Little-Known PC Maker Is Legend in the Making

His youthful looks, easy manner and the company ID dangling from his neck all give Yang Yuangqing the image of a promising foot soldier in China’s march toward a free market economy.

Only the introduction identifies him as a general.

At 36, Yang is president and chief executive of Legend Holdings Ltd., China’s premier high-tech company and one its most remarkable commercial successes. Much like Yang himself, Legend has a deceptively low profile despite its near-vertical growth.

Although its sales jumped by nearly 60% last year to $3.5 billion--enough to make it the Asia-Pacific region’s biggest personal computer maker outside Japan--Legend is what some in the industry call the biggest computer company no one outside China has ever heard of.

With a fairy-tale history, a commanding market share in China, one of the world’s largest and fastest-growing personal computer markets, and a future that points to only more growth, Legend seems to be a global player in the making.

Not yet, Yang cautioned.

“We have to take a very cautious, prudent attitude toward a global strategy,” Yang said in a recent interview at Legend’s gleaming steel-and-glass headquarters building in Beijing’s northern Haidian district. “We won’t take bold actions in overseas markets before we’re ready.”

Legend’s first tentative effort to sell computers outside China--a pilot project this year to market about 10,000 Taiwan-made notebook computers in Europe--is brushed off by Yang as a minor experiment and dismissed by other executives as little more than a market study.

That language is conspicuously restrained for a company that has out-gunned and out-hustled the likes of IBM Corp., Hewlett-Packard Co. and Compaq Computer Corp. in its home market in a way that few other Chinese companies have managed to deal with global competitors. Legend is convinced it outpaced its U.S. counterparts by using superior marketing, better customer awareness and more thorough after-sales service--traditional American strengths, making the feat all the more remarkable.

A little-known bit player when China opened the doors of its computer market to foreign competition nine years ago, Legend today is No. 1, commanding about 30% of China’s personal computer market--more than its top four competitors combined. Analysts following China’s industrial growth predict Legend will be tough for anyone to catch.

“A poster child for modern Chinese industry,” summed up Duncan Clark, managing director of BDA (China) Ltd., a Beijing-based consultancy that tracks China’s high-tech industry. “They’ve done very well.”

Legend’s formula--using aggressive pricing and a competitive edge in packaging and marketing to sell existing technology--is not unlike the strategy employed by Michael Dell in the 1990s to conquer an important share of the U.S. personal computer market. In an interview with Times editors and reporters, Dell cited Legend as a dangerous competitor.

Legend’s success flows in part from the savvy and vision of its principal and founder, 57-year-old Liu Chuanzhi, but also from the accidents of history that have left the company strong but riddled with contradictions.

Among those contradictions:

* Legend’s roots are in research. It was founded in 1984 by 11 scientists from the Chinese Academy of Sciences, yet it has little of its own proprietary technology and counts on strong distribution, marketing and sales skills for its edge. Only now, after becoming a market leader, does Legend see development of its own technology as a top priority.

“We need to have it,” Yang said.

* The company ultimately thrived because initially it was judged weaker than its Chinese competitors. It was forced to operate without the protection and spoon-feeding the Chinese government gave to so-called national champion enterprises.

* Legend competes with major foreign producers, yet it also remains a major distributor in China for some of them, including Hewlett-Packard and Toshiba Corp. To prevent conflict of interest, Legend’s distribution arm, Digital China Holdings Ltd., was spun off last year and is listed on the Hong Kong Stock Exchange as a separate company.

* It remains a state-owned enterprise (Legend’s parent company, Legend Group Holdings Co., is 65% owned by the Chinese Academy of Sciences), whose young president quotes from China’s economic blueprint, the 10th Five-Year Plan, yet adjusts quickly to customer needs and collaborates with industry leaders such as Intel Corp., Microsoft Corp., and National Semiconductor.

In June, Legend established a $200-million joint venture with AOL Time Warner Inc. in a deal that appears to offer strong benefits to both parties. It gives America Online an opening inthe world’s fastest-growing Internet market and strengthens Legend’s efforts to bundle quality Internet content with its computers. Initially, AOL is expected to help spruce up Legend’s own 18-month-old Internet portal, FM365.com, an effort that has drawn lukewarm reviews.

“By developing more applications, you can expand the market for the product as a whole,” Yang said, explaining the logic of Legend’s alliance with AOL.

In the fiscal year ended in March, Legend registered profit of $117 million and had a market value of just over $5.1 billion. It recently was rated by Business Week as China’s fifth-largest emerging market company, behind telecom giants China Mobile Ltd. and China Unicom Ltd., national offshore oil company CNOOC Ltd. and infrastructure conglomerate Citic Pacific Ltd.

