Academic journal article The McKinsey Quarterly

A Computer Legend in the Making

Academic journal article The McKinsey Quarterly

A Computer Legend in the Making

Article excerpt

Tycoon Liu Chuanzhi, the chairman of Legend Holdings, explains how his company became China's--and Asia's--leading manufacturer of PCs.

When people in most parts of the world want to buy a personal computer, they usually think first of the well-known brands: Compaq, Dell Computer, and IBM, for example.

Not so in China. There the branded PC of choice is called Legend. Never heard of it? Perhaps not for long, if Liu Chuanzhi has his way. Since 1984, Liu, the chairman of Legend Holdings, has built his company into China's (and Asia's) number-one manufacturer of PCs, with more than $3 billion in revenue. Legend expects to double that figure in three years.

Although still controlled by the state, Legend is a public company, and its shares trade on the Stock Exchange of Hong Kong. Liu is a forceful advocate for going public and a pioneer in China in the use of stock options. In the following interview, conducted in Hong Kong by Allan Gold, Glenn Leibowitz, and Tony Perkins, Liu discussed the challenge of shaping a successful market-based company in China and the prospects for Legend in the hypercompetitive technology sector.

The Quarterly: Please tell us about the origins of Legend and how you went about building the company.

Liu Chuanzhi: I came out of the Chinese Academy of Sciences, where I was doing work on magnetic storage. But I had to put my designs to the side because there was no way to turn them into products. In 1984, when the market reforms in China were starting to take effect, the country's leaders called for the conversion of research and development results into products that could be marketed. I was excited about doing this type of work, but most people didn't understand it. Chinese people put scientific work on a pedestal, while commercial activities were looked down upon.

More important, although our company was a state-owned enterprise, we structured it as a private company from the beginning. I had to raise capital from banks and outsiders. The initial investment of 200,000 ren min bi [1] was so small that it was barely enough to get started.

The government did give me a very good opportunity. When I discussed terms and conditions, I requested the authority to make decisions myself. I didn't want the government to decide who would work for me. In addition, I had financial decision-making power. I could determine the wages and bonuses of our employees, and I didn't have to do so according to what the government told me.

As time went by, I wanted Legend to make its own PCs because we were technology experts. But at the time, China was entirely a planned economy. The government wouldn't permit us to produce computers, because in China you had to have a license. The government felt that China had many factories, so why should it give a PC license to a company such as ours? I therefore crafted a strategy to go to Hong Kong, which didn't require a license. We set up a company in Hong Kong, at first to do trading, and we later set up a factory. When China's Central Planning Department saw that we had the capability, it gave us a license. So we went back to China.

The Quarterly: How much did you rely on Western technology? Are there Western companies you try to emulate or Western chief executive officers from whom you would like to learn?

Liu Chuanzhi: When we started to work as a distributor for foreign companies, we discovered that management was something we had to learn. So we learned from foreign companies while gaining an understanding of China's computer market.

Our earliest and best teacher was Hewlett-Packard. It was as HP'S distributor that we learned, rather thoroughly, how to organize sales channels and how to market. Later we did a lot of business for HP and helped it reach its leading position in China's computer market. We also studied the strategies of Intel and Microsoft. We constantly read foreign management journals. …

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