lenovo capable of maintaining its dominance. When analyzing how Lenovo managed to develop its organization in a nation that has been marked by serious economic and politic instability, it is important to understand the entrepreneurial spirit that has driven the company throughout its history. Innovation and technological development have been the core factors that contributed to the strong positioning of the Lenovo Group Limited as being one of the pioneers in the global computer industry. These different strategic initiatives are somehow all exemplifies for different responses that Lenovo has made in order survive the demanding IT-industry, which is strongly affected by both the globalization and liberalization of the Chinese market along with the very special type of capitalism that characterizes the Chinese economy.

From domestic distributor to global manufacturer

To start with, Lenovo was owned by Legend Holdings Limited until 1994 when it was listed

on the Stock Exchange of Hong Kong. 11 In March, 2011, 57 % of Lenovo was owned by

public shareholders, 42 % by Legend Holdings Ltd.

and

1

%

by the directors. 12 The

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company’s previous state ownership has implicitly contributed to Lenovo’s success, given the advantage Lenovo has gained in the domestic market due to the one party-system that has favoured strong domestic enterprises. Although the Chinese government targeted the PC industry as a national priority in the 1980’s, Lenovo was not among those companies selected by the government to be nurtured as the foundation of China’s future PC industry. Therefore, Lenovo was not a State-Owned Enterprise (SOE) in its true sense; given that it did not directly receive state support, e.g. Lenovo did not receive a licence to produce PCs until 1991. 13 Despite the fact that Lenovo was not considered an “ordinary” SOE it still relied on its parent’s, the Institute of Computing Technology (ICT), labs for the Research and Development which it could use free of charge. Lenovo’s first production was developed at ICT, whom also facilitated Lenovo’s first production experience by loaning their personnel during the process. ICT with its links to the government through the CAS supported Lenovo

in its early survival and thus the Chinese state played a significant role in the company’s

early maintenance and growth.

As Lenovo made its first Personal Computer under its own brand name in 1991, the company suddenly became more important in the eyes of the government. In 1994 the company was celebrating its one millionth PC built. 14 In the same year it was revealed that domestic computer companies such as Lenovo were going to be protected under a new policy, which was announced by the Chinese ministry of Electronics. Lenovo was included in China's ninth Five Year Plan - from 1996 to 2000 - as a key entity to be supported by government policies. 15 During the ninth Five Year Plan China invested over $1.2 billion in the 909 Project, which is the most expensive government effort for developing an advanced semiconductor industry in China. 16 As a result of the government intervention Lenovo also received an amount of the subsidy and eventually became the Chinese market leader in 1997 even surpassing IBM. The latter was one of the main reasons for IBM to sell its PC division to Lenovo. The fact that Lenovo was able to grow with the indirect support of the Chinese government reflects the special kind of capitalism that exist in the Chinese economy. Lenovo was operating on a free global market and at the same time enjoying the beneficial protectionism and subsidies provided by the communist government. The

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legislation also provided the legal framework that would eventually make the acquisition of IBM possible. The law stated that foreign companies, who wanted access to China, could only do so by cooperating with a Chinese company. This rule was implemented so ensure that Chinese companies gained e.g. know-how on technology.

Lenovo’s success started gradually in 1987 when the company expanded its activities to distribution first for AST (the leading foreign brand in China at that time), and later adding Hewlett-Packard, Toshiba and IBM to its list. 17 Chuanzh, the former CEO, even went to the extent of saying that: “Our earliest and best teacher was Hewlett-Packer”. 18 . What Chuanzh wanted to empathize was that multinational companies such as HP were not only a source of revenue for Lenovo but also a source of learning. By distributing foreign-made PCs Lenovo learned how to organize sales channels and merchandise PCs on a competitive market. Thus, Lenovo began to comprehend its Chinese customers and the PC purchasing habits making this a key for its dominance in the market for the upcoming years.

