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China's investment in the United States and the public relations implications: A case study of the Lenovo-IBM acquisition
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China's investment in the United States and the public relations implications: A case study of the Lenovo-IBM acquisition

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Content CHINA’S INVESTMENT IN THE UNITED STATES AND THE PUBLIC RELATIONS IMPLICATIONS: A CASE STUDY OF THE LENOVO-IBM ACQUISITION by Shuyan Liang A Thesis Presented to the FACULTY OF THE USC GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree MASTER OF ARTS (STRATEGIC PUBLIC RELATIONS) May 2011 Copyright 2011 Shuyan Liang   ii Acknowledgements My life is like a train ride. Some people came and left. Others stay. With my deepest gratitude I wish I could thank every person who has come into my life and inspired, touched, and illuminated me through their presence. They have made this journey enjoyable and worthwhile. I would like to acknowledge the following people, in particular, for their magnificent support and guidance in the completion of my master’s degree and in the creation of this paper. Jonathan Kotler, my thesis committee chair and mentor, has generously shared with me his wit and wisdom in life and helped me advance academically and professionally. I really appreciate his patience with me and thank him for recognizing my potential to pursue further education. He sets a fine example of what a great teacher should be, with his integrity, humor, responsibility and commitment to excellence. Jian (Jay) Wang and Jennifer Floto, my other two thesis committee members, have given me very valuable advice. Jay helped me develop my understanding of communication management. Jennifer saved me from errors and overstatements. Andrew Lih has inspired me to write on this subject. Jonathan Aronson has shared with me his insights. To them, I am truly thankful. I owe a great deal to Thomas Hollihan who gave me detailed comments on the entire paper and has improved it in countless ways.   iii Special thanks go to Manuel Castells and Henry Jenkins, two of the most influential scholars in the field of communication. I have walked in the shadows of their greatness, and I respect them sincerely. Their recognition of my intellectual capacity means a great deal to me and their writings lit a burning fire of desire within me to enter the realm of academia. Steven Harris, Jerry Swerling, Daniel Gaines, Laura Jackson, offered me tremendous help during my studies at the USC Annenberg School for Communication & Journalism. I thank them all. I am also grateful to Stanley Rosen, Professor of Political Science, for illuminating me about politics in the People's Republic of China, Chinese film and Chinese society. I would like to express gratitude to all the generous teachers and broad-minded thinkers, all the intelligent colleagues and sincere friends, who I have met during my studies at the University of Southern California in the past two years. Finally, my writing reflects my personality, and whether personality is shaped by nature or nurture, I thank my parents. They received only a limited education in China and do not speak or read English, yet they gave me the greatest education one could have, an education based on love, justice, and an appreciation for others. It is neither a small achievement nor a small sacrifice for them to send me to study at one of the finest universities in the United States. I thank them for their loving support. It is to them that I dedicate this paper.   iv Table of Contents Acknowledgements ii List of Tables vi Abstract vii Chapter 1: Introduction 1 1.1 Rationale of the Study and Research Questions 1 1.1.1 Why Study Acquisitions by Chinese Companies in the U.S. 1 1.1.2 Research Questions and Hypotheses 3 1.2 Chinese Companies are on a Shopping Spree 4 Chapter 2: Case Analysis of Lenovo-IBM Acquisition 8 2.1 Organization Overview 8 2.2 The Acquisition Deal 9 2.3 Content Analysis of News Coverage 12 2.4 From Legend to Lenovo—The Name Matters 17 2.5 Branding Communication 18 2.6 More than Big Blue’s PC Business 20 Chapter 3: China’s Investment in the United States 22 3.1 Reasons For China’s Investment in the United States 22 3.1.1 Securing Resources to support Economic Expansion 22 3.1.2 Using Excessive Foreign Reserves 23 3.2 Organizations Supporting China’s Foreign Direct Investment 24 3.2.1 China Council for International Investment Promotion 24 3.2.2 China Investment Corporation 24 3.3 Resistance against China’s Investment in the United States 25 3.3.1 When National Security is at Stake 25 3.3.2 Economic Protectionism 31 3.4 Problems Facing Chinese Companies Going Global 33 3.4.1 Lenovo—the Trendsetter or One of A Kind? 33 3.4.2 Big but Anonymous? 34 Chapter 4 Public Relations Implications 39 4.1 China’s Unfavorable National Image in Western Media 39 4.2 Public Relations Aspects of Mergers and Acquisitions 42 4.2.1. Lenovo’s Communication Strategy Overview 43 4.2.2. Suggestions and Observations 47   v Chapter 5: Closing Remarks 50 References 53   vi List of Tables Table 1. Major Bids for American Firms by Chinese firms 6 between 2005 and 2010 Table 2. Preliminary PC-makers’ World Market Share Estimates 11 Table 3. Global 500 Companies from China in 2005 and in 2010 35 Table 4. Lenovo’s High-ranking Personnel Appointment after 46 the Acquisition   vii Abstract This paper discusses Lenovo’s acquisition of IBM’s personal computer division in 2005 as a case in point to explore issues involved in China’ investment in the United States, particularly its public relations implications. It is demonstrated that media coverage underscored the complications and tensions in these supposedly free market activities. This paper presents the manifestation of controversial issues such as state-ownership of businesses, national security, and economic protectionism, as Chinese enterprises invest in the United States through mergers and acquisitions. It provides an account of Lenovo’s communication strategies and gives suggestions to better manage corporate reputation and brand images for Chinese companies that are seeking overseas investment.   1 Chapter 1 Introduction 1.1 Rationale of the Study and Research Questions 1.1.1 Why Study Acquisitions by Chinese Companies in the U.S. China has been regarded as “the world's biggest factory” 1 , the manufacturing base for the biggest international names such as Nike, Nokia and Motorola. In contrast, Chinese brands—with the exception of Tsingtao Beer and a handful of others—have not yet gained international recognition. Until recent years, the global dimension of China’s economic rise had been a flood of exports to the world and a surge of foreign investment in China, as major international brands scrambled to gain a favorable position in the world's most dynamic market. In 2005, Lenovo acquired IBM’s PC division, and it became a symbolic beachhead for other Chinese businesses eager to build their global presence through acquisitions or investments in overseas companies. These efforts have won the support of the Chinese government, which is determined to drive foreign direct investment (FDI) in regions ranging from Latin America to Australia and from Europe to the United States. In the U.S., however, Chinese companies seeking international competitiveness will undergo close scrutiny. Political sensitivities, a lack of managerial experience, and contrasting business cultures, all lead to complications. For                                                          1  Zhibin Gu and Andre Gunder Frank, China's global reach: markets, multinationals, and globalization (Fultus Corporation, 2006) 42.   2 instance, in 2005, Chinese appliance maker Haier weighed a bid for Maytag, then the No.3 American appliance maker, before stepping back. Acquisition deals by Chinese companies in the United States have often prompted national debates and political intervention in both countries. In 2005, American politicians made an effort to block an $18.5 billion cash bid made by the China National Offshore Oil Company (CNOOC) for Unocal, the oil giant in El Segundo, Calif., on the grounds of a need to safeguard national security. U.S. Rep. Richard Pombo of California said at a congressional hearing that a CNOOC takeover would have “disastrous consequences for our economic and national security.” 