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China flexes increasing muscle for global deals

By Stephanie Hoo
The Associated Press

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Judging from the whistles and cheers of Chinese reporters at a press conference on the deal, the new affiliation with the IBM brand should send a strong message from the government to its people.

But the biggest step yet in a multibillion dollar expansion that already includes automobiles, televisions and telecommunications will require more than China's burgeoning financial might to succeed.

Even a brand as powerful as IBM's is a dicey proposition in a business as fickle and fragmented as personal computers. Despite the industry's relative youth, the leadership baton has changed hands several times in less than a decade, and the current market leader, Dell, holds just a 16 percent share of the business.

Still, for now, the deal adds new legitimacy to China's global ambitions, especially in Western circles.

"I think this is the kind of milestone that marks a new level of U.S.-China business and trade development," said John Wang, president of the Asian American Business Development Center in New York City. "It is an inevitable trend between China and the United States. There will be more and more of this type of collaboration between the two countries."

The $1.75 billion agreement announced yesterday between IBM and Lenovo Group is the latest in a string of prominent dealings over the past two years:

• China Netcom paid $1 billion for a subsidiary of U.S. telecom giant Global Crossing.

• Shanghai Automotive Industrial acquired South Korea's No. 4 automaker, Ssangyong Motor.

• Electronics maker TCL gained control of the U.S. television brand RCA when it merged with France's Thomson after buying German TV maker Schneider Electronics.

"It's a signpost, and a really prominent one, on what's the next phase for China, which is China moving outwards," said Bob Broadfoot of the Political and Economic Risk Consultancy in Hong Kong.

"China's desire is to really become one of the major international players and be as self-contained as possible," he said. "Why should a Lenovo be dependent on foreign technology when it can own it?"

But China is still largely a source of low-cost manufacturing for foreign companies.

Its leaders — both political and corporate — clearly want to develop their own brand names and technology, for both prestige and the fatter profits they can bring.

A booming economy and growing markets give China's corporations an edge in striking deals with foreign firms, Broadfoot said.

An element of that might have been at play in IBM's thinking. Instead of selling its PC business outright, the Armonk, N.Y.-based company is taking an 18.9 percent stake in the combined company, giving it a potentially lucrative alliance with Lenovo.

In return, Lenovo gets ownership of the well-regarded ThinkPad and ThinkCentre computer brands, and the rights to keep using the globally recognized IBM name for five years.

"They're very ambitious but also quite pragmatic in the sense that they want to buy brands," said Duncan Clark, managing director of the Beijing-based consulting firm BDA China.

Lenovo is paying $1.25 billion in cash and stock for its majority stake in the merged computer business, while assuming $500 million worth of debt and liabilities.

"This acquisition will allow Chinese industry to make significant inroads on its path to globalization," Lenovo chairman Liu Chuanzhi said yesterday at a news conference in Beijing.

IBM popularized the mass-produced personal computer in the early 1980s, back when China was starting to emerge from decades of economic collapse and political turmoil.

Two decades later, IBM now focuses on consulting and software instead of manufacturing, while China has become a production powerhouse with low labor costs and growing engineering skills.

Lenovo was founded in 1984 by academics at the official Chinese Academy of Sciences and first worked out of a small cottage. Initially set up to distribute equipment made by IBM and other companies, by 1990 it was selling PCs under its own brand name.

Market research firm IDC yesterday forecast that the global PC market is expected to grow at a modest pace in 2005 as the economic recovery slows. IDS projects that worldwide shipments will increase by about 10 percent to 195 million machines in 2005, down from 14.5 percent growth this year and 11.9 percent in 2003.

Copyright © 2004 The Seattle Times Company

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