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The amazing story of China's first global capitalist

By BusinessWeek
December 21, 2006 11:37 IST
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On a bright September afternoon, a black Mercedes S320 pulls up to a curb in the middle of Beijing's bustling Zhongguancun, the consumer-electronics shopping district. Out steps a man in a conservative gray suit, with ink-black hair, a round face, and wire-rim glasses. He still has the same youthful appearance he had 18 years earlier when, as a shy, bean-thin science student, he first arrived in this neighborhood.

Then called Swindler's Alley, the area was a disreputable bazaar for knockoffs and black-market software. Now all that has been replaced by neon, steel, and glass.

Yang Yuanqing, 42, chairman of Lenovo Group Ltd., the leading PC company in China, steps into the Ding Hao Electronics Mall and a dizzying scene. Everywhere there are signs, lights, and swarms of shoppers. Strolling from one shop to another to peruse the displays of his company's devices, Yang, introduced by his handlers, speaks quietly with shopkeepers. But each time he stops, he is immediately surrounded by a scrum of people giddily snapping his picture with tiny digital cameras and camera phones. Yang is a rock-star executive here, a Chinese Bill Gates.

It was in this neighborhood in 1988 that Yang began working for Lenovo--then a tiny company called Legend Group--in a nondescript three-story building. Yang slips back into the Mercedes and is soon gliding past the spot where he once bunked with four roommates in a company dormitory.

Looking around, he realizes that the building has been demolished to make way for a parking lot. "Everything has been torn down," marvels Yang. "It's a total changeover."

Yang himself has undergone no less startling a transformation. He grew up poor in Hefei, a backwater city in eastern China, during the Cultural Revolution.

Today he leads the world's third-largest PC company, with $13 billion in revenues. He's a rich globe-trotter: His compensation last year topped $2 million. He has a luxury apartment overlooking New York's Central Park and a home in suburban Beijing. In July, Yang moved his family for a few weeks to his apartment in Raleigh, N.C., near Lenovo's headquarters, so his kids could soak up American culture at summer camp. The Forbidden City meets Piggly Wiggly.

Last year, when Lenovo bought IBMPC Co., Yang stepped onto the world stage. He became the first Chinese executive to lead the takeover of an iconic Western business. In one swoop, he took on the world's leading technology companies. Now, as China's first truly global capitalist, he has a chance to help his homeland shed its image as a cheap manufacturing hub.

But Yang Yuanqing may turn out to be much more. From the moment he was tapped at age 29 to shake up the struggling PC unit of Lenovo's predecessor company, Yang has defied the stereotype of a Chinese manager. (That's assuming most American business managers can name even one leader of a Chinese company.) Today he is emerging as the first of a hybrid class of leader, marrying the drive and creativity of Western management with the vast efficiencies of China's manufacturing operations.

If your idea of a Chinese boss is a cautious bureaucrat propped up by the state, Yang is not that guy. He presides over a merit-based culture built on the Silicon Valley blueprint: In an elder-worshipping country, he fearlessly promotes young people and fires employees who aren't up to snuff. He demands that people learn from their mistakes, and he's relentless about self-improvement. When it became clear 18 months ago that he was being hindered by his scant knowledge of English, he hired a tutor, watched CNN obsessively, and went from halting to conversant within a year.

Some of Yang's management techniques would make Jack Welch proud. Shortly after rising to power at Legend, he decided managers needed to reconnect with their staff. Too many had highfalutin' titles with the equivalent of "president" in them; Yang wanted everybody addressed by their given name.

To make the point, he ordered executives to stand outside the building every morning and greet workers while holding signs with their names written on them. "After two weeks, the change finally stuck," recalls Wang Xiaoyan, who is currently Lenovo's senior vice-president for information services.

The pressure on Yang is intense, and not just from shareholders. In the summer of 2005, a few months after the IBM deal closed, Chinese Premier Wen Jiabao paid a visit to Lenovo's Beijing offices. Yang showed him the latest PCs and cell phones. As the short visit wrapped up, Wen told Yang: "You carry the hopes of China on your shoulders," according to someone who was there.

But Yang is discovering just how hard it will be to translate success in China into success everywhere else. The honeymoon after the IBM PC purchase is long over. This spring, Yang ran into a buzz saw of Beltway politics when congressional concerns about security forced the State Dept. to change the way it used some of the 14,000 PCs it had ordered from Lenovo. Responding to worries that Chinese government snooping technology could be tucked into the machines, the department redirected some of them to less sensitive projects.