2 General Motors announced on Oct. 9, 2009 that the entire stake in the Hummer brand was to be sold to Sichuan Tengzhong Heavy Industrial Machinery and a group of private investors, but on Feb. 24, 2010, The Ministry of Commerce of China rejected Tengzhong’s bid. While not all deals have been closed, there has been a strong trend for Chinese companies to acquire American assets while the economic crisis was still palpable in America and while the Chinese Yuan remained strong against the U.S. dollar. In 2008, Ford Motor Company decided to sell its interest in Volvo Cars, and subsequently, Geely Automobile, one of the four largest independent private automobile manufacturers in China, decided to take it over. Geely signed a deal with Ford to acquire Volvo Cars for $1.8 billion on March 28, 2010 and closed the deal on Aug. 2, 2010.                                                          2 Todd Crowell. “Ever heard of Lenovo, Haier, CNOOC? You will.” Christian Science  Monitor, (30 June 2005) n.pag.    3 What makes these bids for Chinese companies’ acquisition of American firms succeed or fail? Is it government agencies? Investors? Public perceptions? What public relation lessons can Chinese businesses draw from previous examples, both successful and failed ones, as they look for expansion, technological know- how and management skills in developed economies? If purchases on the open market are thwarted, will China then seek more aggressive ways to secure its economic goals? The subject of this paper consists of dynamics and trade-offs of economics, politics, and public perceptions regarding Chinese investment in the United States. 1.1.2 Research Questions and Hypotheses This paper answers the following questions: 1. How did media coverage affect public perceptions about acquisitions by Chinese companies in the United States? 2. What were the reasons of increasing Chinese investment in the United States? What were the challenges facing Chinese companies? 3. What are the public relations implications of such acquisitions? This paper primarily analyzes the 2005 Lenovo-IBM acquisition deal to test the following hypotheses: 1. Media coverage on acquisitions by Chinese companies in the United States differed in China and in the U.S., and in the U.S. this coverage was more   4 negative. 2. American public has come to regard Chinese companies’ products as cheap and of low quality. Chinese businesses’ ties to the communist party adversely affect their brand images. 3. The U.S. government demonstrated resistance against acquisitions of American assets by Chinese companies. National security was a constantly raised concern. 1.2 Chinese Companies are on a Shopping Spree China’s high savings rate has resulted in a situation where many companies have excess amounts of cash on hand and Chinese banks have surplus deposits. As a result of all of this liquidity, Chinese companies have been positioned to become more aggressive buyers of overseas assets. Investment in energy and utilities sectors is designed to secure stable supplies to feed voracious domestic needs for economic development. A case in point is CNOOC. After it failed to acquire Unocal in 2005, it agreed to buy 33% of Chesapeake Energy’s Eagle Ford shale acreage in Texas for $1.27 billion in 2010. In industries such as electronics, the objective is frequently to learn technological skills and earn recognized global brand names, epitomized by the Lenovo-IBM deal. In 2005, Chinese firms owned merely 6% of global investment in international   5 business. 3 In 2010, Chinese investment accounted to 10%. 4 Concerns will intensify as China is determined to create its own set of “global champions”—30 to 50 internationally competitive and yet state-backed companies. 5 More deals are inevitable, but there is a long way to go for Chinese companies to prove successful buyers as the richer economies frown upon China’s rise. The world has been watching as the two biggest economies on Earth to date—the U.S. and China—are wrestling on the acquisition arena. The following chart shows the major bids for American firms made by Chinese firms between 2005 and 2010.                                                          3 “Special Report: The Dragon Tucks in - Chinese Companies Abroad; Chinese Companies Abroad," The Economist (2005): 71. 4 Audio, “Chinese Takeovers - The coming wave.” The Economist (2010). 5 See Note 3.   6 Table 1: Major Bids for American Firms by Chinese firms between 2005 and 2010 Source: Lenovo; CNOOC; Haier; Huawei                                                          6 See Note 2. 7  Ariana Eunjung Cha, “Telecom Firm in China Sets Sights on U.S. Market,” Washington Post (6 January, 2008) A1.  Year of Bid Industry Target Investor Chinese State Ownership Deal value 2005 Personal computer IBM (PC division) Lenovo Group About 28%; but it is a public company $1.75 billion 2005 Oil and Gas Unocal Corp CNOOC 100% state-owned $18.5 billion 2005 Home Appliance Maytag Corp Haier None; Haier is a “collective”, with 100 % profits retained by the company. 6 $1.28 billion 2008 Telecom Hardware 3Com Corp (16.5%) Huawei Technologies (with Bain Capital) None; Huawei is a private-held company, but research by Rand Corp indicated that Huawei has “deep ties” to the Chinese military 7 $2.20 billion 2010 Telecom 3Leaf Systems (intellectual property) Huawei Technologies None $2.00 million 2010 Oil and Gas Chesapeake Energy Corporation CNOOC 100% state-owned $1.27 billion   7 With regard to high profile M&A proposals such as thoses listed above, China has so far had very limited success. One of the few exceptions was the 2005 Lenovo-IBM acquisition. Nonetheless, Lenovo’s success came with media scrutiny, political tension and consumer doubts. In the following chapter, this particular case is deconstructed to illuminate some key issues involved in Chinese investment in the United States.   8 Chapter 2 Case Analysis of Lenovo-IBM Acquisition 2.1 Organization Overview International Business Machines (IBM) is a multinational computer, technology and IT consulting corporation headquartered in Armonk, New York. IBM is the world’s third largest technology company and one of the most valuable global brands. In 2010, IBM was ranked the 20 th largest firm in the U.S. by Fortune and the 33 rd largest globally by Forbes. Other rankings that year include Number Two best global brand (after Coca-Cola) by Interbrand, Number One green company by Newsweek, Number One company for leaders by Fortune, Number 15 most admired company by Fortune, and Number 18 most innovative company by Fast Company. 8 Lenovo Group Limited is a multinational computer technology corporation that develops, manufactures and markets desktop and notebook personal computers, workstations, servers, storage drives, IT management software, and related services. Amid the global dotcom bubble in the 2000s, Lenovo began to pump resources into sectors such as mobile phones, internet-related business and information technology services. The technology joy ride was short-lived as competition at home grew ferociously with the mainland's entry into the World Trade Organization, eating into Lenovo’s bottom line. After this ill-fated strategy                                                          6 “IBM Brand Ranking,” retrieved 1 April 2011 <http://rankingthebrands.com/Brand-detail.aspx?brandID=6>.   