Updated Jan. 30, 2014 1:13 p.m. ET
China's
Lenovo Group Ltd.
0992.HK -8.21% , once known as Legend, grew from a tiny government-funded venture in the 1980s to a global powerhouse that last year became the No. 1 personal-computer maker in the world.
With its proposed $2.91 billion purchase of
Google Inc.
GOOG +2.57% 's unprofitable Motorola Mobility handset business, Lenovo is making a risky bet it can replicate that success in smartphones.
"This will be a good start to challenge the big players in smartphones," said Chief Executive
Yang Yuanqing in an interview after the company announced the deal. "We want to become a global player."
The deal represents one of the boldest steps yet in the evolution of Lenovo, which started out in a tiny, one-story bungalow in Beijing, distributing foreign-made computers to Chinese homes. The company so far has built its successes largely on a ruthless ability to cut costs by manufacturing its PCs in-house, while building a reputation as a solid, reliable brand abroad. Lenovo's acquisition of
International Business Machines Corp.'s
IBM +0.54% PC business in 2005 helped establish the company's credibility globally, though many of its biggest sales inroads have been with businesses or in emerging markets.
But the Motorola purchase pushes Lenovo farther into the world of smartphones, with their picky, brand-conscious buyers. It puts the Chinese maker up against industry leaders
Apple Inc.
AAPL -0.19% and
Samsung Electronics Co.
005930.SE -0.23% , two of the world's most recognized consumer brands. Neither Lenovo nor Motorola was on the list of top 100 brands in consultancy Interbrand's Best Global Brands 2013 survey, while Apple ranked No. 1 and Samsung came in at No. 8.
And Lenovo will be taking up its battle in the U.S., far from its stomping grounds in China, where it still enjoys a home-company advantage. China made up 41% of its $18.56 billion in sales for the six months ended Sept. 30, the latest figures available.
The task is made tougher by Motorola's red ink: The handset firm's net loss widened to $928 million last year from $616 million in 2012, according to Lenovo. Concerns the deal will hurt Lenovo's profitability led investors to dump the stock during Asian trading Thursday, with shares falling 8.2% to HK$10.06 (US$1.30). The drop leaves Lenovo's market value at about US$13.5 billion.
The turnaround effort is further complicated by Lenovo's other major deal, announced last week, to buy IBM's low-end server business for $2.3 billion. Lenovo's management capacities will be stretched as the company simultaneously integrates two big businesses in very different areas, analysts say.
"I'm surprised Lenovo is getting into something this risky," Sanford C. Bernstein analyst Alberto Moel said of the Motorola deal. "Lenovo is biting off more than it can chew."
Mr. Yang notes that Lenovo has a track record of proving the skeptics wrong. It has beaten better-known technology firms to take market share, maturing and globalizing as it goes.
When Lenovo bought IBM's PC unit for $1.25 billion, the business also was struggling. At the time, critics said Lenovo wouldn't be able to manage the acquisition, since it was much larger than the Chinese firm's own PC business. "Some people said it was like a snake swallowing an elephant," Mr. Yang recalled.
When Lenovo bought IBM's PC business, Mr. Yang spoke little English, according to other Lenovo employees. To force himself to study it, Mr. Yang made English Lenovo's official language and moved with his family to North Carolina to work closely with IBM's PC executives. His English has improved dramatically since and Mr. Yang conducts analyst conference calls and foreign media interviews entirely in English.
Lenovo also has been honing its international marketing chops during the past few years, launching campaigns featuring sports stars and celebrities. In 2012, the company signed a three-year sponsorship deal with the U.S. National Football League that allowed it to use NFL trademarks in its marketing. Lenovo also hired National Basketball Association star Kobe Bryant for its smartphone ads in Asia and enlisted Hollywood actor Ashton Kutcher in its latest marketing push in the U.S.
In many ways, Lenovo is a model of what the Chinese government says it ultimately wants from the country's companies. China wants its firms to buy or nurture brands abroad, as the country looks for ways to diversify its economy beyond cheap manufacturing and to invest its cash hoard abroad. As its labor costs rise and traditional growth sources ebb, China wants to move up the value chain and make sophisticated, high-margin goods to boost its economy and create better jobs.
Lenovo has been a pioneer in China's push for homegrown consumer electronics brands to make and sell their own products and services rather than playing supporting roles for foreign labels.
And though Lenovo still has government funding, through a major shareholder of its biggest investor, it differs significantly from the massive state-owned enterprises—or SOEs—that dominate the country's banking, resources and transportation industries.
The company started out as New Technology Developer Inc., a small tech venture founded with seed money of just $25,000 from the state-owned Chinese Academy of Sciences. It was incorporated in 1988 as Legend Hong Kong and listed on the Hong Kong Stock Exchange in 1994.
In the early days, Legend distributed PCs made by foreign companies to businesses and households in China, even helping with installations. When Mr. Yang joined the company in 1988 as an intern, he delivered computers by bicycle.
After Legend started selling PCs under its own brand in 1990, it expanded quickly in the domestic market with products that appealed to millions of Chinese consumers who weren't familiar with technology. Its Internet PC, for example, came with a simple button that users could press to instantly connect to the Internet.
In 2003, Legend changed its name to Lenovo, combining "Le" from Legend and "novo," the Latin word for new.
Those roots are still visible in Lenovo's shareholding structure: the Chinese Academy of Sciences holds a 36% stake in Legend Holdings Ltd., which is Lenovo's largest shareholder with a 32.5% stake. Mr. Yang and other directors hold 7.3% of Lenovo, and the rest of the shares are traded publicly. Under the terms of Lenovo's $500 million loan deal with a group of banks, the loan agreement goes into default if Legend's holdings slip below 20% or if it loses its place as Lenovo's largest shareholder.
At the same time, Lenovo has more in common with Western rivals than with Chinese companies run by Beijing. Its loan agreement comes from a consortium of Chinese and foreign banks, while big SOEs rely on cheap credit from China's state-owned lenders and big policy banks.
Lenovo has dual headquarters in North Carolina and Beijing. Its executive ranks include several foreigners, and an American—former Dell executive Bill Amelio—was once CEO. At SOEs, leaders are often high-level Communist Party officials who party leaders occasionally shift to other companies.
Mr. Yang said in a recent interview that he doesn't consider Lenovo a Chinese company, citing the diversity of its management team and shareholders.
Lenovo still stands to benefit from Beijing's policies. Foreign business groups complain that Chinese government procurement rules favor domestic players like Lenovo in a market worth 1.4 trillion yuan in 2012, or $231 billion at current exchange rates. China hasn't signed on to the World Trade Organization's guidelines pertaining government procurement, though Chinese officials say they are in active talks with the WTO.
Lenovo in years past also benefited from government rules preventing foreign computer makers from setting up distribution systems in China, according to a study last year by the Center for Strategic & International Studies, a U.S. think tank that focuses on security issues. That allowed Lenovo to build sales channels around the country to sell computers made by other manufacturers before it went into the computer manufacturing business itself.
—Carlos Tejada contributed to this article.
