Lenovo was founded in 1984 in Beijing by 11 researchers from the Chinese Academy of Sciences. Initially the company was called Legend and was a distributor of PCs made by other manufacturers, including IBM, Hewlett- Packard and AST, a Singapore-based PC maker. In 1994, Lenovo started to make its own PCs and in a short period of time became number one in the Chinese market. It has now been number one for seven consecutive years.
In 2003, Legend changed its name to Lenovo. The origin of the word is ‘Le’, from Legend, and ‘Novo’, which is Latin for ‘new’.
In December 2004, it was announced that Lenovo had agreed to buy IBM’s PC division. At that time, Lenovo’s turnover in China was a little over $3 billion. The PC division acquired from IBM had a turnover of $10 billion and operated in 67 countries, one of which was China. So Lenovo acquired operations in an extra 66 countries, having previously only worked in one. The acquisition was completed 1st May 2005. Lenovo is still number one in the China market; if you add in IBM’s volumes, the market share in China is now 37%. Worldwide, Lenovo’s market share is about 7-8%, which makes us the world’s third largest manufacturer of PCs.
The acquisition of the IBM business included IBM’s laptop computers, which will continue to be sold under the name ThinkPad. Initially, they will continue to use the IBM brand, but this will be phased out over a period of time. There is also the former IBM desktop range, known as the ThinkCentre. In addition to the PC business, Lenovo has a business in China which makes mobile phones, and in a period of four to five years, we have become number four in the Chinese mobile phone market – which is the largest in the world, as well as the fastest growing.
How is treasury structured?
Treasury is highly centralised. Although we are a Chinese company – and treasury in China continues to be managed from Beijing – the constraints in China’s treasury environment have led us to base the international operations in Singapore. As the international business has only recently been spun out from IBM, we have a relatively simple legal structure, with only one legal entity in each country. This means that we do not have to worry about concentrating the cash between different subsidiaries in each country: all receipts come into the same place. The one exception to this rule, of course, is China, where we have five manufacturing plants and several distribution companies – so the treasury department in Beijing has a busy and important task to perform in bringing this cash into a central bank account in Beijing.
Outside China, all the national subsidiaries buy their computers – both laptops and desktops – from Lenovo Singapore. Thus Singapore acts as a sort of re-invoicing centre. It is the biggest single supplier to each national subsidiary – for these subsidiaries, the purchases from Singapore represent over 80% of their revenue. So we have a natural source of funding for each national operation: the countries simply delay payment to Singapore until they have enough cash on hand. There is no need for them to have local bank lines. On the other hand, as soon as they have enough cash, we can centralise it into Singapore by having the subsidiaries settle some or all of their outstanding payables due to Singapore. Singapore, in turn, acts as the hub through which we pool the cash with the mother company in China and Hong Kong.
As the holding company is a Hong Kong company and is quoted on the Hong Kong stock exchange, we have a treasury department in Hong Kong. This group handles funding and strategy, as well as the requirements of the Hong Kong listing. We also have a small group in Raleigh, North Carolina, which looks after the Americas. Altogether, we have a total of about 32 treasury staff.
How did you set up treasury operations after the acquisition?
Before the acquisition, Lenovo had no dealings outside of China. There was a team of five people doing cash management in Beijing and three people doing treasury in Hong Kong, looking after the holding company and the overall funding. On the IBM side there was no treasury structure: the PC activity was simply a division. In IBM, as in most companies, individual divisions do not manage their own treasury. So, between the 7th December 2004 and the 1st May 2005, we had to set up cash management and funding operations for a $10 billion a year company.
Lenovo took charge of the first 17 countries on the 1st May and then the remaining 49 on the 1st August. That did give us a little bit of breathing space. The solution that we adopted was to decide to go for a highly centralised treasury function. Hiring treasury staff in each country would have created a challenge, just in terms of recruitment and training. Also, given the simple nature of our distribution activities in the countries, and the fact that in many countries we are quite small – in Portugal, for instance, we only have five employees – we were always going to be facing separation of duties issues. This was an additional reason for choosing a centralised process.
Under this process, the bank accounts are managed remotely. All of the accounts are with the same bank, no matter which country we are in. This bank was selected a) because it is present in all of the countries and b) because it has a very good internet banking product which enabled us to manage the bank accounts remotely. So we were able to recruit and train a small team in one central location. This team is fully dedicated to cash management, and big enough to ensure separation of duties.
