Category Archives: Lenovo

China’s New Encryption Rules Favor Homegrown Vendors

As if to illustrate the point I made in my earlier post today about China’s far-reaching industrial strategy in the technology sector, the Wall Street Journal reports that Cisco will be among the companies affected by new rules that will require vendors of six categories of technology products — including smart cards, firewalls, and routers — to disclose encryption codes to Chinese authorities as a certification precondition for sales to government accounts.

As the WSJ reports, encryption codes are closely guarded by technology vendors for both competitive and security reasons. Although the product categories covered by the new encryption rules account for, at most, hundreds of millions of dollars in sales to the Chinese government — a small fraction of what China’s government spends on technology — the dispute is the latest flashpoint between China and foreign technology companies.

Quoting from the article:

Industry observers who follow the issue say that the regulation appears to be part of a broader effort by Beijing to promote domestic enterprises. Foreign executives say such regulations make it increasingly difficult for foreign companies to compete fairly in one of the world’s most important markets.

Assuming Cisco does not acquiesce to the new rules, it would be one of the companies most affected. Cisco has declined to comment on the matter.

The WSJ reports that, as of last night, a government list of companies certified under the new rules included — surprise! — only Chinese companies. Foremost among those companies was Huawei and Leadsec Technologies Co., an Internet-security subsidiary of Lenovo Group Ltd.

Palm Tries to Bluff, but It’s Too Late

In the latest rumor du jour, Lenovo is cited by Reuters as a potential acquirer of Palm. It really does seen the menu changes daily, and if you’re having trouble keeping up with the Palm-takeover speculation, feel free to join the bemused club.

Palm’s sales agents, Goldman Sachs and Frank Quatrrone’s Qatalyst Partners, have conducted themselves with all the discretion and subtlety of carnival barkers. It’s clear that their contrived, heavy-handed tactics — including a seemingly endless succession of leaks to the business press — have failed. If anything, Palm is in a worse situation today than when the investment bankers set up their medicine-show sales tent on the M&A midway.

One after another, like too-obvious suspects in a creaking murder-mystery potboiler, Palm’s rumored acquirers have removed themselves from suspicion, apparently miffed and a little mortified at having been used as plot decoys.

So now it’s down to Lenovo. Before that, companies suggested to have an acquisitive interest in Palm included Dell, Microsoft, Nokia, Google, RIM, Apple, HP, and Motorola. Then, the focus shifted to China and Taiwan, where Huawei and HTC were drafted into the action. Nobody went for the bait — not seriously enough, anyway.

I thought ZTE might be tempted to take a look, but its chairman told Reuters it was not approached by Palm or its agents. Maybe Palm and its agents that ZTE would step from the shadows and declare its interest.

Nonetheless, Palm, distressed and capsizing, is asking too high a price. The company’s advisers (investment bankers) were said to be seeking $1.2 billion for the company. It’s difficult to envision any of the dwindling prospective buyers paying anywhere near that price.

As a result of tepid buyer interest, Palm now is making sounds about staying the course as an independent entity. The company says it could get out of hardware and license its WebOS platform to handset vendors, along the lines of Google with Android and Microsoft with Windows Phone 7 Series or whatever else it decides to sell.

Palm isn’t serious, though. That move wouldn’t make much business sense, not with licensing as its exclusive business model, and not against two well-heeled players who utilize their mobile platforms as vehicles for bigger business ambitions.

Alas, Palm is bluffing when it says ti could just walk away from the M&A table. The problem is, it’s too late to bluff when all your cards are on the table, their faces fully exposed.

China’s Evolution: From Sweatshops to Innovation

Two stories relating to technology and China prompted some dark thoughts, not that I need much help on that front.

First, I read the story about the deplorable working conditions and objectionable treatment of workers who manufacture peripherals and other PC hardware for Microsoft, HP, and other technology mainstays. That item tells us a lot about the China of today, the China whose contract manufacturers have attracted Western patronage with low costs predicated on cheap labor and a lax regulatory regime.

It’s unconscionable that such manufacturers treat their employees so abysmally, but, as Paul Thurrott writes, nothing is likely to change. Microsoft HP, and others will continue to manufacture in China, occasionally dealing with dubious contract-manufacturing partners, as long as the cost of producing goods in China remains low and helps to fatten profit margins.