9 of diversification and a focus on the domestic market between 2001 and 2003, Lenovo chairman Yang Yuanqing said in an interview with the South China Morning Post, Lenovo shifted its business philosophy. “On the one hand, we’d optimize our advantages in the domestic market, on the other, use it to ‘attack’ the international market,” he said. 2.2 The Acquisition Deal Lenovo proposed to acquire IBM’s PC Company Division, which marketed the ThinkPad line of notebook PCs for approximately $1.75bn—$650 million in cash and up to $600 million in shares, giving IBM an 18.9% stake as well as $500 million in debt. 9 The U.S. private equity fund Texas Pacific Group was Lenovo’s fiercest rival. TPG offered about $100m less, all in cash, but IBM opted for Lenovo’s offer. The reasons were: (a) IBM wanted to retain a stake in the market it created with the first IBM personal computer in 1981; (b) IBM understood that China was a huge developing market for PCs and thus by retaining a stake in a partnership with a Chinese company they were far better positioned to profit in that market. Presumably, IBM’s stake in Lenovo also contributed to boosting confidence in the acquisition precisely because of the intricate connection between the two companies. The Committee on Foreign Investment in the United States, the government group that vets deals affecting national security, investigated the deal and eventually approved it.                                                          9 Mure Dickie, Francesco Guerrera, Justine Lau and Simon London. “Lenovo buys IBM’s PC unit for $1.75bn.” Financial Times. December 9, 2004.   10 The deal quadrupled Lenovo’s sales to more than $12 billon, allowed it to use IBM’s brand under license for five years and gave it control of the Think trademark. Lenovo also transferred its head office to the United States and kept IBM as preferred supplier of after-sales service outside China. This acquisition quickly raised Lenovo’s ranking in the global PC industry to No.3 in 2005—it was making at least 14 million units a year with annual revenue of $13 billion. By 2010, Lenovo remained the fourth largest vendor of personal computers in the world. 10 The following table shows the change of worldwide PC vendors’ market share.                                                          10 “Gartner Says Worldwide PC Market Grew 13 Percent in 2007,” Gartner press releases, retrieved 1 April 2011 <http://www.gartner.com/it/page.jsp?id=584210>.   11 Table 2: Preliminary PC-makers’ World Market Share Estimates Company 2003 Market Share (%) 2006 Market Share (%) 2007 Market Share (%) 2010 Market Share (%) Dell Inc. 16.7 15.9 14.3 12.0 Hewlett- Packard 16.2 15.9 18.2 17.9 IBM 5.8 / / / Toshiba 3.3 3.8 4.0 5.4 Acer 3.1 7.6 8.9 12.9 Lenovo 2.3 7.0 7.4 9.7 Others 52.6 49.8 47.1 42.1 Note: Data include desk-based PCs, laptops and netbooks, not tablets Source: Gartner; Bloomberg; Thomson Reuters   12 2.3 Content Analysis of News Coverage To better understand the nuances of the acquisition deal, the author performed a detailed content analysis of resulting news coverage and public statements made by various stakeholders—competitors, customers, Lenovo and IBM employees, politicians and industry experts. Characteristics such as positive and negative comments were captured. Positive Comments From Lenovo’s Chairman Yang Yuanqing: “Lenovo has always been a capitalist, profit-driven company. While the Academy of Sciences is a government agency,” he says, “it fills much the same role creating innovative companies as Stanford University does in the USA.” 11 State-ownership was definitely an unfavorable element in Lenovo’s brand building. Even with the IBM assets in the bag, Lenovo still faced relentless challenge to win over skeptics and secure investor interests. From Lenovo CEO Stephen Ward: “The people of Lenovo have built China’s No.1 computer company, a competitor in this market that I have admired and respected. They have out-performed everyone—including IBM,” he said. “Naturally, IBM will be the biggest customer of the new Lenovo. No IBM’er would ever give away their ThinkPad and now,                                                          11 Michelle Kessler. “Lenovo chief says it's still the same IBM ThinkPad,” USA TODAY (July 25, 2005) P.1B.   13 from Lenovo, it will be even better.” 12 To curb the risks of managing such a large foreign business and retaining IBM’s customers and employees, Lenovo appointed Stephen Ward Jr., IBM former head of IBM’s PC division and senior vice-president, as chief executive of the new Lenovo. From former IBM employees joining Lenovo: Speaking for former IBM employees who had joined Lenovo, Ms O’Sullivan, who headed the command centre in Raleigh, North Carolina, said they have been “very positive.” She described the new Lenovo as “an innovative global PC enterprise that is committed to excellence and customer service, and offers its employees great career opportunities.” 13 Negative Comments From mass media: Lenovo was described as “a controversial, newly formed company partly owned by China's Communist government” by USA Today’s reporter Michelle Kessler. 14 Fawning coverage of Lenovo’s branding strategy also included “Lenovo Is All                                                          12 See Note 9. 13 Bien Perez, “Lenovo off like a rocket with IBM unit under its belt,” South China Morning Post (9 May 2005) 3. 14 See Note 11.   14 Over the Place (Not in a Good Way)” in Marketing 15 and “Devoured by the Dragon” in Sunday Times (London) 16 . It is fairly typical for the media to project a Chinese company as an aggressor backed by a draconian communist government, which feeds on the preconceived concerns of China’s economic expansion. From competitors: “When was the last time you saw a successful merger or acquisition in the computer industry?” said Michael Dell, chairman of Dell Inc. 17 Lenovo’s acquisition will “create a lot of turmoil within IBM accounts” from which HP will benefit, says Duane Zitzner, head of Hewlett-Packard’s PC division. 18 It is not surprising that the two largest worldwide PC vendors would give negative comments on the deal that made Lenovo the third largest PC producer in the world. Nonetheless, these opinions represented some of the IT industry experts’ reservations on Chinese companies’ M&A capabilities. Even with more than two decades of economic reform in China, there is a granted belief that Chinese enterprises personify inefficiency, nepotism, poor transparency, and lack                                                          15 Mark Ritson. “LENOVO IS ALL OVER THE PLACE (NOT IN A GOOD WAY).” Marketing (8 June 2005) 22.  16 David Smith and Dominic Rushe, “ Devoured by the dragon,” Sundy Times (London) (12 December 2004). 17 See Note 9. 18 Mure Dickie, Justine Lau and Simon London. “IBM brand loyalty holds the key for Lenovo,” Financial Times (9 December 2004) n.pag.   15 of technology and management know-how. 19 From U.S. politicians: Right after the deal was announced, Rep. Don Manzullo, R-IL, fretted that “Lenovo staffers in the company’s Raleigh offices might be able to get into nearby IBM research labs and send cutting-edge technology to China.” 20 The national security issues were often cited by American politicians to oppose the deal. These concerns were regarded as legitimate and needed addressing properly. From customers: One previous loyal IBM user, network engineer Song Yingqiao would not buy IBM again: “It is a gut feeling. It feels uncomfortable; international IBM has become domestic Lenovo.” 21 Apparently, it was a major challenge for Lenovo to retain IBM’s customers. Mixed reviews from a Chinese customer: “Lenovo was really something to have pulled off such a deal,” said Ma Liyuan, a government worker in Shanghai. Ironically, she added that her next PC is more likely to be from HP. “I didn’t think much of the Lenovo PC I used to have and I                                                          19 Elaine Chan, “Taking Charge,” South China Morning Post (14 December 2005) 16. 20 See Note 11. 21 See Note 18.   16 feel IBM has now suddenly lost a lot of its cachet,” she says. 22 While positive comments emphasized the capitalist bent of Lenovo’s business and its dedication to excellence, negative comments originated from three issues. The first issue was that the deal might be abused because of Chinese government’s sizable stake in Lenovo. Back in 1984, Lenovo’s founders got about $25,000 in start-up money from the Chinese Academy of Sciences, a government agency. Chinese holding company Legend Holdings owns 41.3% of Lenovo's stock and is its biggest shareholder. In turn, the Chinese Academy of Sciences owns 65% of Legend Holdings and is its largest shareholder. 