Global Cachet Comes With Chinese Deal for IBM Unit

As a graduate student in Japan in the mid-1980s, Wenran Jiang marveled at how Sony, Panasonic, Toshiba and others proudly marched into the U.S., establishing well-respected brand names and buying landmarks like Rockefeller Center in New York and Columbia Pictures in Hollywood.

Jiang, a native of the industrial city of Harbin in northeast China, never imagined that companies in his motherland would undertake such global expansion.

Now, it appears, that moment has come.

China’s Lenovo Group said it was buying the personal computer business of IBM Corp., an American icon that had pioneered the PC market. The $1.25-billion purchase would catapult Lenovo -- virtually unknown outside of China -- into the world’s third-largest seller of PCs, giving it an internationally recognized brand and access to IBM’s technical and management capabilities.

More than that, in the eyes of many Chinese and others around the globe, the Lenovo-IBM deal represents a watershed in the Asian nation’s rise as a global economic power, moving beyond just churning out cheap goods from low-wage factories.

“This is a new Chinese business model emerging,” said Jiang, an associate professor at the University of Alberta in Canada. “It shows there is an integrated strategy that in order to break into the world markets, you have to be brand conscious, build up domestic production and dare to buy and expand.”

The Chinese want to possess quality brands in a host of products, including consumer electronics, home appliances, software and automobiles. And flush with U.S. dollars from their booming exports to America, the Chinese are looking to buy their way to world-class economic status.

Early this year, China’s TCL Group combined its television and DVD operations with French company Thomson to create the world’s leading maker of televisions, built around the RCA brand.

Shanghai Automotive Industry Corp., China’s top automaker and a partner of General Motors Corp., agreed in October to buy a controlling stake in South Korea’s Ssangyong Motor Co. and is in talks with Britain’s MG Rover Group Ltd. The goal: to gain footholds in overseas markets and produce at least 50,000 vehicles with its own distinctive moniker by 2007.

Appliance makers Haier Group and Kelong Corp. are seeking entrance into the U.S. market by building their own sales networks or buying well-known brand names. Haier has a refrigerator plant in Camden, S.C., and a New York sales office in midtown Manhattan.

Said Gao Yingjun, a manager at medicine exporter Tong Ren Tang: “Previously our slogan was ‘Where there is Chinese, there is Tong Ren Tang.’ Now it’s: ‘Where there are Westerners, there is Tong Ren Tang.’ ”

Lenovo’s plan to purchase IBM’s PC business carries huge symbolism and potential ramifications. Unlike the expansion of Japanese electronic firms, which painstakingly built up their own brands, Lenovo is looking to seize foreign markets and close the technical and business gap with rivals in developed countries much more quickly.

“It’s a very big opportunity for China,” said Yoshitaka Okada, a professor at Sophia University in Tokyo and an expert in Japan’s electronics industry.

The strategy is fraught with risk, he noted. About half of all mergers and acquisitions fail, Okada said, and it’s unclear how well Lenovo, which is partly owned by the Chinese government, can maintain brand quality.

Some IBM dealers in China said the marriage would dilute the IBM brand and hurt its sales in the Asian nation. “Customers might hesitate to buy an IBM in the short term, worried that the quality of the computers might decrease,” said Liu Qinhua, a salesman at an IBM ThinkPad shop in Shanghai.

But the potential reward is huge. Success at Lenovo could elevate it, and other Chinese companies that follow its lead, into the next stage of development. Many in China’s high-tech industry, sharing such hopes, were exuberant Wednesday.

“It’s a very proud thing,” said Li Kan, general manager of ISoftStone Technologies Ltd. in Shanghai, which was buzzing when news spread through the office about Lenovo’s acquisition. The software company, based in Beijing, has a sales office in Boston and is looking to expand in the U.S. and Asian markets through partnerships.

“One day,” Li said, “many, many more Chinese companies will play an important role in the world. This is the first big one.”

At the same time, with the aid of massive foreign investment, the Chinese are also trying to hatch their own brands and develop capabilities to produce such high-tech goods as semiconductors and telecommunications equipment. One factor in China’s favor: It has a huge bankroll to finance purchases.

Thanks to its trade surplus with the U.S., largely due to sales of low-tech products such as toys, bags and shoes, China has amassed foreign reserves of $540 billion. And instead of just spending the money on U.S. Treasury bills, the Chinese are scouring for productive assets around the world.

The international push comes after 25 years of market reform, which has vastly improved people’s living standards and created some of the most dynamic cities and companies anywhere. But there are questions about whether the Chinese have developed the sophisticated management know-how needed to compete globally.

The recent scandal involving Chinese-owned China Aviation Oil (Singapore) Corp., which is reeling from losses of as much as $550 million from trading in derivatives related to oil investments, has heightened concerns about China’s corporate governance practices.

Others have derided China’s role in the world as a “carrier economy,” merely a producer and handler of goods for foreign multinationals. For example, by some measures, the Chinese are already the world’s leading exporter of computers. But they are cheap models and command little if any premium.

Just as the Japanese expansion in the 1970s and ‘80s drew criticism abroad, the Chinese are almost certain to stir resentment as they go on a shopping spree and exert new economic power.

In Canada, China’s state-owned Minimetals’ proposal to pay about $5 billion for Canada’s largest mining company, Noranda Inc., has generated vigorous debate about what a takeover by the Chinese would mean for miners’ jobs.

In September, in the shoe-producing town of Elche, Spain, some 500 demonstrators set fire to Chinese-owned warehouses and demanded that the Spanish government restrict imports of shoes.

But China may not feel the intensity of emotion that the Japanese engendered two decades ago in America. For one thing, China is making its global foray while also opening its own markets wider to foreigners. Chinese companies also appear more interested in gaining access and learning rather than imposing their management techniques or way of doing business in other lands.

Nor is the purchase a pure capitalistic move to enhance profit immediately; IBM’s PC division was losing money. Moreover, Lenovo agreed to keep the business based in the United States and run by the current management team, with IBM holding a 19% stake in Lenovo.

“That’s important because it’s a clear indication that one of the things China is buying is expertise,” said Donald Straszheim, chairman of Los Angeles-based Straszheim Global Advisors, which has offices in Beijing and Shenzhen, China. “China knows that they don’t know how to run a company like this and how to navigate an American economy.”

Straszheim said he expected many more Chinese companies, high- and low-tech, to be swooping up established names. “They want to buy brands, not build them.”

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Times staff writer Terril Yue Jones in San Francisco and Zhang Xiuying of The Times’ Shanghai bureau contributed to this report