There has been plenty of friction inside Lenovo, too. Last December, Yang and the board pushed out his second-in-command, former IBMer Steve Ward, in part because he was too slow to cut costs. Ward's replacement as CEO is the frenetic William J. Amelio, who formerly ran Asian operations for Dell Inc.

It's an oddball management setup. Yang runs the company, and Amelio reports to him. But they share a lot of responsibilities for overseeing this sprawling organization on a near-equal basis. Lenovo sells products in no fewer than 66 countries and develops them at labs in China, the U.S., and Japan.

Yang and Amelio also must mix the best people and traits of the old Lenovo with those of IBM. In essence, they're blending two national cultures and, to add to the stress, three corporate ones, since Amelio has been replacing some of the top executives from Lenovo and IBM with his own team, mostly from Dell. Rarely if ever has a corporate leader had to manage such a tangled web of relationships.

Yang answers to an odd mix of shareholders that includes public investors, the Chinese Academy of Sciences, the company's founders, and IBM. Each constituency has its own ax to grind. Private equity investors hold a lot of clout, having sunk $350 million into the company for a 10% stake.

Board members William O. Grabe of General Atlantic and James G. Coulter of Texas Pacific Group early on pressed for faster cost-cutting and more decisive decision-making. "This is an unusual melding of what had been a Chinese company, IBM, and some very strong-willed U.S. investors," says Coulter.

Yang's strategy is ambitious. Over the next couple of years, he wants to boost Lenovo's already dominant 35% market share in China while expanding to other emerging markets. In the West, he taps IBM for help in selling to large corporations.

But for small and midsize businesses, Lenovo is now mimicking its China strategy and offering a new line of PCs through a host of retailers. Meanwhile, the company is retooling the old IBM PC Co. manufacturing supply chain to make it as efficient as Lenovo's China operations. "We want to extend the business model that was so successful in China out across the world," Yang says.

In the long term, Yang aims to turn Lenovo into a high-profile global brand. He took the first huge step in 2004 when he inked a deal with the International Olympic Committee to be the tech sponsor of the Turin and Beijing Olympic Games. After the merger was completed, he challenged company engineers to come up with a string of hit products for businesses and consumers worldwide in advance of the Beijing event.

At the same time, Lenovo is weaning customers off the IBM brand, which it has the right to use for five years. First, it stopped using IBM in advertising. Now it's gradually shifting the branding on ThinkPad laptop computers to remove IBM and replace it with Lenovo.

Former IBM engineers say things have changed for the better since the merger--and in ways you might not expect. Yang has kept research and development spending constant as a percentage of revenues. But because more of the work is being done in China, where engineers cost one-fifth what they do in the U.S., he gets more bang for the buck. He has also dedicated 20% of his R&D budget for cutting-edge ideas.

Under U.S. management, the unit had become focused largely on cost-cutting. "It used to be, Can we save a penny?' Now it's, What new ideas do you have?'" says David Hill, executive director for corporate identity and design. One novel concept already has come from the Beijing engineers: NovaCenter, a living-room-style combination of PC and TV that's now selling in China. In addition to Microsoft's Windows, it has an entertainment-oriented operating system that was created by Lenovo.

For all its big plans and lofty ambitions, though, Lenovo remains in a precarious position. Sales are still strong in China, which is expected to be one of the fastest-growing markets in coming years. However, Lenovo is up against companies several times its size. Dell alone has sunk $16 billion into Chinese factories and suppliers over the past year--more than Lenovo's worldwide sales.

Lenovo's sales declined by 9% in the U.S. last quarter, signaling that the company is struggling in its efforts to build a global brand. Analysts are troubled by that report, though they expect efficiencies and revenue growth to click in over the long term. The stock (which doesn't trade on U.S. exchanges) is priced around HK$3.30, having zigzagged between $2 and $4 for three years. In September, Lenovo was dropped from the Hong Kong Exchange's Hang Seng Index because of slack trading volumes.

Other Chinese business kingpins are watching closely to see if Yang stumbles. With a domestic economy growing at 10% per year and foreign reserves topping $1 trillion soon, they are hungrily eyeing attractive overseas takeover targets--everything from oil to consumer electronics. But China's early forays into global expansion have been frustrating.