23 The concern is that Lenovo will pass the technology it gains from IBM to the Chinese government and possibly, to the military. On the face of it, this concern seems overdone because PCs are not at the cutting edge of advanced technology, and the U.S. does not have a monopoly over their manufacture. IBM in any case had already made them in China before the bid. The second issue was that national security would be harmed if industrial espionage were to happen. China could conceivably use the IBM facility in North Carolina as a base for espionage. It is pointed out that the Chinese government has a long history of using business and cultural activities as fronts for espionage of all types. 24 But suggestions that the deal could provide China with                                                          22 Ibid. 23 See Note 11. 24 Wayne Rash. “Suppose IBM-Lenovo Deal Doesn’t Happen,” eWeek (24 January 2005) n.pag.   17 opportunities for industrial espionage should be deemed as cold war paranoia. The third issue was quality control and brand positioning of the new Lenovo. A survey by WPP Group’s Millward Brown of U.S. reveals that most American and British consumers associated China with low-priced products and value for money and quality was cited as the “major hang-up.”25 Fascinatingly, not only IBM, but also other successful multinational technology companies like Nokia and Apple have been marketing products that are “Made in China” or “Assembled in China.” For consumers, “getting the right brand is more important than where the product comes from.” 26 Therefore, it is crucial for Chinese companies to build brands with a clear perception of quality. 2.4 From Legend to Lenovo—The Name Matters In fact, Lenovo has been working steadily to become China’s first globally recognized brand. In 2003, it changed its name from Legend to Lenovo “specifically because Legend was too common and already trademarked in the West.” 27 “Lenovo” is a portmanteau of “Le” (from Legend) and “novo”, Latin ablative for “new.” The Chinese name means “association” or “connected thinking” but can also imply creativity and imagination. “I can’t speak for others, but Lenovo sounds much more professional than                                                                                                                                                                       26 “Chinese marketers bent on going global,”Advertising Age, (14 March 2005) 16. 26 See Note 25. 27 See Note 2.   18 Legend, ” said Jonathan Kotler, a trial and appellate attorney and professor of journalism at the USC Annenberg School for Communication & Journalism. “Legend sounds like a bad stage name, but I have no problem putting Lenovo together with other reliable tech brands like Sony or Panasonic,” he said. Retaining “ThinkPad,” a well established, world-renowned name, was a strategic move on Lenovo’s part. Deepka Advani, Lenovo’s senior vice president and director of marketing said, “there will be no doubt that ThinkPad is made by Lenovo, just like iPod is made by Apple.” Lenovo’s strategy is to link its name with the better-known products (ThinkPads and ThinkCenters), until they become synonymous in the customer’s mind. This strategy should help Lenovo gain recognition. “The way the deal is structured, with IBM retaining a stake and putting its brand name on the line, will help them do that,” said Oded Shenkar, professor of international business at Ohio State University and author of The Chinese Century. 28 Consequently, it is critical to retain legacy—brand identity, local capabilities and people. But how? 2.5 Branding Communication A newspaper advertisement that Lenovo initiated in early May 2005 shows a man sitting in the shovel of a backhoe, working on a laptop computer. “How do you build new technology?” it says. “Start by building a new technology                                                          28 See Note 2.   19 company.” The text-heavy spot goes on to explain the fusion of IBM’s PC division into Lenovo. Before starting the new ads, Ogilvy, a unit of the WPP Group that has also been IBM’s longtime ad agency, mounted an internal communications campaign aimed at employees of Lenovo and the PC division, as well as some customers. An eight-page marketing brochure attempted to answer the question, “Does the world really need another PC company?” 29 These branding efforts, nonetheless, were not appreciated by all. Mark Ritson, an associate professor of marketing at Melbourne Business School, for example, remained skeptical about Lenovo’s success. “There will be great Chinese brands at some point,” Ritson said. “But some of them are going to fail spectacularly at first.” How did Lenovo respond to such views on its rebranding endeavor? “People tend to stereotype,” Deepak Advani, chief marketing officer at Lenovo commented. “Lenovo is a company that will shatter all stereotypes,” he said. 30 Lenovo has four core values at the heart of its brand: (a) serving customers, (b) accuracy and truth seeking, (c) trustworthiness and integrity, and (d) an innovative “can-do” spirit. 31 Lenovo can leverage these four values to fulfill its ambition of being technology-driven, service-oriented global brand.                                                          29 Eric Pfanner, “Lenovo tries to win the West; on Advertisting,” The International Herald Tribune (16 May 2005) 9. 30 See Note 29. 31 See Note 15.   20 Ritson regarded Lenovo’s position as “generic, pointless and ultimately dangerous,” 32 but branding is an ongoing investment, constant refinement of processes, and a long-term vision. Actions speak louder than words. Since Lenovo Group Limited announced the closing of the acquisition of IBM’s PC Division on May 1, 2005, Lenovo has been working its way to become one of the largest personal computing companies in the world and has won worldwide consumer confidence in its products. Lenovo reported global profitability, outpacing the industry in key emerging markets, as well as growth from the acquisition. According to Technology Business Research (TBR), by the end of August 2005, Lenovo has moved into the No. 1 position in notebook corporate customer satisfaction, and customer satisfaction rate in ThinkCenter desktops has grown by nearly 4% over the past 18 months. 2.6 More than Big Blue’s PC Business Lenovo has become the first state-controlled Chinese company to acquire an iconic global brand, together with the high profile and psychological leap of faith. In this sense, it is fair to say that the deal gave Lenovo more than Big Blue’s PC business. After the acquisition, Lenovo teamed up with Microsoft on launch market trials in China and India that would validate the market for pay-as-you- go personal computing in 2006. Lenovo is also the main sponsor of the 2008 Olympic Games. Lenovo also went into co-operation with big international brands like Visa, Coca-Cola and Kodak. In December 2008, Lenovo teamed up with leading Formula 1 Team Vodafone McLaren Mercedes.                                                          32 Ibid.   21 It is widely believed that the acquisition of ThinkPad has provided a better platform for Lenovo to involve other influential companies in its marketing strategy, which will inevitably help Lenovo on its way to becoming a global brand. In its 2010 Super Bowl advertisement, “Lenovo” no longer lives in the shadow of “ThinkPad.” Now Lenovo is marketed to consumers, independent from ThinkPad. It has become a valued and trustworthy tech company that not only makes “Think branded” products, but also unveils a suite of new products—including an Android-based tablet “Le Pad.” 33 The corona of the global brand Lenovo makes a bold statement of how far a Chinese company can go.                                                          33 Rupal Parekh, “Three Agencies Competing for Lenovo Global Ad Duties,” retrieved 1 April 2011 <http://adage.com/agencynews/article?article_id=148001>.   