The demand for computer technology became pervasive during the Third Industrial Revolution which naturally benefited all computer manufactures around the world. A lot of Chinese industries had not yet reached the industrialization level of the western world, however the IT-industry is an exception. The Chinese IT-industry plays a great part in the Third Industrial Revolution where the immense increase in volume of international trade, investment and finance frequently has been centred in China. In addition, one could therefore argue that Lenovo came on the right time with its first PC in 1991 in the exact same period of history where demand for computer technology increased, explaining its enormous success both in the domestic and international market. Lenovo already had a wide network of distributors at that time and gained great insight in the Chinese consumption pattern, which gave them a huge advantage compared to their strongest competitors. Thus, it is necessary to stress the importance of the Third Industrial Revolution as it created a market Lenovo knew how to profit from by using its competitive advantages.

Schumpeterian responses creative and adaptive

The various Schumpeterian responses that have been made in Lenovo’s corporate history

enable us to explain how Lenovo became one of the market leaders in the IT-industry. The

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Lenovo Group Limited’s corporate history really exemplifies very well how Schumpeter’s theory can be put into practice.

Lenovo has in many ways been a pioneering brand, which has played an important role in the development of the global computer industry, as we know it today. Technological development, massive investment in R&D, comprehensive channels of distribution, aggressive advertising, increasing efficiency and economies of scale are some of the most important characteristics describing Lenovo’s history. Some of these initiatives certainly changed the computer industry, while others were implemented in order to adapt to the changing market conditions. When Lenovo produced its first PC in 1991 and vertically integrated new activities in their value chain they gained several second-mover advantages from its close cooperation with IBM.

In 1997 the Legend Group signed a landmark agreement with computer-giant Microsoft to install Windows 95 in its products 19 . One could argue that this agreement in fact was a sign of adaptive response as Microsoft were first-movers in the invention of computer operating systems and by incorporating this popular product, the Legend Group could add significant value to their products. The Chinese computer industry was not able to develop its own computer software and was therefore encouraged to adapt the standards of operating systems that had been invented in the United States. By joining hands with the pioneering Microsoft Corp the Legend Group could benefit from the second-mover advantages and focus on their own strengths, which primarily include the development and assembling of Personal Computers.

The fact that Lenovo distributed IBM’s and HP’s products on the Chinese market meant that the company had both developed a valuable know-how and an effective channel of distribution. In many ways Lenovo had to adapt to the current computer industry where big businesses like HP and IBM already had set the standards of computer manufacturing. The fact that IBM invented its first computer in 1981 meant that Lenovo could use a lot of the knowledge from IBM, they had gained before in their computer manufacture. The adaptive response that Lenovo had to make would eventually create several opportunities for the company to influence the entire industry. Thus, their continuous cooperation with IBM positioned them as a trustworthy brand and they benefited a lot from the goodwill that IBM had among the Chinese consumers. This cooperation culminated in December 2004 where

Lenovo announced that they had completed the acquisition of IBM’s PC division for the

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amount of $1.75 billion (including $500 million in assumed liabilities) (Quelch, Knoop and Carin 2006). IBM most likely saw this deal with Lenovo as an opportunity to create stronger relations with the Chinese government from which they hoped to benefit from in the long- term. As part of the deal, Lenovo gained the right to use the IBM logo on its products for five years, along with permanently acquiring the IBM ThinkPad and ThinkCenter desktop brands. 20 . In return, Lenovo promised not to compete with IBM’s services and consulting groups. Moreover, Lenovo also had access to IBM’s 30,000-member enterprise sales team and on- going support from partner and channel management programs in 138 countries (Quelch, Knoop and Carin 2006). The IBM brand was associated with great credibility and the fact that

Lenovo’s products contained components manufactured by IBM was considered a great

addition of value among the consumers. The acquisition also allowed Lenovo to expand its global activities and with the sponsorship of the Olympics in both Turin and Beijing, Lenovo became extremely popular on the global market. The public visibility that Lenovo achieved through its advertising during the Olympics turned out to be very valuable in the attempt to market their products world-wide. Thus, Lenovo managed to achieve a market share of 9.6% in Russia by the beginning of 2011.

