"Handsets are a real possibility, I don't have a date now but that is a part of the strategy"

It has been a little more than two years since the Chinese company Lenovo acquired IBM's ailing pc business in an effort to combine its manufacturing efficiencies with Big Blue's powerful brand. While the acquisition catapulted Lenovo from a distant #9 in the global pc sweepstakes to the third largest player (after hp and Dell), the synergies promised at the time of acquisition have still not been realised completely.

Just over a year back, Lenovo hired William "Bill" Amelio as its global head and moved its operational headquarters from Beijing, China to Raleigh, North Carolina, America. Amelio, till then was with Dell as its Senior Vice President heading its operations in the Asia Pacific and Japanese markets. A second degree black belt in Karate, Amelio, 49, would need all the agility and kickboxing abilities of a champ to take on competition in the marketplace. Lenovo had revenues of $4 billion (Rs 17,600 crore) and a net profit of $58 million (Rs 255.2 crore) in the third quarter of the current fiscal. On his first visit to India after taking over as Lenovo's CEO, Amelio, spoke to BT's Venkatesha Babu on the company's prospects and plans for the international and domestic market. Excerpts from the interview:

It has been two years since the acquisition of IBM's PC business, how has the transition worked out, especially as most major international acquisitions don't succeed? What have been the challenges?

Let's look at the results as it is a great point to start. While, yes, it is true that most major acquisitions in the IT space don't work out, our results in the last 20 months speak for itself. In our core market of China, Lenovo actually gained marketshare. After the successful IBM (PC division) acquisition, we moved away from just focussing on the enterprise to what we call the transaction model (Editor's Note: In contrast to relationship model targeting large enterprises looking for tailored solutions with quick delivery and responses, transaction model is focussed on the small and medium business (SMB) and consumer space, where extensive distribution, service and aggressive pricing are emphasised) and India is the place where we pioneered this model very successfully. The growth rate in India for Lenovo has been awesome. We followed this up by targeting the consumer in the Indian market, moved it up to ASEAN region, next to Europe and we will eventually migrate it to the us.

Lenovo got a little over 40 per cent of its (FY 2006) $14 billion (Rs 61,600 crore) revenue from the Chinese market. You are under pressure in your core market as both MNCs such as HP and Dell as well as local players are attacking you. Is Lenovo fighting a two-front war as it seeks to defend its China turf even as it aspires to expand its international footprint?

(Laughs) The pc business has always been an extremely competitive business for all the years I have spent in it. So it never gets easy, which is great news for all customers, whether enterprise or end consumers. In the China market, we grew revenues, we grew marketshare, by any standard…

……But margins are under pressure, you made less money…

Yes, that's true and it is natural in business. That goes and comes. The important thing is that the opportunity is so huge. Having been in the large enterprise space alone had created associated problems for us. While we had a great supply chain in China, for instance, outside of China, it wasn't that great. In China because we had a transaction model, we could adjust things, say when it came to pricing, which we can't do so easily if it is a relationship business. So, we have rolled out this transaction model first in India. Everybody said it would be difficult to do in a developed market, so we next rolled this out in Germany, which is a good example. In the last three quarters, we grew by 40 per cent. We have this good feeling that we have got the recipe right for both growth (and) profitability. On your question of battling on two fronts, we are doing by rolling out our transaction model, fixing our supply chain, reaching out to consumers and, importantly, building our brand. It is so important for us to get people to know and trust our brand, everywhere in the world. It already is in China and now in India. Pre-merger in India, awareness about Lenovo was close to zero, today Neeraj (Sharma, MD of Lenovo South Asia) and the India team have done a fabulous job of getting it 78 per cent (unaided) awareness.

Your growth has largely been confined to Asian markets. In the crucial North American market, you actually dropped marketshare. Does this worry you?

Everything worries me (smiles). This is one of the things which worries me. To be specific, we were earlier addressing the enterprise market alone, which is around 25-30 per cent of the overall market. But as we add the transaction model, we will enter the higher growth, more profitable segments of the American market. We will start seeing higher marketshare and growth.

From when?

Immediately. We are fixing the supply chain, investing in enhancing brand visibility, we will see some traction. We are at a tipping point and will see accelerated growth.

Being an ex-Dell veteran and given Dell's recent stumbles in the marketplace, what are the lessons for players like Lenovo? Is price no longer the deciding factor?

You are right. It is more than just the price. That is why at Lenovo increasingly the emphasis has been on innovation as seen by some examples. (For instance, Lenovo introduced a notebook that uses facial recognition technology for access security). Innovation is in the DNA of the organisation. We believe this will help our customers get an edge in their own marketplace.

