From IBM caterpillar to Lenovo butterfly?

Lenovo's acquisition of IBM's desktop division for £920m last December may not have been the most expensive deal in the history of IT buy-outs but it caused political waves unprecedented in the technology industry.

Selling a key chunk of one of America's oldest tech firms to the Chinese had US senators crying foul and trying to block the sale for fear that the world's policeman may lose some of its technical advantage.

But despite the protests, the deal was approved by regulators in May. Based on both companies' 2003 sales figures, the joint venture will have an annual sales volume of 11.9 million units and revenue of $12bn (£6.8bn), increasing Lenovo's current PC business fourfold.

That's the theory anyway. The reality is Lenovo faces a tough transition period to integrate IBM's international heavy-weight enterprise-focussed business with Lenovo's Chinese consumer brands. Rather than concentrating on one sector, Lenovo is hoping to provide the complete range of PCs from low-value consumer machines to high-spec business equipment.

ZDNet UK met with Lenovo's UK managing director Gareth Hansford to discuss plans for taking on HP and Dell, and hear about the new technology that will drive the PC market for the next six months.

Interview highlights:

On moving away from just selling to businesses:

"There is a low-end notebook market that we just don't compete in today with our Think products — with our Lenovo products we expect to be able to do that from the beginning of next year."

On the X41 Tablet PC:

"You might say that we are a little late getting to the market with a tablet but when we did it we brought out something that is the thinnest, lightest, has the longest battery life – the most highly rated tablet in the market."

On Linux:

"We do work with some of our larger enterprise customers with Linux and in those cases we do offer it preloaded to them."

On whether the release of Windows Vista will lead to more evaluation of Linux:

"Every time you give people a change point like that then they will probably take the opportunity to consider their options, and Linux could come out as strong contender in that case."

Moving from US to Chinese management:

"They have a very considered, long term strategic view for the company; they made decisions within the company with the aim of becoming a global organisation."

How has the transition from IBM to Lenovo been in the last few months?
It has been a lot of work, but actually it seems to have gone pretty well. We basically didn't miss a heartbeat in terms of the day-to-day running of the business, from being IBM one day and Lenovo the next. That has been the majority of our focus until today — making that transition as seamless as possible, so that we maintain the business we have. I'd say we have been pretty successful, unlike some mergers we have seen where the combined market share has dropped as a result.

Has all the infrastructure and staffing remained the same — has there been any headcount loss, for instance?
There has been no headcount loss and at the moment we are retaining the same offices but that is something that will probably change. Now that we have finished that transition the focus is now looking forward to the future and how we combine the skills of both sides and get operational efficiency out of that combination.

Where do you see that future exactly, given IBM's business-focused heritage and Lenovo's consumer pedigree in China?
We now have the ability to take the strengths of both sides and put them together in one offering. Our aim is to continue to do the business we are doing, that is the enterprise and mobile business and the 'Think' products that we have, but then to bring alongside that new Lenovo products to help us get into a new set of markets. It is not inconceivable that in the future you will see us offering consumer products. We don't have a date for that yet, but the opportunity is there for us.

Is there not the danger that on the enterprise side you will lose some of the benefits of being connected to the rest of IBM, in terms of being able to offer servers, infrastructure and services etcetera?
We do have an alliance agreement with IBM, we are still the PC element of IBM's solutions and we are sole supplier of PCs to IBM — they won't be doing PCs with anyone else, and that's an alliance that will be in place for five years — that way we don't lose too much of that synergy. We also tried to keep as many things the same as possible for our customers — the same account teams, the same relationship with IBM, the same products, the same research and manufacturing. It was very much about making it a seamless transition, which I think we have achieved.

What are your plans for the next six months and what kind of targets are you setting yourself in terms of expanding the brand and the business?
The first part is continuing to do what we do and not take our eye of the ball. But we are going to add to that, which will begin early next year when we bring out a set of Lenovo branded products. We will maintain our Think products but will introduce SME-type products as well as some that allow us to operate in price-cells we haven't done before. There is a low-end notebook market that we just don't compete in today with our Think products — with our Lenovo products we expect to be able to do that from the beginning of next year.