For Lenovo the acquisition of IBM's PC business meant the rise as a global player in a key industry. Lenovo was not a well-known brand outside Asia, until this acquisition, which allowed the new enlarged company to build a new brand name using IBM’s legacy. All this together, enabled the company to move quickly into the international marketplace making it a reliable computer manufacture internationally. Through IBM Lenovo gained access to the worldwide PC market and their annual revenue quickly rose to more than $12 billion. In September 2005, the company underwent a management restructuring that integrated the

original Lenovo and former IBM organization. Lenovo’s top jobs went to executives around the world resembling the company’s new international composition and scope 21 .

In order to distinguish Lenovo’s success from its competitors it is important to acknowledge the creative responses made by IBM which Lenovo could then further develop and imitate. In terms of creative response, IBM introduced its pioneering ThinkPad product in 1992 which was the first step towards several creative responses that would determine which elements computers would contain in the future. The first creative response was the integration of CD- ROM drives in the ThinkPad, the first time a PC manufacturer did so in a notebook. This kind of creative response without doubt changed the technological standards of computer

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manufacturers as every competitor now had to adapt to this new innovative response in order to survive in the growing IT-industry. The beginning of 2000 another new element was

integrated in the new ThinkPad I Series, which was a built-in wireless network 22 . This was truly a ground-breaking invention and once again changed the expectations among consumers towards computer products. Both the CD-ROM drive and the built-in wireless network are now common components that consumers take for granted. This might not have been the case if IBM had not integrated these elements in their notebooks. After the

acquisition of IBM’s PC division Lenovo experienced huge success in their continuous

development of their flagship the ThinkPad. Thereby, the ThinkPad provided Lenovo with possible future responses. Lenovo was now in charge of assembling the entire product and developing new technologies. Lenovo could then distribute the products under its own brand, with the option of using the IBM brand on the IBM Think-family products and in the overall advertising as long as the two brand where not separated.

The Chinese manufacture industry is well known for its ability to imitate existing products, which Lenovo is a great example for. As already mentioned, Lenovo imitated a lot of its activities from IBM. Whether imitation is entrepreneurial spirit must be discussed. According to Schumpeter the imitator is not a real entrepreneur, as he does not cause economic growth. However, Schumpeter misses to define a very important role the imitator plays in terms of economic growth. Producing a product does not create economic growth. The imitation of a certain product allows the market to grow and forces new innovation and technology for the competitors to stay competitive. Looking at Lenovo, you can clearly see how the company has evolved since its establishment by copying and buying other’s ideas and thereby growing to a market leader. This example clearly shows that an imitator should be considered as an entrepreneur as he is essential for economic growth.

Lenovo made another creative response by analyzing the consumer market and implementing segmentation into their production. This creative response took the Chinese computer industry from phase two in phase three according to the Three Phases of Marketing. The segmentation of the Chinese market was due to a very thorough and comprehensive market research by Lenovo, asking over 4.000 customers face-to-face about their preferences. The Lenovo organization learned that consumers predicted decreased innovation and quality while services and support would be outsourced overseas. The response to these challenges was to build up Lenovo as a strong master brand and at the same time boost the ThinkPad product brand. The number of product categories had to be

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decided and they were two business models to follow. The first model prioritized supply chain efficiencies in order to create economies of scale, which was commonly used by such producers as Dell and Acer. The other business model was the one that focused on selling product innovation which was carried out by both IBM and Apple. In order to differentiate its products from competitors such as Apple, Lenovo was endeavored to combine quality innovation and efficiency in their products, as they did not consider quality and cheap production as contradictory. The efficient network base in China together with a great global infrastructure enabled Lenovo to add both values to their already well-reputed brand. To complete this strategy, Lenovo was planning to launch new products along with a three phase advertising plan. From May to September 2005, the company ran a worldwide advertising campaign with the agenda of maintaining the ThinkPad’s sales volume. Lenovo wanted to preserve its goodwill after the acquisition by ensuring that very little had changed since they purchased the IBM PC division. The second phase was part of the unique sponsorship at the Olympics from which the Lenovo group had achieved a very significant advertising platform. At the Turin Olympics Opening Ceremony on February 10, 2006, Lenovo ran a campaign with the headline “ThinkPad unleashed”, which was expected to reach at least 27 million viewers. The last phase of the advertising plan was based on the concept of innovation as the company would take advantage of the strength of the ThinkPad product and transfer its values to the superior Lenovo Brand. If you look at the huge success Lenovo has achieved by adapting and imitating the industry it is hard to question its strategic decisions. Being able to benefit from first-movers and having the strength and courage to stimulate and develop your own strengths in order to achieve global success, is without doubt great entrepreneurial spirit, although Schumpeter might disagree.