Electronics maker TCL Corp.'s 2004 joint venture with France's ThomsonTMS, which owns the famed RCA brand, has bled cash, resulting in shuttered plants and offices. And in 2005 an $18.5 billion bid by CNOOC Ltd. for Unocal never got off the ground; the U.S. Congress put the kibosh on it. Many Chinese executives want to see how Yang does before they, too, plunge into globalization.

Edward Tian, a friend of Yang's and former vice-chairman of telecommunications giant China Netcom Group, explains how others view the Lenovo executive: "In China there's an old saying, Don't be the first one to eat the crab.' It's difficult to get the meat out, and you might be poisoned. People see Yuanqing as the guy eating the crab. They're waiting to see if he'll survive."

If Lenovo fizzles, it won't be for lack of intensity. Former IBMers agree that the pace of business and decision-making has picked up since Yang took over. That's visible in the massive third-floor atrium of the Lenovo Building in Beijing's sprawling Shangdi Information Industry Base, where a huge billboard with a map of China is divided into 18 sales regions.

Across the bottom are columns showing the sales and ranking of each region. Every day at 7:30 p.m., totals are tallied and messages go out to all of the managers' mobile phones. If a region comes in with less then 100% of its quota, its manager immediately must produce a plan for turning things around.

Sometimes, Yang seems obsessed with details. Before formal dinners, he personally reviews seating arrangements to make sure all protocols are being followed. Last year, during a ceremony launching a summer camp program for kids at Lenovo Beijing, he noticed that the Lenovo flag was attached upside down on a flagpole. To get the attention of the events team, he docked their performance bonuses.

Figuring out exactly what role Yang should play in the company has been tricky. He engineered the IBM acquisition, yet during the transition seemed to fade into the background. Ward became the company's front man with the Western press and analysts. Although Ward and Yang deny there was ever any tension between them, one industry bigwig recalls that when he had dinner with the two a few months after the deal closed, Ward did nearly all of the talking. "It was really an uncomfortable situation," he says.

Initial encounters between Yang and Amelio were also tense. No wonder: They had been head-to-head competitors in the China market. Amelio recalls their first awkward one-on-one session at a Hong Kong hotel: "Here we were, two guys who have been trying to slit each other's throats talking about doing something together."

At their second meeting, Yang surprised Amelio by pulling out a single sheet of paper listing the roles for Lenovo's chairman and CEO. His job included setting corporate and technology strategy and communicating with investors. Amelio's main task was running the PC business day-to-day.

This is not the typical split between chairman and CEO--Yang would be much more hands-on, like a co-CEO. Amelio went along without complaint. "I was surprised that he agreed so quickly," says Yang. "He looked at it for three minutes and said, O.K.'"

Now they're a tag team. Yang goes deep on his specialties, which include marketing and distribution. Last July, for instance, he spent two days in Stuttgart, brainstorming with a dozen European salespeople about how to radically make over the way the company plans and prices products in Central Europe.

Elements of the new program were launched within two weeks. Longtime IBMer Robert Pasquier, now Lenovo's distribution director for Central Europe, was impressed that Yang was willing to get his hands dirty. He says the company has been transformed culturally since Lenovo took over: "There's more of a sense of urgency with everyone. It used to be we felt pressure only at the end of the year, but now we feel it every month. People want to win."

Amelio, meanwhile, concentrates on fine-tuning the supply chain. "Bill often calls me boss, but I don't want to put myself only in the boss position," says Yang. "I want to contribute more to the company at all levels." Still, Yang's influence has grown over the past year.

Shortly after the IBMPC takeover, the board created a powerful strategy committee headed by Yang but packed with other strong voices, including company co-founder Liu Chuanzhi. At first, the committee met monthly; now, it meets just once a quarter. "Today, Yang is the guy who runs the strategy and sets the agenda," says General Atlantic's Grabe.

A confident Yang has emerged as more of a public figure in the West. And he has become more outspoken. Yang was irate during the dustup over the State Dept. computer order. "We are not a government-controlled company," he insisted in a phone call placed to a BusinessWeek reporter shortly after the matter came to a head.

"The Chinese PC market used to be dominated by state-owned enterprises. We beat them all." Today, the state-run Chinese Academy of Sciences holds 27% of Lenovo's shares, thanks to its early $25,000 investment in Legend. (That compares with 35% for public shareholders, 15% for employees, 13% for IBM, and 10% for private investors.) But the academy has no members on the board, and the company insists it exerts no influence.