22 Chapter 3: China’s Investment in the United States In 2007, foreign acquisitions of American companies totaled $407 billion, an increase of 93% from the previous year. 34 Although Canada, Britain, and Germany topped the list of foreign investors, China is becoming an increasingly important player. According to the U.S. Treasury, China’s U.S. equity portfolio holdings increased from $1.4 billion in 2000 to $4 billion in 2006, and subsequently swelled to $93 billion in early 2010. According to Dealogic, a provider of financial data, Chinese acquisitions of equity stakes in U.S. companies reached $3.9 billion in 2009, climbing past the minimal levels seen a few years ago. 3.1 Reasons For China’s Investment in the United States 3.1.1 Securing Resources to support Economic Expansion Some critics have pointed out that China’s main overseas investments have been in the energy and mineral sectors—an indication that China is merely trying to secure resources essential to its economic expansion. After the hostile reception the Chinese encountered in CNOOC’s purchase of Unocal, Chinese oil companies have been looking to invest elsewhere: Canada, Australia, Ecuador, Sudan, Venezuela, Kazakhstan, and Russia. The state-owned China National Petroleum Corporation has oil and gas assets in 22 countries, while Chinese                                                          34 Ariana Eunjung Cha, “Weak Dollar Fuels China’s Buying Spree of U.S. Firms; Foreign Cash Ignites Political Concerns,” The Washington Post (28 January 2008) A1.   23 mineral companies have investments in places like Australia, Brazil, Chile, and the Philippines. 35 Chinalco which controls China’s largest aluminum producer, smartly partnered with American firm Alcoa to buy a 12% stake in mining giant Rio Tinto, to ensure it had continued access to aluminum for its continued development. 36 Apart from energy and minerals, China also invests in footwear, garments, electronics, appliances and so forth, “allowing Chinese companies to secure the complimentary resources they need to become internationally more competitive.” 37 3.1.2 Using Excessive Foreign Reserves Besides trying to secure strategic resources for its continued development, the Chinese government is trying to encourage outflows of capital from China to relieve pressure on the yuan. Excess liquidity has been fueling inflation in China and the Chinese government is under grave pressure to reevaluate the currency. Besides, a weak U.S. dollar and ailing U.S. economy tend to make U.S. companies that have fallen on hard times attractive to Chinese investors.                                                          33 Michael Enright and Sun Hung Kai, “China’s Economy Into the Future,” China Into the Future: Making Sense of the World’s Most Dynamic Economy, ed. W. John Hoffmann and Michael J. Enright. (Singapore: John Wiley & Sons (Asia) Pte. Ltd.) 39. 34 David Barboza and Julia Werdigier, “Alcoa and Chinese Rival Buy 12% Stake in Rio Tinto,” New York Times, Business Day (February 2, 2008) B1. 35 “U.S.-China Media Brief.” retrieved 1 April 2011 <http://www.aasc.ucla.edu/uschina/trade_investment.shtml>.   24 3.2 Organizations Supporting China’s Foreign Direct Investment It is noted that there are non-profit organizations and government-supported investment institutions that are trying to orchestrate an environment in which other countries favor China’s investment. 3.2.1 China Council for International Investment Promotion China Council for International Investment Promotion is a national non-profit organization responsible for promoting China’s inward and outward investment in line with China’s economic strategies, with a view to advancing economic development and social progress. The Ministry of Civil Affairs approved CCIIP’s formation in January 2006. Founded by the State Council—the chief administrative authority (Cabinet) of the People’s Republic of China, CCIIP reports to the Ministry of Commerce. One of the objectives of CCIIP is “to facilitate Chinese enterprises investing overseas and participate in international economic and technical cooperation projects.” 38 3.2.2 China Investment Corporation The China Investment Corporation is an investment institution established by the Ministry of Finance as a wholly state-owned company. About 70% of China’s foreign exchange reserves were tied up in low-yielding U.S. Treasury notes prior to 2007. To get a better return on investment, the Chinese government established the China Investment Corporation to manage a $208 billion (1.55                                                          38 China Council for International Investment Promotion, “About CCIIP,” retrieved 1 April 2011 <http://en.cciip.org.cn/english/about/about.htm>.   25 trillion yuan) sovereign wealth fund. 39 Unfortunately, CIC’s first move was a bust as it invested $3 billion of China’s national savings into the IPO of America’s best-known equity firm, the Blackstone Group, only to have the investment lose almost half its value since then. In December 2007, CIC also invested $5 billion for a 9.9% stake in the second biggest U.S. securities firm, Morgan Stanley, which was hard-hit by the U.S. sub-prime crisis. 40 These several failed major acquisitions have shaken CIC’s aim of being a proactive investor. On March 2, 2009, Chinese media reported that the CIC was shifting its investment strategy to focus more on real estate, resources, and other areas more tied to the “real economy.” 41 3.3 Resistance against China’s Investment in the United States 3.3.1 When National Security Is at Stake The United States has formally invited foreign investment since the late 1970s. In                                                          39 “China Investment Corporation unveils investment plan,” United States- Chinese Embassy (PRC), 7 November 2007, retrieved 1 April 2011 <http://www.china-embassy.org/eng/xw/t379014.htm>. 40 William Mellor and Le-Min Lim, “Lou Suffers Blackstone’s ‘Fat Rabbits’ in China Fund (Update 1),” Bloomberg (27 February 2008), retrieved 1 April 2011 <http://www.bloomberg.com/apps/news?pid=newsarchive&sid=at7tCLy lbz2U>. 41 “China’s Sovereign Wealth Fund Favors Real Economy", Economic Observer, 2 March 2009.   26 1983 President Reagan publicly announced, for the first time by an American president, that the United States welcomed foreign investment. “The United States believes that foreign investors should be able to make the same kinds of investment, under the same conditions, as nationals of the host country. Exceptions should be limited to areas of legitimate national security concern or related interests.” 42 The sale of port management business in six major U.S. seaports to a company based in the United Arab Emirates in 2006 raised the question of whether such a sale would compromise national security. National security issues were brought up again and again, and became a major determinant in the success or failure of a given acquisition. Examples were the acquisition of IBM’s PC division by Lenovo, the Unocal bid, and so forth. The agency responsible for reviewing national security issues raised by foreign investment is the Committee on Foreign Investment in the United States. “CFIUS is an inter-agency committee authorized to review transactions that could result in control of a U.S. business by a foreign person (‘covered transactions’), in order to determine the effect of such transactions on the national security of the United States.” 43 Simply put, CFIUS reviews the national                                                          42 See Reagan (1983). President George H. W. Bush also issued a statement on the subject; see George H. W. Bush, “White House Statement Announcing United States Foreign Direct Investment Policy,” 26 December 1991. 