"Yes, it is true that Microsoft is part of our crucial strategy... But we also recognise that we will give whatever the customer wants"

The roll-out of (Microsoft's latest Windows Version) Vista was expected to bump up PC sales. What has been the impact?

Globally, we are not a major player in the consumer space where the adoption is faster. Enterprises have their own cycles and they will roll out a little bit later and its impact might be seen a couple of quarters down the line or beginning next year. Anything that drives additional demand is welcome.

Lenovo's increasingly close ties with Microsoft, including preloading Live Search on your machines, is seen as cutting out Linux. IBM's PC division had made extensive investment on Linux. Comments.

Yes, it is true that Microsoft is part of our crucial strategy to address the marketplace. We have a great relationship. But we also recognise that we will give whatever the customer wants. If the customer wants Linux, we will provide Linux.

The US State Department had certain issues with Lenovo's PCs on grounds of security and Lenovo being a Chinese company. Have those kind of issues been permanently resolved?

Absolutely. I personally spent time on this. It is not essentially the hardware but more of the networks and the software on which it runs. Lenovo is a global company. We will address and work with everybody on all such issues. The noise level on this issue has died down. Everyone I talk to is positive on this issue.

The strength of IBM's PC business was in selling to large companies. A legacy that you have inherited. How have you tried to address the SMB space? Do you still continue to work closely with IBM in select markets?

Transaction model is the response. We figured out how we were successful in China and translated that into other markets. We continue to work closely with IBM and we have a good relationship with them. IBM is still the #1 customer worldwide. We continue to remain their favourite daughter/son. (laughs). They would rather have us than others.

Has the relationship between Lenovo and IBM turned testy? IBM recently sold a chunk of Lenovo shares (which had come as a part of the PC division sale) and brought down its holding to less than 10 per cent from 18.9 per cent at peak.

No, no, no. The sale was a planned move, we were completely aware of it.

Though you had a five-year window to use the IBM brand name, you have chosen to jettison that and use Lenovo. Why is that?

This is something I get asked a lot by analysts. Let me clarify, we don't have five-year rights to use the brand in the exact place. We had to move the logo elsewhere. I decided, well, if I have to do that, 'would rather leverage the Lenovo ThinkPad brand. We would rather bite the bullet now.

"We are experimenting with a number of ideas, including flexi-pay. That is one idea to make things affordable"

You also sell servers, peripherals etc., in the Chinese market. Do you plan to take them to other markets and in doing so won't you compete with IBM in certain markets as its server portfolio is the world leader?

We compete in certain segments and cooperate in other markets. At some point, we will consider (selling outside China).

You sell Lenovo mobile handsets in China. India is adding 6.5 million subscribers a month. Do you plan to launch them in India too?

As we start to stabilise on various counts in our operations outside China, that is something which we will consider. Handsets are a real possibility, I don't have a date now but that is a part of the strategy.

India as a market has been a tough nut to crack for MNCs in general, except, say, for HP, considering the presence of strong local players like an HCL or a Wipro. (Lenovo is the third largest by volume and second largest by value in the segments it operates in the Indian market.) What have you done to address this?

India is an extremely important market for us. He (Neeraj Sharma) has tough targets, but I won't be able to share numbers. We are investing in expanding our manufacturing facilities here and you will hear more about that shortly from us.

There has been some talk of a $100 (Rs 4,400) PC by Lenovo for developing markets like India. Comments.

We are experimenting with a number of ideas, including flexi-pay. Pay as you go. That is one idea to make things affordable. In China, we are experimenting with different models where the TV serves up as the monitor and people check their mails and browse the web. We will watch the progress.

Was cultural integration a challenge, because Americans are seen as aggressive and pushy, whereas in Eastern cultures, including China, people strive for consensus rather than thrust a point of view?

We first brought the companies together and galvanised everybody. All interactions are based on trust, respect and compromise. Being a cross-culture company I think is a strength. Because of the confluence of cultures we get diverse ideas, a different way of looking at things. Actually it has made us strong.

Lenovo's rivals like HP and Dell seem to have done a much better job of marketing and branding their products. How do you plan to compete with such aggressive competitors?

I think we have done a good job of enhancing Lenovo's brand awareness through various initiatives as outlined earlier (including using sports promtions as a key driver). We will continue to invest in increasing brand awareness.

While manufacturing and supply chain has been a key strength of Lenovo, R&D is not seen as a part of that. What have you done to fix it?

That is not true. Lenovo has invested considerably in R&D. We believe that cutting-edge technology will provide us an advantage in the marketplace. For instance, the latest notebooks have several features which some of our competitors don't (have). We will continue to innovate.

Do you see opportunities to expand into any new segments in the electronics markets where you are not present today?

Our efforts would be to consolidate and grow in the segments we currently operate in. But we continue to scan the marketplace for (new) opportunities.