Another example of adaptive response has recently occurred. Liu Chuanzhi, current CEO of Lenovo revealed that the group was planning to include the assembling of smart phones into their production process 23 . This is a move that has most likely been encouraged by the great hype that the smart phones had provoked and in order to keep pace with the IT-industry, Lenovo has been either compelled or inspired to extend its assortment. In any case this product extension exemplifies how the technological development within the industry can create incentives for companies to imitate first-mover’s creative responses. Lenovo has adapted to the growing market for smart phones by introducing smart phones in their assembly line.

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Chinese movement through various degrees

Since Xiaoping became the leader of the country in 1976, China has taken many steps towards economic freedom, which makes it difficult to determine a certain point in time where Chinese communism became Chinese capitalism. The steps towards capitalism have been initialized, as the communism, practiced by Mao Zedong, has proven to be an unsustainable way to rein a country. Chinese capitalism is certainly very different to the capitalism we are usually confronted with due to the historic and present communist background: China is still a communist country and the Communist party is extremely focused on keeping its control.

Applying McCraw’s scale to a communist economy would be rather pointless, because government intervention is usually at a maximum level. However, with the reforms towards a more liberal economy, the scale is very useful do determine the extent of freedom the country has gained. Therefore, the more reforms were made regarding the Chinese economy the closer it moved to phase three on McCraw’s scale - systematic state guidance of private decision making. Although China has been able to be considered economically at least partly capitalistic for a while now, China adopted property law, one of the key pillars of capitalism, which state "Citizens' lawful private property is inviolable", as late as in 2007. That shows that China has managed to establish a different form of capitalism, which only partly coincides with the traditional Western one.

Important „Schumpeterian decisions“

Profit driven enterprises are more likely to make “Schumpeterian” entrepreneurial decision that will secure their survival over a long-term perspective. Lenovo is a profit based enterprise established due to an institutional spin-off and the company is run by professional managers and entrepreneurs. Lenovo has been forced to try to achieve the highest profit possible in order to survive. Therefore, the “Schumpeterian” entrepreneurial decisions made by Lenovo should be analyzed in order to gain a better understanding of Lenovo.

If Lenovo had not made the “Schumpeterian” decision in 1991 to move from sales/distribution to manufacture of personal computers, Lenovo might not be where they are today. This was an adaptive response as they reacted to the change in environment, an increasing demand for personal computers, by starting their own production. In the 1990s the 3 rd Industrial Revolution was already occurring in the developed countries the demand for consumers rapidly increased in both the public and the private sector. The state was about to lift the protection of the Chinese computer industry and expose it to foreign competition. This meant that Lenovo’s business with sales and distribution was suddenly superfluous because foreign

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companies now could penetrate the Chinese market without a partnership with Lenovo. Therefore, Lenovo decided to move into the manufacture of computers under its separate brand. Lenovo was able to do this because of the extensive technological know-how it had gained from working with HP, AST, Toshiba, etc. the company knew how to produce a computer, and it possessed the required distribution network. Through their distribution system in China Lenovo had also absorbed what demand and preferences the different customers had and they knew marketing practices very well. Therefore they were well suited to enter the PC market. Additionally, Lenovo had through their sales and distribution channels generated revenues and accumulated capital, which made this step financially possible for Lenovo.