43 “Committee on Foreign Investments in the United States,” U.S. Department of Treasury, Office of the Assistant Secretary International Affairs, Office of Investment Security, retrieved 1 April 2011 <http://www.treas.gov/offices/internation-affairs/cfius/>.   27 security implications of a wide range of foreign acquisitions of, and investment in, U.S. businesses. In 1975, Gerald Ford established CFIUS by Executive Order 11858. The committee gained additional authority after Ronald Reagan delegated Presidential oversight to CFIUS by his Executive Order 12661 in 1988. In particular, CFIUS was directed to: (a) arrange for the preparation of analyses of trends and significant developments in foreign investments in the United States; (b) provide guidance on arrangements with foreign governments for advance consultations on prospective major foreign governmental investments in the United States; (c) review investments in the United States which, in the judgment of the Committee, might have major implications for United States national interests; and (d) consider proposals for new legislation or regulations relating to foreign investment as may appear necessary. The members of CFIUS include the heads of the following departments and offices: 1. Department of the Treasury (chair) 2. Department of Justice 3. Department of Homeland Security 4. Department of Commerce 5. Department of Defense 6. Department of State 7. Department of Energy 8. Office of the U.S. Trade Representative   28 9. Office of Science & Technology Policy The following offices also observe and, as appropriate, participate in CFIUS’s activities: Office of Management & Budget, Council of Economic Advisors, National Security Council, National Economic Council, and Homeland Security Council. By statute and regulation, CFIUS is authorized to review a transaction either upon a voluntary filing by either party to the transaction, or upon an agency notice filed by one of the committee’s members. 44 CFIUS’s inquiry for the Lenovo-IBM deal was a full investigation, which occurs in less than 1% of cross-border deals, according to former members of the committee. 45 The committee’s proceedings are secret. It is said that IBM “made more in the way of commitments and assurances than concessions, which might restrain its sales or product development.” 46 Consequently, Lenovo’s American employees, mainly in Research Triangle Park in North Carolina, would be separated from IBM workers in that industrial park who work on the development of other products. IBM engineers and executives dismantled a desktop PC and a ThinkPad notebook, part by part, to identify for the committee                                                          44 Regulations Implementing Exon-Florio, Code of Federal Regulations, title 31, sec. 800, App. A (1988). 45 Steve Lohr, “U.S. clears IBM sale to Lenovo; Chinese firm making several concessions to buy PC unit,” The International Herald Tribune (11 March 2005) 13. 46 Ibid.   29 where the components are produced and how the machines are assembled. Liu Chuanzhi, the Lenovo chairman, told Reuters that the company gave up access to the names of IBM’s U.S. government clients to win the clearance. “The lesson from the IBM experience is that the government is going to be difficult on them all,” said William Reinsch, president of the National Foreign Trade Council and a former trade official in the Clinton administration. 47 In his article “Deal-Breaker: FDI, CFIUS, and Congressional Response to State Ownership of Foreign Firms,” Rahul Prabhaker argues that state ownership of a given foreign firm seeking to acquire a U.S. firm significantly heightens the likelihood of a CFIUS review. Even if the transaction is approved, it will be blocked through political pressure or the foreign bidder will withdraw the bid. Thus, CFIUS is considered a “deal breaker.” 48 In 2005, there were 65 CFIUS notifications submitted, but there were only two investigations. The CNOOC-Unocal acquisition was one of the two. This deal was selected as one of the “Breakthrough Energy Deals” for 2005 by Investment Dealers’ Digest (Jan. 16, 2006). 49 Although CNOOC outbid Chevron, the proposed acquisition of Unocal by CNOOC was doomed due to state ownership. The                                                          47 Ibid. 48 Rahul Prabhakar, “Deal-Breaker: FDI, CFIUS, and Congressional Response to State Ownership of Foreign Firms,” 13 May 2009, retrived 1 April 2011 <http://ssrn.com/abstract=1420790>. 49 “CFIUS,” Skadden, retrieved 1 April 2011 <http://www.skadden.com/Index.cfm?contentID=47&practiceID=101&foc usID=1>.   30 independent nonexecutive directors of CNOOC terminated the proposal, believed not to be able to resolve U.S. government security concerns presented by the proposed transactions. The Chinese acquisitions of high-profile companies, especially those in the more sensitive and strategically important sectors like energy, information technology, or security (ports, for example), have met with much greater resistance from the U.S. government. Congress is particularly concerned about the motives of potential Chinese buyers who are usually owned by or have deep ties to the Chinese government, such as oil companies or sovereign wealth funds, or other ostensibly “private” companies that nevertheless lack transparency regarding ownership, such as Huawei Technologies. The major concerns about sovereign wealth funds like CIC appear to be: 1. Is there any hidden geopolitical strategy of ruining the U.S. economy? 2. Do SWFs have access to government officials and information not available to the ordinary investor, and engage in insider trading? Do they use their investments to eradicate competition in favor of their own homegrown companies? 3. Can SWFs destabilize U.S. companies by threatening to withdraw their equity over whichever reasons that might emerge? Interestingly, the U.S. has asked China to participate in the drafting of voluntary international “best practices” for sovereign wealth funds to be coordinated by   31 the International Monetary Fund. 50 3.3.2 Economic Protectionism On the one hand, the U.S. is “increasingly uneasy about competitive pressures coming from Asia, and the softening of domestic industry, ”said Lorenzo Codogno, an economist with Bank of America in London. 51 On the other hand, it needs to attract growing amounts of foreign investment to finance its gaping current account deficit. Lee Raymond, chairman of Exxon Mobil, sided with the free marketers, asserting that it was “a big mistake” to block the CNOOC bid for Unocal. 52 As China has been one of the greatest recipients of foreign investment, the hostility and resistance against its investment in other countries seems unjustifiable. With economic reform in the past quarter century, the Chinese government has been credited with creating and incubating the market, enhancing incentives to liberalize the economy and promoting inward foreign investment. Competition among localities was induced by the state to provide better infrastructures in order to attract capital. (Lee, 2009: 48) Although the perception, fed by the media, may be that China is on a global buying spree, the fact is that inward FDI into China—$74.8 billion in non-                                                          50 See Note 37. 51 Heather Timmons,"Britain, France and U.S. Squirm Amid Growing Wave of Foreign Takeovers: 1R Edition," International Herald Tribune: (2006) 15. 52 See Note 3.   32 financial FDI in 2007, or $82.7 billion in total FDI, representing an almost 14% increase over the previous year—far exceeds China’s outward FDI, said to be around $20 billion. 53 U.S. foreign investment into China, while only a small fraction of total U.S. foreign investment in the world (less than 1% of total U.S. FDI in 2006 on a historic cost basis), and only a small component of total FDI into China, is nevertheless still considerably larger than Chinese investment in the United States ($600 million China FDI in the U.S. in 2006 compared with $22.2 billion of U.S.FDI in China). 