Later, Yang made his case directly to Congress on a sweep through Capitol Hill. Last June, at a business conference in San Francisco, he switched name tags at a table so that he could sit next to C. Richard D'Amato, a member of the congressional advisory committee that had raised the security concerns. D'Amato says he was impressed with Yang's earnestness, but "nothing really changed my thinking."

Yang was more successful in brokering a deal to help rein in PC software piracy in China. Microsoft had been struggling for years to get Chinese computer users to pay for software, yet most of them still bought PCs that didn't include Windows and later loaded illegal copies on their machines.

In July, 2005, during a meeting at Microsoft headquarters in Redmond, Wash., Gates and Microsoft Chief Executive Steven A. Ballmer asked Yang for help with piracy, and, over the next few months, Yang worked out a deal with Microsoft China executives. They agreed to give him a rebate on Windows and marketing help in exchange for him agreeing to load it on most Lenovo PCs sold in China. Yang gambled that other Chinese makers would follow suit, and, thanks to pressure from the government, they did.

Microsoft's sales of Windows shipped on PCs in China have tripled since the deal came together last fall. Says Ballmer: "Yuanqing made a huge difference. He was willing to go out on a limb."

But if Yang is more of a risk taker than one might expect of a person who grew up in a communist state, his style is also highly calculated. Lenovo colleagues who have spent evenings with Yang playing Tuolaji, a Chinese card game, say he studies his cards for a long time before making a move.

Even when dealt a bad hand, he tries to figure out a way to win. They see parallels in how Yang runs the company: He's willing to take risks, but only if he has thoroughly studied a situation and figures he has a reasonable chance of prevailing.

It's no mystery where these traits come from. Yang recalls his parents as tough taskmasters who demanded that he study hard and rank at the top of his classes. Both were surgeons, yet in 1960s China they were paid the same as manual laborers and repeatedly sent to the countryside for reeducation and community service.

That forced Yang to grow up fast. Starting at age 8, he cooked meals over a smoky coal fire for himself and two younger siblings on the balcony of the brick housing project where the family lived in a cramped apartment. Yang's only toy was a bag of marbles; if he wanted to play ball, he'd scrunch up a cast-off cigarette package.

His mother, Wang Biqin, gave him a tiny allowance each month, but he rarely spent it because he knew that she might have to take it back to buy food. Yang knew nothing of the outside world. "It was a tragedy, but it was also lucky," he says, looking back. "If you don't know what's going on outside, you don't know what you're missing."

Contrast hardscrabble Hefei in the 1960s with Yang's life today. In August he moved his parents, wife, and three children into a Raleigh apartment inside a gated community amid rolling, wooded countryside. On a steamy summer day, the Yangs gather excitedly in the living room around a low glass table spread with fresh fruit and cookies--which the children don't touch.

Yang proudly prompts his eldest boy, Yang Yiqi, 11, to list the three goals he had been assigned when he went off to American summer camp. They were: learn English, make new friends, and excel at sports. "And did you reach your target?" Yang asks. The boy's enthusiastic answer: "Yes, I did!"

When asked what Yang was like when he was growing up, his father, Yang Furong, launches into a long tale that makes the whole family chuckle knowingly. Yang studied ferociously for the national university entrance exams. One evening, he accompanied the rest of the family on a rare outing to a movie theater, but when the house lights came up at the end, they discovered that his seat was empty. In mid-movie, he had raced back home to study.

Yang loved reading literature and writing poetry as a teenager, but pursued a computer science degree at university on the advice of a professor friend of his parents. Six years later he was studying in Beijing to finish up his master's degree in computer science and was headed for an academic career when he spotted an ad for a job at Legend in a newspaper.

At the time it was a 100-person company that sold Sun Microsystems and Hewlett-Packard computers at retail. Yang signed on as a salesman at one of the few truly market-driven companies in all of China. His pay: $30 a month.

It was a fortuitous choice. Legend's chief executive, Liu, had emerged in the 1980s as one of modern China's first real entrepreneurs. He and 10 other researchers at the science academy formed the company in 1984. Legend had a rocky first few years, but, by the time Yang landed there, it seemed to be on solid footing.

He excelled as a salesman, and Liu eventually put him in charge of small businesses and then the company's crucial engineering workstation unit. There, he got to know Americans who worked for Sun and HP, and he scarfed up every bit of knowledge he could about how to run a successful business.

