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(originally published by Booz & Company)


China’s Multinational Quandary

Lenovo’s ill-fated ambitions reveal the difficulties China faces in developing and managing innovative global corporations.

When China’s Lenovo Group bought the personal computer division of IBM in May 2005 for US$1.25 billion, the company launched a bold experiment: Founder and chairman Yang Yuanqing attempted to create one of the first truly multinational Chinese corporations. He retained Stephen Ward, who had been head of IBM’s PC division, as chief executive officer, designated English as the company’s official language, and laid plans to market Lenovo computers in virtually all major world markets. As a result, Lenovo, the world’s fourth-largest PC maker, became a symbol of the Chinese government’s stated aim to build a “national team” of multinationals that would occupy 50 positions in the Fortune 500.

By December 2005, Ward was out, a victim of infighting during the postmerger integration. But Yang continued to pursue his internationalist strategy, naming American high-tech veteran Bill Amelio, who had run Dell Inc.’s Asian operations, as CEO.

Amelio, however, encountered friction between Western and Chinese management styles. He was frustrated by his Chinese colleagues’ reluctance to speak their minds and their preference to follow orders. “You don’t want everyone saying, ‘yes, yes, yes’ all the time,” Amelio told the Wall Street Journal in late 2008. His decision in 2006 to remove a popular Chinese executive who was head of the company’s supply chain triggered a backlash from other Chinese executives. Under fire, Amelio left in early 2009 after Lenovo reported big losses for the fourth quarter of 2008, as well as declining global PC market share. Yang returned as CEO, and the company retreated at least temporarily from its multinational ambitions, deciding instead to concentrate on the Chinese market, where it is dominant.

The Lenovo story has led many Chinese experts to a troubling conclusion: Despite its significant gains as a manufacturer during the past few years, China will have much greater difficulty than its leaders anticipated in creating true multinational corporations.

Amelio’s departure reflects Lenovo’s and China’s “extremely limited international capabilities,” says Oded Shenkar, a professor of global business management at Ohio State University and author of The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job (Wharton School Publishing, 2006). Lenovo relied on a U.S. consulting firm to help integrate the IBM PC acquisition, but neither management nor the outside consultants fully understood the cross-cultural challenges, Shenkar adds. “Culture was a major part of what went wrong.”

The fundamental differences between Chinese companies and typical multinationals lie in the roles that top executives and rank-and-file workers play. Unlike more decentralized Western corporations, Chinese organizations are generally run by a powerful CEO who gives orders to a hierarchy of workers, who typically follow them to the letter without raising questions. In addition, the Chinese have little trust in impartial Western systems of performance measurement or executive development, and frown on lower-level employees proposing ideas to their superiors. Chinese companies “have a very severe handicap in empowering their workforce in order to generate creativity,” says Gordon Redding, adjunct professor of Asian business and comparative management at INSEAD and coauthor of The Future of Chinese Capitalism: Choices and Chances (Oxford University Press, 2008). “These organizations have an absolutely dominant laoban — a father figure — who usually created the company.”

Lenovo isn’t the only Chinese company that has attempted to gain a foothold as a global player, and others, arguably, have had more success. For example, Haier Group is among the world’s largest appliance manufacturers and now assembles some products in the United States. Huawei Technologies Company and ZTE Corporation are going head to head against Cisco Systems Inc. in marketing routers and other telecommunications networking equipment, particularly in developing markets. And China International Marine Containers Group (shipping materials), Galanz Group (microwave ovens), and the Midea Group (household appliances) are also making waves globally.

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  1. William J. Holstein, “China’s Long Road to Innovation,” s+b Leading Ideas Online, 11/18/2008: Chinese companies are facing difficulties in creating technological innovation.
  2. Gordon Redding and Michael A. Witt, The Future of Chinese Capitalism: Choices and Chances (Oxford University Press, 2008): A definitive examination of the challenges that China faces in its effort to emerge as an economic superpower.
  3. Dexter Roberts, “China’s Chery Gets Closer to Being a World Player,” Business Week, December 12, 2008: An update on the aspirations of the Chinese car manufacturer.
  4. Oded Shenkar, The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job (Wharton School Publishing, 2006): Chinese enterprises and companies will force a radical restructuring of the global business system.
  5. Jane Spencer and Loretta Chao, “Lenovo Goes Global, but Not Without Strife,” Wall Street Journal, November 4, 2008: An exploration of the internal cultural challenges at Lenovo. (Subscription required.)
  6. Ming Zeng and Peter J. Williamson, Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition (Harvard Business School Press, 2007): How Chinese enterprises and companies can rapidly target high-end industries that rely on engineering, design, and research and development.
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