54 It was not until 2009 that Chinese acquisitions of U.S. equity stakes surpassed U.S. acquisitions of Chinese equity stakes for the first time. 55 Therefore, the complaints by many American businesses and politicians that China can invest in U.S. companies with relative ease while China still tightly restricts access to Chinese markets and companies appear to be groundless and comes from a sense of insecurity and economic nationalism or protectionism at best.                                                          53 Jason Subler, “Update-China investment inflows brisk despite scrutiny,” Reuters, 19 January 2008, retrieved 1 April 2011 <http://www.reuters.com/article/companyNews/idUSPEK32105200801 19>. 54 See Note 37. 55 JC de Swaan.“China Goes to Wall Street.” Foreign Affairs. 29 April 2010. Retrieved 1 April 2011 <http://www.foreignaffairs.com/articles/66398/jc-de-swaan/china- goes-to-wall-street?page=show>   33 3.4 Problems Facing Chinese Companies Going Global 3.4.1 Lenovo—the Trendsetter or One of A Kind? Skeptics harbored doubts that other Chinese companies would follow Lenovo in the trend of seeking international brands and markets. First, the domestic market is a large and growing one. If a Chinese company is able to clinch a substantial domestic market share, it can create a lucrative business. The high-growth prospects of many industries in China will act as a constraint on cross-border deals. In Lenovo’s case, the acquisition was not only to enter the global league, but most important, to cushion the blow of growing competition in the home market. The PC industry in China had been suffering from falling margins and overcrowding. Lenovo executives cited IBM’s PC business’s gross margins of 20% as part of its appeal, compared to Lenovo’s 15%. Second, there are few companies that encompass the caliber of Lenovo. Even groups with an avowed ambition to expand abroad, like Haier, have so far “focused on picking low-hanging fruit closer to home.” 56 And even for those that are equipped for overseas expansion and backed by the State Council, such as CNOOC, the risks are high. CNOOC was forced to withdraw its $18.5 billion all- cash bid for Unocal on U.S. political opposition, despite surpassing Chevron's rival offer of $17.3 billion. Third, the lack of experience in management posed challenges for mergers and                                                          56 Francesco Guerrera and Richard McGregor. “Deal devides opinion over future M&A trends,” FT Report - China Goes Global (May 2005) 18.   34 acquisitions deals. It took 18 months for Lenovo to close the deal with IBM. “Minmetals, a state-owned metals group, failed in its bid to buy rival Noranda because it could not close the deal before the expiry of the exclusive negotiations period,” concluded Francesco Guerrera and Richard McGregor. Bureaucracy might have been one reason, but Chinese companies’ lack of “killer instinct to close the deals” might have been the culprit. 57 3.4.2 Big but Anonymous? Chinese corporations have been rapidly gaining the attributes of global multinational giants. The number of Chinese companies listed as Fortune Global 500 jumped—from 16 in 2005 to 46 in 2010—by 187.5% within mere five years. Some of the companies, such as Sinopec and Huawei, are actively seeking and closing overseas M&A deals. But many of these Global 500 companies from China may never become household brand names. Few of them are consumer brands and most of them are in the industries of energy, minerals, banking and insurance.                                                          57 Ibid.   35 Table 3: Global 500 Companies from China in 2005 and in 2010 Company Global 500 Rank in 2010 Global 500 Rank in 2005 City 2010 Revenues ($ millions) Sinopec 7 31 Beijing 187,518 State Grid 8 40 Beijing 184,496 China National Petroleum 10 46 Beijing 165,496 China Mobile Communications 77 224 Beijing 71,749 Industrial & Commercial Bank of China 87 229 Beijing 69,295 China Construction Bank 116 315 Beijing 58,361 China Life Insurance 118 212 Beijing 57,019 China Railway Construction 133 / Beijing 52,044 China Railway Group 137 / Beijing 50,704 Agricultural Bank of China 141 397 Beijing 49,742 Bank of China 143 339 Beijing 49,682 China Southern Power Grid 156 316 Guangzhou 45,735 Dongfeng Motor 182 / Wuhan 39,402 China State Construction Engineering 187 / Beijing 38,117 Sinochem Group 203 287 Beijing 35,577 China Telecommunications 204 262 Beijing 35,557 Shanghai Automotive 223 / Shanghai 33,629 China Communications Construction 224 / Beijing 33,465 Noble Group 242 / Hong Kong 31,183 China National Offshore Oil 252 / Beijing 30,680 Citic Group 254 / Beijing 30,605   36 Table 3: Global 500 Companies from China in 2005 and in 2010, Continued China First Automotive Works Group 258 448 Changchun 30,237 China South Industries Group 275 / Beijing 28,757 Baosteel Group 276 309 Shanghai 28,591 Hutchison Whampoa 302 347 Hong Kong 26,938 COFCO 312 434 Beijing 26,098 China Huaneng Group 313 / Beijing 26,019 Hebei Iron & Steel Group 314 / Shijiazhuang 25,924 China Metallurgical Group 315 / Beijing 25,868 Aviation Industry Corp. of China 330 / Beijing 25,189 China Minmetals 332 / Beijing 24,956 China North Industries Group 348 / Beijing 24,150 Sinosteel 352 / Beijing 24,014 Shenhua Group 356 / Beijing 23,605 China United Network Communications 368 / Shanghai 23,183 People’s Insurance Co. of China 371 / Beijing 23,116 Jardine Matheson 382 / Hong Kong 22,501 Ping An Insurance 383 / Shenzhen 22,374 China Resources National 395 / Hong Kong 21,902 Huawei Technologies 397 / Shenzhen 21,821 China Datang Group 412 / Beijing 21,460 Jiangsu Shagang Group 415 / Zhangjiagang 21,419 Wuhan Iron & Steel 428 / Wuhan 20,543 Aluminum Corp. of China 436 / Beijing 19,851   37 Table 3: Global 500 Companies from China in 2005 and in 2010, Continued Bank of Communications 440 / Shanghai 19,568 China Guodian 477 / Beijing 17,871 Source: Fortune (July 25, 2005 and July 26, 2010)   38 China’s foreign investment in the world has been on the rise to support economic development and commercial expansion. Not-for-profit organizations such as CCIIP aim to facilitate Chinese enterprises investing abroad. Sovereign wealth fund CIC was established to manage a flux of foreign reserves. Encouraging outflows of excess capital is also a remedy for curbing inflation in China. CIC invested heavily in the United States, but Chinese acquisitions of U.S. assets have met with great resistance from the U.S. government. CFIUS reviews the national security implications of a wide range of foreign acquisitions of, and investment in, American businesses and the committee’s proceedings are secret. CFIUS is considered a “deal breaker” and its inquiry for the Lenovo-IBM deal was a full investigation. Meanwhile, Chinese companies have intrinsic attributes that dwarf their overseas expansions and it will be a long way to go for them to become internationally household brand names.   39 Chapter 4 Public Relations Implications As companies venture overseas, corporate reputation, a company’s intangible asset, is gaining increasing importance (Corporate Reputation Watch, 2003). Jay Wang, professor of strategic public relations at the USC Annenberg School for Communication & Journalism, argues that one of the essential tasks for business communicators is to examine and understand the “political ecology” of the host country market in order to effectively manage foreign public’s perception of the company and its brand (2007:134). Political ecology as used in this context means transactions representing exchanges based on social legitimacy and authority rather than those of goods and monetary resources (Hutt et al., 1986). One particular aspect of the political ecology of the United States that Chinese companies must grapple with is the national image of China and its implications for Chinese companies’ public relations and branding communication. 