When looking at the significance of Lenovo’s corporate history, one could argue that the company was the computer manufacturer that took the Chinese computer industry by segmenting their products from phase 2 to 3 in model of The Three Phases of Marketing. Earlier, the Chinese computer market was widely based on unification and mass production. The Chinese market was seen as a whole. Lenovo started to segment the customers into different groups and developed special products for each of these groups. Lenovo’s segmentation consisted of many segments; examples are the banking segment, the SME segment, the big business segment, the individual consumer segments (with different segments underneath), etc. This revolutionized the Chinese computer market and competitors had to follow this change in order to survive. There was no bridge back to previous production pattern, which is why this move should be considered as creative destruction. This also led to Lenovo spending millions of dollars on R&D on consumer demands and habits. Lenovo sees and essential aspect in understanding their consumers well as it allows the company to attack certain consumer groups and develop products that cover their demand. In the year 2000 Lenovo won the Intel PC Innovation Award for their innovative home oriented PC product designs, which proofs Lenovo to be an extremely consumer orientated company 24 .

Lenovo made another “Schumpeterian” decision when they shifted their focus towards manufacturing leading technological products instead of low-costs computer products. The foreign competitors did not prioritize the Chinese market in the 1990s due to the relatively small PC market. Hence, foreign competitors were not represented by their best products in the Chinese market and foreign products were more expensive than Chinese computers (Tsui, Bian and Leonard 2006). Due to China’s growth rates the income level raised and

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increased the wealth in China’s middle class, which created a new, much stronger consumer market for high-quality products. By 2002 the Chinese PC market was worth $ 10 billion, the 3 rd largest PC market behind the United States and Japan 25 . Lenovo realized this change and moved into this emerging consumer market. Being a first-mover in this respect gained Lenovo huge advantages to their competitors. This increasingly strong domestic market was as lucrative as expected and enabled Lenovo to compete with their global competitor’s quality products. All they needed now to become a global player were global distribution channels, transnational production facilities and a good brand.

With the acquisition of IBM’s Personal Computer Division Lenovo had gained the distribution channels, the transnational production facilities and the good and reliable brand. This acquisition can be considered as a “Schumpeterian” decision that was fundamental to the company’s survival and future growth. According to Schumpeter any entrepreneur must have a motivation or driving power that explains his entrepreneurial activity. This motivation can also be detected in Lenovo’s entrepreneurial activity. As Lenovo is a profit driven enterprise it is determined to constantly seek maximization in profits willing to secure its survival. If a private enterprise stops seeking profit maximization, it will lose its competitiveness. Losing its competitiveness means for a firm that it is not far from struggling with its existence. Lenovo’s acquisition of IBM’s Personal Computer Division is clearly driven by profit motivation and the

wish to expand beyond borders. By the acquisition of IBM, Lenovo gained further technological know-how and expertise (Lenovo also gained 10,000 employees of which 60 % already were located in China 26 ). Moreover, Lenovo also gained a global brand, global distribution network and overseas facilities, the basis for Lenovo’s development into a global player. By 2011 Lenovo had gained a market share of 12 % of the global PC market 27 . The acquisition once again was fundamental for Lenovo’s expansion to the global market and their ability to compete with other global players in the IT-industry. Hence, the importance of

this adaptive response must be underlined as it had a great impact in Lenovo’s growth and survival as a computer producing company.

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Lenovo reflects the Chinese variation of capitalism

Generally, Lenovo has reflected the Chinese variation of capitalism throughout the last three decades. Mao’s death in 1976 and the takeover by Confucianism influenced Deng Xiaoping changed China’s course from communism towards the Chinese type of capitalism. Several changes in Lenovo’s history reflect the reforms enforced by Deng Xiaoping.

Lenovo as a spin-off enterprise from ICT reflects the political decisions of the early 1980s made by Mao’s successor, Deng Xiaoping, of moving China from a plan economy towards a common market. Deng Xiaoping was in favor of the Confucians idea of bottom-up changes which exactly is what Lenovo reflects. Liu and ten other scientists took advantage of the government’s interest in commercializing ideas and creating sustainable enterprises based on capitalist foundations. This meant for Lenovo that they were in the start by principle was allowed to fail. The scientists had a new motivation for establishing enterprises having the right to retain profits, a fundamental part of a capitalist economy. This entrepreneurial motivation is essential in a capitalist economy also according to Schumpeter (as mentioned earlier in this paper). This start of Lenovo reflects the early variation of Chinese capitalism where supply and demand were the main drivers towards a common market.