Corporations are abstract entities, not individual human beings. A corporation, especially one on the public markets, doesn’t think, breathe, feel, or have a conscience. It functions as an amoral business entity, for the purposes of growing revenue, boosting profits, and producing a return on investment for shareholders. As they say in the mob movies, it’s nothing personal, it’s just business.

But the thing is, China won’t always be the place it is today, which brings me to the other story I read, online at the Wall Street Journal. In that piece, John Deng, chairman of Nasdaq-listed Vimicro, makes a convoluted and unconvincing argument that regulatory and other barriers to foreign firms operating in China will somehow be beneficial to worldwide innovation.

I’m not sure I follow his sashaying, weaving logic, but he makes other points that are less disputable. He points out, for instance, that innovation in China heretofore has been done “through collaboration,” in which Chinese companies (like the aforementioned contract manufacturers) have adhered to U.S. and international standards and built business models on the modest foundation of low labor and environmental costs rather than on the elevated pedestal of high-value innovation.

Citing Huawei and Lenovo as examples, he says the situation is changing. Just as Japan and South Korea outgrew their humble manufacturing origins and became innovation powerhouses, Deng sees a similar but even bigger evolution for China. Unlike those countries, China can leverage unique attributes (namely its size, power, and influence) to set its own technological standards. Deng believes it should do just that to encourage the development and growth of indigenous technology companies.

He’d also like to see China get better at commercializing university research and development. He also would like the country to develop improved legal protections for intellectual property.

In China’s earlier (still current) stage of industrial development, the defense of intellectual property wasn’t a priority for the country’s leaders. With most of the innovation being brought into the country by foreign companies — and technology transfer, from Western to Chinese companies, being the strategic imperative — China and Chinese companies weren’t as concerned with the unassailable integrity of intellectual property.

As China innovates, and develops competitive differentiation and business value from those efforts, Chinese companies and authorities will have a newfound appreciation for intellectual property. At that point, China will enact legal and regulatory reforms that will strengthen protections for intellectual property. By then, though, China will have more to protect, and more to lose.

If one views the evolution of China in this context, the country looks like the ultimate honey trap for Western technology concerns. Western companies could not resist what the country offered — low-cost manufacturing operations and a vast market for commodities and consumer goods. Even though these foreign companies knew that doing business in China entailed significant risks, including the loss of valuable intellectual property, they took the plunge because their greed outweighed their fear, the temptation was too great.

In the future, we probably won’t see many stories about execrable working conditions at Chinese contract manufacturers. At some point, low-cost manufacturing sweatshops will move elsewhere, and the bad news coming from China will be on a different scale entirely.

Lenovo Buys Back Lenovo Mobile to Reenter Chinese Handset Market

Lenovo is getting back into the mobile-phone business in China, according to the Wall Street Journal. One has to wonder whether that was the plan all along.

In 2008, Lenovo withdrew from the handset market, selling Lenovo Mobile for $100 million to group of investors led by Lenovo Holdings Ltd., the private equity arm of Lenovo’s parent, Legend Holdings Ltd. Back then, the rationale for the divestiture was that Lenovo wanted to place singular emphasis on its execution in the personal-computer business.

Then and now, though, Lenovo had to realize that the handset market in China would be a fast-growing, potentially lucrative market for many years to come. Run as a separate entity, Lenovo Mobile prospered, now ranking third by unit shipments in China’s mobile-handset market.

What’s more, Lenovo Mobile apparently got its financial house in order after leaving the official Lenovo fold. That’s one of the reasons Lenovo has decided to buy it back with for $200 million in cash and shares sourced from “internal resources.” The main reason, of course, is that the Chinese cell-phone market is an ever better place to be now than it was in 2008, which — even for the those afflicted with attention-deficit disorder — wasn’t that long ago.

Lenovo has a prototype mobile Internet device (MID) in the works, and Lenovo-branded handsets will be released shortly. Again, it makes one wonder whether the spin-out-to-spin-in strategy wasn’t in the playbook from the outset.