Ambitious companies from emerging economies have stormed into global markets. They now face their biggest test ever.
by Tim Burke/CFO Magazine
Despite its striking red and silver pattern and a scroll-like shape that pays homage to China's invention of paper, the Beijing-bound Olympic torch that leaves Greece next month looks essentially like any other Olympic torch. But there's more to it than meets the eye. The torch, which will travel across 20 countries over five months, was designed by a 30-strong team of engineers from Lenovo, China's biggest PC maker. Though Lenovo wants its brand to be known for laptop computers, the torch and its journey are fitting symbols of the company's global aspirations. Starting out in Beijing in 1984 under the name Legend, the company has spent most of its life cracking China's nascent computer market. As recently as three years ago, its entire annual turnover — HK$22.5 billion (€1.9 billion) — was generated domestically.
That's not the case today. After its $1.75 billion (€1.2 billion) acquisition of IBM's PC business three years ago, it embarked on a new journey, one that catapulted it from the world's eighth largest PC player in terms of volume to number three, behind American heavyweights Hewlett-Packard and Dell. With turnover more than quadrupling since then, its business now reaches all corners of the world. Today China accounts for less than 40% of sales.
With expansion, Lenovo has joined the elite ranks of what Andy Miller, CFO for EMEA, calls the "new world" multinationals. This group of developing-economy companies has expanded far beyond their home countries and now competes head-on with mighty developed-world rivals. Many, like Lenovo, are bold dealmakers, bringing home-grown knowledge to bear on growth plans in developed markets. A case in point: India's Mittal Steel, which grabbed the headlines two years ago during its €18.6 billion takeover of Luxembourg-based rival Arcelor. More recently, Tata Motors and Mahindra & Mahindra, both of India, have battled to buy Jaguar and Land Rover in the UK from Ford, while Brazil's Vale, the world's largest iron-ore exporter, just announced plans to bid for Switzerland-based rival Xstrata.
Now, as fears of recession grip the developed world, many are looking to these developing-country high flyers to become key global growth engines. With their vast experience conquering some of the world's most difficult markets, The Boston Consulting Group (BCG) calls these companies the "new global challengers." The consultancy recently published research that identifies 100 globetrotting companies from developing economies that deliver profitability and shareholder returns far higher than many developed-country rivals. Having grown revenue by nearly 30% a year between 2004 and 2006, BCG reckons that the combined sales of these top-performing 100 companies will reach $11.8 trillion in 2015. "What is certain is that the new global challengers will only strengthen and multiply," the report notes. (See "Making the Grade" at the end of this article.)
To make these projections a reality, says Janmejaya Sinha, a Mumbai-based senior partner and managing director at BCG, developing-economy "challengers" need to undergo far more aggressive change than they already have, reworking the business models that have served them well in the past, restructuring balance sheets to tap international sources of capital, and rethinking M&A to take them even farther afield.
Lenovo is well aware of the challenge. Worldwide expansion has been part of its plans for a long while. Back in 1999, then-CFO Mary Ma told CFO Asia, a sister magazine of CFO Europe, that Lenovo wanted to be a Fortune 500 company within the next decade. It still has a way to go, but buying IBM's PC business took it much closer than it ever could go on its own.
All this, however, is putting Lenovo's turnaround skills to the test. IBM's PC business lost nearly $1 billion in the four years before its acquisition, so that much of the integration process has revolved around getting it back in the black. According to CFO Miller, a key part of that effort has been introducing IBM to its homegrown "transactional business" model — that is, selling built-to-stock products for small businesses and consumers alongside IBM's built-to-order products for large corporate customers. The pilot took place last year in Germany, contributing to results that satisfy Miller. "In Germany, we grew revenue 67% and volume 86%," he says. "That's pretty spectacular growth for a PC business, and coming from our IBM heritage, that's certainly not the sort of growth we were used to seeing. That was a real lesson. You can see that these models do translate from one geography to another."
Another important part of Lenovo's plan involves the internationalisation of its senior ranks. While group CFO Wong Wai Ming, a former China-based investment banker, was brought in after Ma's retirement last year, Lenovo's CEO, Bill Amelio, is a recent recruit from Dell. The rest of the senior executive ranks are a mix of veterans from IBM, Lenovo and other PC companies "We have the eastern presence and western presence — two very different cultures — and I think we can use that to our competitive advantage," says Miller.
As for the CFO, he refers to himself as a "long-term IBM-er," having spent 22 years with the US firm, including a stint as finance chief of its EMEA PC business. Along with the turnaround, Miller's initial months at Lenovo's base camp in Paris were spent getting a new finance team up and running as quickly as possible, including accounting, tax, treasury and other parts of finance that work closely with, for example, global commodity managers on supply chain issues. Miller says it was a challenge he relished. "When we were in IBM, these were support functions that were outside of my scope and responsibility," he notes.
The turnaround is working. Lenovo achieved a profit of $161m in 2007 compared with $22m in the year following the IBM deal. But it can't rest easy. With its position as world number-three threatened by Taiwanese rival Acer, Lenovo wants to move on from the IBM acquisition and get back into deal-making. Just recently, though, Lenovo's young European team was dealt a blow when it lost out on a bid to buy Packard Bell of the Netherlands, which went to Acer and its newly acquired Gateway business. Miller concedes the deal "would have given us a step up," but reckons "we still have a solid consumer strategy with or without Packard Bell."
Of course, Lenovo always has its emerging-market roots to fall back on, and in a home market like China — where Forrester Research predicts the number of PC users will grow from 54m today to nearly 500m by 2015 — that's an enviable place to be. And Lenovo, like others, is leveraging its low-cost home base — "a fundamental element of their success," BCG notes — to compete against developed-country rivals.
But there is a downside. Competing on low costs alone is no longer viable. For one thing, as these companies move further into developed markets in order to build market share, they face the same cost issues as their more established competitors. For another, these competitors aren't sitting still, and are shifting supply chains around the world so that they, too, can take advantage of low-cost locales.
This is an issue that Satyam Computer Services, a $1.4 billion, Hyderabad, India-based company, is facing. Srinivas Vadlamani, CFO of Satyam since 1994, calls the company "one of the pioneers" in the low-cost offshoring sector, graciously adding, "We happened to be in the right place at the right time." The way he tells it, Satyam's big break came in 1992, when it sent a team of engineers to Illinois to pitch its services to John Deere, an American agricultural-machinery manufacturer. The team rented a flat opposite John Deere's IT centre and used a 64kbps satellite link to simulate offshore software development. John Deere became Satyam's first Fortune 500 customer. Today, it has more than 600 customers and nearly 50,000 employees in offices around the world.
This article was excerpted from CFO.com. Read the full article here.
Tim Burke is senior staff writer at CFO Europe.
© CFO Publishing Corporation 2008. All rights reserved.