Lenovo’s vertical integration into the manufacturing of PCs reflects the governmental target to create domestically competitive PC manufacturers in China. Moving into manufacturing in a more open Chinese economy enabled Lenovo to capture technology from foreign PC manufacturers and apply this knowledge to their own production. The Ministry of Electronic Industry wanted Chinese enterprises to capture foreign technology, so they could imitate it Simply by gaining this knowledge about technology Chinese company would then be able to profit from being second-movers (Tsui, Bian and Leonard 2006). Lenovo is an explicitly good example of a company gaining second-mover advantages and in this respect definitely reflects the Chinese capitalism. By reducing tariffs on imported PCs in 1992 (Tsui, Bian and

Leonard 2006) Lenovo was exposed to foreign competition and this competition clearly has benefitted Lenovo when you look at the company today in terms of the present position in the

PC industry. It could be argued that a major reason for Lenovo’s survival during the early competition is also due to a major government subsidy from the 9 th Five Year Plan from 1996-2000 (Tsui, Bian and Leonard 2006). In a time where liberalization was still being introduced and the level of competition in China, Lenovo has been able to develop a sustainable competitiveness and has risen to a strong global player. This development reflects the movement of enterprises in the Chinese capitalism at that time very well.

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Furthermore, Lenovo reflects the Chinese capitalism, as it is a company that has profited from government support to a great extend. The Chinese government wanted large

enterprises that are able to set up a mass production and thereby produce much cheaper and efficient. Lenovo received support from the government through protectionism and subsidies. This reflects Chinese capitalism in a period of liberalization and the government’s idea to support the growth of “important” industries, wherefore China enforced the “picking the winners” approach. The CPC was simply supporting the industries they considered

important and likely to make good profits in the future in order to create national champions. Another importance the government saw in growing companies was to secure China’s most important commodity stability. First, Lenovo was supported to become a domestic champion. Later on, it became a global player by the acquisition of IBM’s PC division, which once again secured the company’s growth and stability. Furthermore, a Multi National Enterprise (MNE) like Lenovo is more likely to contribute positively to the country’s balance of payments. A surplus in the trade balance makes it easier for the state to control the currency and avoid inflation, which is of supreme importance for the country’s stability. Thus, the strife for stability is deeply rooted in the Chinese capitalism and is clearly seen in the government support given to Lenovo.

Lenovo’s acquisition of IBM in 2005 reflects the decrease of regulation and lowered barriers for trade and foreign direct investment that were a consequence of China becoming a member of the WTO in 2001. Entering the WTO, China also obviously wanted their economy to become more integrated in the global trade and businesses to act more globally. Lenovo’s acquisition of IBM clearly reflects China’s lowered barriers for FDI as they attracted IBM to enter the Chinese market a few years before. Earlier Chinese companies were not able to make big outward FDIs, maybe because it created pressure on the currency, Yuan. But the entrance required less regulation of various Chinese protectionist apparatus and gave Lenovo the opportunity to acquire foreign companies. The acquisition of IBM thereby reflects the capitalism at that time.

Conclusion

Analysing the present nature of capitalism in China, it quickly turnes out that the country’s history has had a great impact on the Chinese capitalism as we see it today. China has been in transition since the first reform in 1978 from a static communist plan economy towards a market-based capitalist economy. The various reforms first in the 1980s, then 1990s, and later in the next wave until today explain the development of Chinese capitalism. The

Chinese capitalism has emerged out of a communist party and reasoned by the country’s

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history is very much influenced by the valuation given to “stability” in China. In the last decades Chinese capitalism has shown how various types of capitalism can succeed when competing on the global market. Participating in the global trade, symbolized by the entry in the WTO in 2001, has enforced a further liberalization of the Chinese capitalist economy. The communist Party China (CPC) is still the only active party in the government. However, it has dropped most of its communist ideals and keeps implementing capitalist characteristics, which is why the Chinese capitalism is placed between degree 3 and 4 of government intervention on the scale of McCraw. It has moved through various phases in terms of starting its capitalist existence at degree 4 on McCraw’s scale and, with continuously decreasing government intervention, moving towards degree 3.