This is a somewhat unusual structure, but it was the only way we could have everything up and running in such a short space of time. I suspect that as a result of this approach, we had fewer problems than we would have had if we had adopted a more decentralised solution.
What challenges did you encounter?
The first challenge was that there was some nervousness in the subsidiaries about not having control over their own bank accounts and cash management. A second challenge was that the payroll systems had to be reprogrammed to generate an interface towards the bank we were using, which was not necessarily the bank that IBM had been using in these countries. As always, when you create new interfaces you get problems. By and large the interfaces have worked well, but inevitably, there have been countries where we have had issues – particularly as we have discovered that the bank often uses an international format, which doesn’t necessarily accommodate all of the characters found in different local alphabets. We have had cases of payment files getting rejected for this reason. It was fairly easy to rectify – but it is never good when payroll files are processed late!
One of the things that you focus on in this situation is ensuring that you understand the cut-off times for delivering payment instructions to make sure that all the payments get made on time, especially payroll. We discovered that the banks tend to assume that the headquarters are in Europe or North America and that any activity in Asia is a subsidiary, and calculate the transaction dates accordingly. Some of the payments were going through late simply because the bank system was adding a day instead of subtracting it – it had been designed on the assumption that the head office was in North America. These things are easy to address – but you only discover them when something goes wrong.
What is the structure of your bank accounts in China?
The arrangements in China have not been modified at all, for the simple reason that they work very well. We use primarily local banks. We do use foreign banks to some extent, but the cash management is all done through Chinese banks. It works very well. I was very impressed when I first went through it. It uses the electronic banking services provided by the Chinese banks. Although we have several different legal entities spread around the country, we are able to concentrate the cash into Beijing on a daily basis using entirely Chinese electronic banking products. China is the only country where we have several different legal entities and is therefore the only country where we have the problem of how we concentrate our cash. This entirely Chinese solution addresses the issue very well, and compares favourably with what I have seen in any international company.
Outside China, we have been limited in the extent to which we have been able to use Chinese banks, simply because they do not yet have the international branch structures. But we have been pleased with the credit support which has been vital for Lenovo’s international expansion. We look forward to expanding this co-operation, as both Lenovo and the banks continue to grow and expand.
Have you encountered any difficulties specific to China?
We do tend to run positive cash balances both inside and outside of China, for various reasons. Of course, the interest rate that we can get on a deposit in China is regulated and is low. Like any other company operating in China, a lot of the goods we buy are imported. So, like everybody else, we have to manage our way carefully through the exchange control regulations. It is perfectly possible to work with them, and within them. But they do exist and they do mean that we have to manage cash inside China and cash outside China as two different pools.
What projects do you have planned in 2006?
We are planning to consolidate what we did in 2005. When you need to get things set up in a hurry, you have to do things with the objective of getting them up and running, as opposed to finding the optimal solution. Now that this has been achieved, the next thing is to have another look and ask, is what we are doing as efficient as it should be?
I am very impressed by our treasury team in Beijing and what they do. As there was a very strong and thriving business in China – and no treasury infrastructure outside China – the approach so far has been to leave China to continue to function as it is, and focus on the international side. As we go forward, we will be focusing on the integration of the treasury operations within China. There is a large plant acquired from IBM in Shenzhen, which needs to be fully integrated into the Lenovo China cash management process.
The next step, is to get the teams inside China and outside functioning as one, while recognising that the different regulations and environments will require them to continue functioning as two separate cash pools. The people in both areas show a very good team spirit, and I am optimistic about this process. But, at the same time, everyone is very busy – we have to impose on ourselves the discipline to make the effort to look outside the task of the day, and work on building the combined team. We are starting to have exchanges of people between the different teams, so the team members can get to know each other personally, and learn from each other the good things in both environments.
The key question as we go forward is –
How can we structure things so that they are as efficient as possible, given that we are in a highly competitive industry with formidable competitors?
It is going to be a question of keeping the pressure on and seeing how we can do things in a better way.
We have a very strong market position in China, but people in other countries need to get to know the name Lenovo. That is going to be one of our main focuses. The name has very positive associations in China. We want to make sure we maintain those same positive associations as the brand awareness is created outside the country, and Lenovo becomes the first truly international Chinese company.
