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Lenovo, the large Chinese PC manufacturer, has suddenly embarked on a $5 billion acquisitions spree, with bids to purchase IBM’s low-end server business ($2.3 billion) and Google’s Motorola mobile-phone business ($2.9 billion). As with all proposed Chinese acquisitions in the high-tech electronics area, both of the deals will be subject to a scrub down by the Treasury-led Committee on Foreign Investment in the United States (CFIUS) that evaluates foreign investments in light of US security concerns. Most observers doubt that Lenovo will encounter much opposition in this review. Lenovo successfully navigated the CFIUS process in 2005 when it purchased IBM’s personal computer business; and in the current circumstance, neither of the relatively low tech businesses seem on their face to present troublesome security challenges. (Though it should be noted that my AEI colleague Derek Scissors has pointed out that trouble may come from the stark deterioration in the Chinese investment climate—to wit, what seems a developing policy in Beijing of harassment and blackmail of foreign corporations). Taking no chances, Lenovo has hired CFIUS experts from every Washington law firm in sight.
Actually, my interest in this posting does not concern the national security aspects of the proposed acquisitions but rather the purely competitive perspective. A decade ago, James Glassman, now an AEI scholar again, wrote an excellent appraisal of the foolish controversy over another proposed Chinese investment: CNOOC’s bid to buy the US oil company Unocal. After heaping scorn on the spurious national security arguments against the takeover, Glassman pivoted and heaped almost equal scorn on CNOOC’s rationale for buying Unocal. He posited that “Unocal shareholders will be big winners”—their stock had already climbed 50 percent and CNOOC’s bid would inflate it further. CNOOC’s shareholders were “another matter.” Glassman queried: “Does it really make sense to spend all that money on an energy company when oil prices are at an all-time high? Buying low is usually a smarter strategy.” He suspected that the Chinese were just trying to lock up future energy supplies, whatever the current stock price. And he concluded: “That’s the logic of central planners, but it makes little sense in a global market.”
Is there an analogous situation developing here: in this case, however, a successful CFIUS clearance for a questionable business strategy? Certainly, the initial investor response confirmed those skeptical about the deals: in the week after the announcements, Lenovo’s stock plunged 16 percent, and at least five brokerage houses downgraded the stock from buy to neutral. But over the longer term there are countervailing positive factors. Predicting the success or failure of high-risk business moves is a “mug’s game”; but here are some of the offsetting elements of such a calculation:
The bottom line is that Lenovo’s simultaneous launch into two new high-tech markets segments while plausible in the long run carries substantial risks over the short to medium term. There are certainly synergies to be reaped from latching onto the IBM server unit’s long-established ties with carriers. But even low-end servers—owned by a Chinese company—may present unstated security worries in some countries by skittish carriers. On the other hand, Lenovo may benefit by preferential sales in the home Chinese market, even though ironically IBM servers were already manufactured there.
The future with regard to smartphone competition is much more uncertain. As noted above, worldwide, Lenovo starts from a weak position, with Samsung and Apple forging ahead with new products and services. Further, there may be little room to maneuver in the key Chinese market in that there are now two strong native companies, Huawei and ZTE, both investing large R&D and marketing resources to compete with Samsung and Apple throughout China. Lenovo is really the “new kid” on the block and cannot count on the undivided attention and favor of Mother Beijing.
Finally, it should be added that Lenovo’s CEO Yang Yuanqing has faced this challenge once before. When he led the company in buying IBM’s computer division, skeptics abounded, arguing that Lenovo was not ready to inherit the IBM brand and inevitably would undermine the ThinkPad’s strong reputation. Instead, Lenovo soon left competitors such as Dell far behind and became the world #1 PC manufacturer. Whether this record can be matched in today’s far more complex PC/tablet/smartphone/software competitive world remains an open question. In this case, then, if there is a flaw in Lenovo’s future business model, it will not stem from James Glassman’s “logic of central planners”—but rather a more typical technology and market miscalculation about the trajectory of high-tech information and computer competition.
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