In conclusion the fact that Lenovo was able to become domestic market leader was mainly a result of the well-established network of distributors, the successful vertical integration of the manufacture link and the beneficial know-how acquired from IBM. By imitating the fundamental assembling procedure combined with the advantage of the integrated channels of distribution, Lenovo managed to position its brand that combined efficiency with innovation. When looking at Chinese capitalism in relation to the corporate history of Lenovo, the role of the one-party system played a crucial role by stabilizing the recently formed company. The governmental promotions of Lenovo together with the Chinese IT-industry experiencing Third Industrial Revolution both were decisive factors in the global success that the company eventually achieved.

The Schumpeterian theory proves how different types of responses are decisive when it comes to competing in the global market place. These responses all took place in a business environment influenced by the special type of capitalism that characterizes the Chinese economy. As part of The Third Industrial Revolution the evolving Chinese economy provided a huge increase in domestic demand from which Lenovo was able to display its potential. Conclusively this was realized as a result of all the adaptive responses that Lenovo was making in order to carry on the legacy of IBM.

Schumpeterian

Several ”Schumpeterian” decisions have been made throughout Lenovo’s history, which secured the company’s growth and survival. By moving from distribution and sales into manufacturing of PCs Lenovo made an important “Schumpeterian” decision that secured that

Lenovo would not be superfluous in the future due to reforms towards a common market.

Likewise, when they went from low-cost computers to the more lucrative high-end products it also secured growth through a first-mover advantage in the new domestic consumer market

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created by the new Chinese middle-class that is developing by the process of urbanization.

Once again Lenovo made and important “Schumpeterian” decision when it acquired IBM’s

personal computer division which turned Lenovo into a global player instead of only a domestic one. This acquisition secured future growth through new technology and know- how, a good brand, global distribution channels and global production facilities.

China and Lenovo

The development of Lenovo reflects the development of the Chinese capitalism in different ways. Lenovo was an institutional spin-off provoked by government’s wish to establish more profit-driven enterprises. The entrepreneurs had an incentive to establish these enterprises,

as they were allowed able to retain profits a fundamental element in capitalism. The government emphasized the vertical integration made by China into the manufacturing of PCs. The state wanted to create big domestic players in “important” industries able to reach economies of scale. The state wished more economies of scale because such are more competitive which was of great importance, willing to compete with the increasing competition through foreign competitors entering the Chinese market. Hence, this move by Lenovo reflects the Chinese capitalism at that time. By using a “picking the winners” strategy the Chinese state supported these “important” industries both directly and indirectly. This is

also a clear element of the Chinese capitalism of the latest decades. Although China is

moving towards a more capitalist economy with a more liberal market, the state still intervenes a lot to control and guide the economy.

Finally, the acquisition of IBM reflects a movement of the Chinese capitalism into more openness triggered by the entrance into WTO. The entrance provided Chinese companies with less regulatory and cleared the path for outward FDI. The IBM acquisition was a symbol of a more international Chinese capitalism.

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Literature List:

  • McCraw, Thomas K. (1997) Creating Modern Capitalism; How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions. Harvard: University Press

  • Tsui, Anne S., Bian, Tanjie C., Leonard (2006) China’s Domestic Private Firms. Armonk: M. E. Sharpe

  • Quelch, John & Knoop, Carin-Isabel (2006):”Lenovo: Building a Global Brand”, Harvard Business School, October 19. Harvard: HBS Premier Case Collection

  • Joseph Schumpeter, The Creative Response in Economic History, The Journal of Economic History, vol. VII, Nov. 1947, no. 2.

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