It still sounds like a very wide-ranging business plan, from consumer to large enterprise. Do you not think it would be more effective to specialise in one segment?
We believe we can cover a wider spectrum because we have these different focus areas — from IBM enterprise products to Lenovo consumer and SME products. The bit we are working on now is how do we do that — how we enable the channel to do that? How do we focus the right resources across those two areas?

How long do you intend to maintain the various IBM brands you have inherited?
The IBM brands could stay with the Think products for up to five years, but we expect to start moving away from that at the end of next year. The strategic alliance with IBM is five years and that also covers things like warranty provision and customer leasing and financing.

What kind of work have you done in putting the Lenovo brand out there to IT purchasers in the UK and elsewhere?
Our message since September has very much been about everything staying the same. The primary brand that is being put out at the moment is around ThinkPad and ThinkCentre but you can expect that to change now that the transition is complete. You will start to see more of the Lenovo name particularly around product launches. We are also tying into it our sponsorship of the Winter Olympics which is in February next year. So you will see more but so far it has been one-on-one or word of mouth.

In terms of technologies, do you see any new or emerging technologies that will be an important part of your strategy in the near future?
Well one is the X41 Tablet which we announced in June this year. You might say that we are a little late getting to the market with a tablet, but when we did it we brought out something that is the thinnest, lightest, has the longest battery life — the most highly rated tablet in the market. Another one is the announcement we made today around the Z60, which has more multimedia features than we would have put onto our machines in the past. As far as the digital home [goes] — Lenovo has those products and we expect to introduce them next year and they are already selling as Lenovo products in China. We have some fantastic-looking home entertainment systems, VoIP phones and wireless connectivity to digital services. All those things are there for us; it's just a case of adding them to existing lines.

Do you have any strategy around operating systems, in particular Linux? Are there any plans to offer notebooks or desktops running Linux?
We do work with some of our larger enterprise customers with Linux and in those cases we do offer it preloaded to them. We don't have a Linux machine on our top-seller range but there are some of our resellers who are doing exactly that. It is there and the fact that a reseller for small business is now offering that is quite a significant change.

What effect will the release of Windows Vista have on the market?
Every time you give people a change point like that then they will probably take the opportunity to consider their options, and Linux could come out as strong contender in that case. However I do know that Microsoft is working to make their Vista release as bug-free as they can. I think it will come down to, as usual, a set of customers that are pioneers to Vista before the masses follow behind them. The challenge for us is to make the machines compatible for Vista today.

What have been the cultural changes moving from US to Chinese parents?
We have a pretty balanced executive team made up of Americans and Chinese. But in terms of specific Chinese management style there are a few things you can look back on in Lenovo's history. They have a very considered, long-term strategic view for the company; they made decisions within the company with the aim of becoming a global organisation. They took the decision to rename the company from Legend to Lenovo because Lenovo was a more internationally accepted name. They sponsored the Winter Olympics as a signal of being a global entity and global success.

There was some question of why a company would get into the desktop business today, as it's a pretty low-margin, uninspiring market. Obviously you wouldn't agree with that...
Our focus at IBM was creating a productivity machine for users that saved money across the life of the machine and wasn't necessarily focused on reducing the price on day one. Just by the fact that it doesn't break when it is dropped, for instance, means it is far more productive and will cost you less in the long run.

Dell seems to be the competitor to go after — HP has up to recently not been a happy ship — but how do you see yourselves competing with Dell's direct sales model?
Ours is obviously a channel model, theirs is direct, but I have seen recently that they have begun to talk to the channel more than they ever did in the past.

But wasn't the acquisition by Lenovo an opportunity to rethink the sales strategy at all — maybe consider direct sales?
To be honest, you're right that we do have the opportunity to re-think our route to market and that is being done as part of our channel strategy but the net of that is we will still be a channel-based company. As we move forward into consumer that piece of work is still being done but it will probably still involve a route to market that involves partners.

Could there be some direct sales then?
Again — we haven't finished that work but my expectation is that it will involve partners. It could be one of those things that looks direct but will actually involve partners.