Legend’s joint venture with AOL is the latest in a series of deals with top American information technology companies that many see as a key ingredient in the Chinese computer giant’s success.

Nearly a decade of working closely with these companies and their products has allowed Legend to absorb invaluable knowledge, according to those who have watched the company grow.

When Liu and his colleagues left the security of academic life at the Chinese Academy of Sciences in the mid-1980s with a mandate to commercialize some of the organization’s research results, they shared a common bond: None had any business experience.

Although quickly applauded for developing hardware that gave personal computers Chinese-language capabilities, they were denied a government license to manufacture computers. As a result, they were forced into trading and distributing imported machines.

According to Philip Sohmen, whose recently completed master’s thesis at Stanford University details Legend’s rise, that initial setback became a godsend. It forced Legend’s people to grow quickly on two fronts: They suddenly had to learn the intricacies of state-of-the-art foreign-made computers, and they had to learn China’s consumer market from shoe-top level.

“They learned the benefits and drawbacks of each computer and the ins and outs of the market,” Sohmen said, adding that Legend’s strong technical skills gave it a competence that attracted both suppliers and customers. With no manufacturing license for mainland China, Legend was forced to go to Hong Kong to produce motherboards, the main circuit boards in computers. Life in Hong Kong exposed Legend to the intense commercial pressures of an international marketplace.

As Legend grew into a leading motherboard producer, it forged an alliance with Intel, the world’s premier chip maker, testing its components in a deal that later would help sell Legend’s own computers.

When China slashed tariffs on imported computers and boldly opened its domestic market to all comers in 1992, once-protected computer makers were crushed. Within a year, the domestic producers’ market share had dropped from 70% to about 30%. Only one Chinese company was ready to counterattack: Legend.

Liu reorganized for the fight. He coaxed the Chinese Academy of Sciences to give the company’s old guard employees 35% of Legend’s equity for a dignified retirement. He then brought in young talent to produce computers. He listed his Hong Kong motherboard operation on the stock market--as much for the corporate transparency it imposed as for additional funding it brought, Sohmen speculated.

By 1995, Legend had carved out an 8% share of China’s PC market and was outmaneuvering its foreign competitors. It offered computers designed for Chinese consumers, armed with Intel’s latest chip, at prices that undercut imported PCs offering older technology.

After discovering that the majority of China’s prospective PC owners wanted to surf the Net but had no idea how to get there, the company developed the Tianxi computer, with simple one-button access to the Internet, and it waived the first year’s online fees. For older people befuddled by keyboards, it produced a model activated by touching the screen.

Positioning for strong PC growth among small and medium business enterprises, Legend last October launched a service package tailored for office automation, offering individual business solutions.

The result of all this: Legend’s share of China’s personal computer market jumped from 14% in 1998 to about 30% last year. However, in notebook computer sales, Legend is locked in a battle with IBM for leadership, with both companies holding about 20%.

With plenty of growth left in the nation’s fast-expanding computer markets, Yang leaves little doubt that Legend’s short-term game plan is focused almost exclusively within China. Independent analysts agree that this concentration makes sense. Market research firm International Data Corp., for example, predicts China’s PC market will grow 25% to 30% this year before settling into a slightly slower growth rate of about 15% over the next five years.

“There’s still good growth in this market and Legend definitely has its advantage,” said Kitty Fok, IDC’s associate director in Hong Kong. “I believe they will hold their top position.”

Because tariffs on imported computers were slashed several years ago, China’s impending entry into the World Trade Organization is unlikely to have a major effect on the high-tech sector, analysts say.

Those tracking the company worry more about Legend’s diversification into highly competitive markets such as mobile handsets.

“It’s so tempting for them to get into these areas because they’ve cracked the distribution problem,” Clark said.

Yang defends the lateral moves, saying each has its logic. He cited his company’s joint venture with AOL as an example, arguing that the ability to provide quality Internet content will help sell computers.

“It becomes a valuable feature,” he said. “It really helps our traditional business.”

Mobile handsets with both voice and data processing functions--so-called smart phones--are in the same category, Legend executives say.

Although expanding with confidence domestically, caution dominates Legend’s view of the world beyond China’s borders. Company executives say that once in foreign countries, Legend would lose its superior knowledge of both the consumer and the distribution network that gives the enterprise its edge at home.

Yang said Legend would first build up its component business overseas, then produce computers for third parties for export before launching its own brand in a foreign market.

He also voiced concern about China’s image in the world as a producer of sophisticated, high-quality goods.

“Sometimes you really need to establish the image, the brand, of a whole country,” Yang said. “Legend will be very cautious about going abroad.”