A pivotal moment came in 1994. Liu was laid up in a Beijing hospital suffering from exhaustion and stress. Legend had begun selling its own PCs in 1990, but, when China opened the market to direct imports by foreign PC giants, it was caught in a pincer. As a publicly held company, Legend did not receive government support like state-owned PC outfits.

Yet it didn't have the financial strength of foreign PC makers. Flat on his back for weeks, Liu used the time to consult with his underlings. He came away impressed with the youthful Yang's knowledge of the PC business and his Boy Scout-style honesty--not a small consideration at a time when Chinese enterprises were rife with corruption. Upon leaving the hospital, Liu decided to stay in PCs and create a separate division with the 29-year-old Yang in charge.

What Yang accomplished far exceeded Liu's expectations. In just three years he transformed Legend from an also-ran into the leading PC player in China. He switched from using only a direct sales force to also selling through a vast network of retailers. And he focused on innovation. Until then, the technology in PCs sold in China had been a generation behind those sold in the West.

Legend shipped PCs based on Intel's new Pentium processor at the same time they were shipped in North America. Yang also opened up the now-vast consumer market with low-cost, super-easy-to-use PCs. One Legend model let PC novices set up an Internet connection with a single push of a button.

Along the way, Yang learned management lessons that would later prove vital. As the new boss of the PC Div., he supervised several of the company's founders. That was hard for them to swallow. To make matters worse, Yang didn't have a diplomatic sinew in his body. He fired half of the staff, forced managers to radically alter the way they did business, bawled out people when they screwed up, and ignored criticism.

It was not very Chinese of him. Liu saw that he very nearly had a revolt on his hands, so he called a management meeting to deal with it. "I criticized Yang so severely he almost broke down in tears," recalls Liu. "But this had a good effectParagraph .. He started to change his work style."

While Yang became more diplomatic, he remained a reformer. When the PC Div. switched buildings in 1997, he used the move to break with the past. He insisted on a more formal dress code and trained all employees in phone etiquette. This is when he made everyone start referring to managers by their given names.

It wasn't until later that Legend employees understood what Yang was up to. He wanted Legend managers and employees to think and act like techies in Silicon Valley, Boston, or Berlin. Yang knew that unless Legend expanded beyond the borders of China, it would not be able to match the clout of the foreign PC giants. So, when Liu handed the CEO job to him in 2001, Yang made globalization one of his long-term goals.

His big opportunity came in 2003, when he learned that IBM was interested in selling off its large but money-losing PC unit as part of its move to services. Yang saw this deal as a way for Legend, which was about to rebrand itself as Lenovo, to leap onto the world stage without having to grind it out country by country.

But the entire board of directors lined up against Yang. Think about what he was asking the Lenovo elders to do: A $3 billion company based in China would be taking over a $10 billion global behemoth. IBM had practically invented the PC industry; if Big Blue couldn't make money selling these machines worldwide, how could little Lenovo hope to do any better? "We had all built this company, and nobody wanted to take such a big risk," explains Liu.

Yang and his team dug in. They made presentation after presentation to the board until the endless meetings took on the feel of a court trial. Yang was under extreme pressure. One day, when Yang was venting to him in the locker room after a workout, his friend Tian suggested they take a sauna to relax. Yang had something of an epiphany after the two men jumped, naked, into a pool of icy water.

"Suddenly Yuanqing was not a serious person anymore. He smiled like a baby," recalls Tian. Eventually, Yang prevailed. He agreed to give up the CEO role to a more worldly Western executive and convinced the board that he could make the former IBM operations more profitable.

Today, Yang's moments of pure bliss are rare. At the end of a long workday in September, he sits at a table in the Bai Family Courtyard Restaurant in Beijing--a setting as far from the smoky balcony in Hefei as you could imagine.

The restaurant is decorated in the style of Beijing's Imperial Palace, and the waitresses dress like Qing Dynasty princesses in elaborate headdresses and lavishly embroidered silk clothing. They bring dish after exquisite dish, an overabundance that seems designed to make up for the privations of China's past.

For a moment, Yang appears relaxed. But that's only temporary. A guest asks what keeps him up at night, and Yang quickly answers: almost everything. "I have a lot of anxiety dreams," he says. "It's the normal emergencies of running a company every day. A customer complains. We're not able to meet demand. There's a shortage of parts. I often wake up, and sometimes I'm up all night."

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