4.1 China’s Unfavorable National Image in Western Media At the 2006 China International Public Relations Conference, statistical analysis was released on how China was portrayed in American media 58 Among the 243 pieces of news randomly picked from coverage on China- related issues in 2005 from three major newspapers in the United States of America, Los Angeles Times, New York Times and Washington Post, that covered China-related issues, 64 pieces were objective news that described the fact itself; 83 items were negative news that purely blamed China; and                                                          58 Wang, Guoqing. Speech in the International PR Conference. Beijing. 2006, retrieved 1 April 2011 <http://www.scio.gov.cn/gzdt/ldhd/200606/t98646.htm> (translated from Chinese).   40 96 pieces were balanced reporting that represented both sides of the story…China’s national image had changed a lot since the 1990s, around the time of Tian’anmen Square Issue, when negative news reports about China were up to 60%-70% of regular coverage. The fast growth of China’s economy has enticed huge interest by American media. Quotes from China’s central government have obviously increased, but negative reporting still accounted more than 30%. The issue of Chinese acquisitions of U.S. assets has been generating ambivalence and unease among Washington’s politicians and in the U.S. business media. Elsewhere, reports about Chinese acquisitions or economic boom often shed a negative light, such as “The Dragon Tucks in” and “Being Eaten by the Dragon; Chinese Takeovers” in The Economist, a British weekly news and international publication with an average circulation of over 1.6 million copies per issue, about half of which sold in North America. 59 An unpopular national image is assumed to drive Chinese business ties out of the international mainstream. For China, the issue is a test both of its efforts to encourage Chinese companies to expand abroad and of its broader relationship with the U.S. For the U.S., summarily rejecting Chinese bidders would cut off an increasingly important source of such investment and would raise questions about Washington’s commitment to the deepening of economic ties that has underpinned improved diplomatic relationship with China. “To spread the ‘China Threat’ and try to curb China’s progress and starve its energy needs is not in the interest of world stability and development. Such attempts are doomed to                                                          59 “Worldwide circulation vitality,” The Economist, retrived 1 April 1, 2011 <http://ads.economist.com/the-economist/circulation/worldwide- circulation/>.   41 fail,” said Zhang Guobao, vice-chairman of China’s National Development and Reform Commission, during a visit to an energy conference in New Orleans in 2005. 60 Needless to say, the deep involvement of the Communist Party in the Chinese economy poses a significant challenge. One may contend that just as Japanese and Korean companies overcame skepticism to succeed abroad, so China’s ambitions should be taken seriously. Certainly, Japan and South Korea encountered distrust from Washington, mass media and U.S. customers in the 1980s and now brands like Toyota, Honda, Sony Corp. and Sumsung Electronics are some of the most valued brands in America. The main difference is, while there were high-profile cases of resistance to Japanese investments, Japan was considered a close U.S. ally and not an adversary. Chinese companies, undoubtedly, face unique challenges—the brands come from a country that is still communist, a pernicious notion in the West. Elizabeth C. Economy (2007), Senior Fellow and Director for Asia Studies of Council on Foreign Relations noted that The turning point of Chinese economic development came in 1978 when Deng Xiaoping became the unofficial leader of the nation. In an effort to encourage economic growth and increase the standard of living among Chinese people, Deng instituted a series of reforms that overhauled Maoist policies concerning China’s economy. It was during these reforms that China moved away from the traditional communist style command economy and began to participate in world markets. International trade along with foreign investments invigorated the Chinese economy and brought revenue to the starving nation. The Chinese dual track economic system, in which state owned companies cooperated with private-owned                                                          60 See Note 3.   42 enterprises, promoted technological advancements and the diversification of industry. [However,] there is still a large portion of the Chinese economy that is state directed…The government keeps a big finger in the economic pie.” For instance, Haier’s longtime CEO, Zhang Ruimin, likes to call himself the “Chinese Jack Welch” after the famous American business icon and former head of GE, but Jack Welch was never a member of the Central Committee of the Chinese Communist Party. 61 4.2 Public Relations Aspects of Mergers and Acquisitions While public perceptions of China and the state involvement in businesses are inevitably impacting public perceptions of Chinese companies, strategic public relations provides a powerful way to give the best possible impression of the business—engineered to create intrinsic value, maximize market impact and desirability. Penetrating a foreign market does not happen overnight, but rather takes painstaking efforts and tremendous amount of time and patience. The combination of the language barrier and the cultural barrier makes any merger and acquisition transaction difficult from a communication standpoint. The approach to globalize through purchasing part of a well-known company is beyond reproach a good strategy. Lenovo’s acquisition of IBM’s PC business was said to “bring confidence and pride to all Chinese people.” 62 But even in such a                                                          61 See Note 2. 62 “With Lenovo, from Legend to IBM,” Bloomberg Businessweek (5 May 2005).   43 successful case, there were noted issues: (summarized by former chairman and co-founder of Lenovo, Liu Chuanzhi 63 ) (a) keeping the original IBM employees with the new company; (b) retaining original clients and customers of IBM; (c) integrating the business operations of the two vastly different companies; and (d) facing potential cultural conflicts. 4.2.1. Lenovo’s Communication Strategy Overview To examine Lenovo’s communication strategies and messages pre-, during and post-acquisition will be of great help for other Chinese companies in their global M&A adventures. Message I: Lenovo is a company of openness and honesty. Strategy: Have a team of “media-friendly” high-ranking officers Timely, coherent and honest messages will jump start in trust building. Mergers and acquisitions are of a sensitive nature and thus in reality executives of the companies can be reluctant to disclose information. However, that is no excuse for hiding information. Equivocal responses were given when asked about Huawei Technologies’ ownership; Lenovo’s top executives and chairman, in comparison, did not shun from the media during or after the acquisition. Instead, they openly discussed controversial issues such as state ownership and culture clashes. On Sept. 22, 2005, it was announced that Lenovo Founder Liu Chuanzhi was                                                          63 Ibid.   44 honored by National Committee on U.S.-China Relations in recognition of his notable contributions to building relations between the United States and China. 64 Human talent is quintessential. Successful PR programs showcase key players in appropriate ways: their experience and practical vision. Message II: The new Lenovo is not Chinese-based, but a global corporation. Strategy: Establish a new headquarters, hire International executives, and retain American IBM’ers Lenovo decided to make an American the first CEO and to locate the company in the U.S. Besides the new headquarters in New York, Lenovo has major offices in Raleigh, N.C., and in Beijing. “This decision was made according to the interests of our shareholders,” Liu Chuanzhi explained. 65 To establish a global company, it is not uncommon to find a global CEO, regardless of his or her nationality. Lenovo originally considered maintaining two headquarters, but it chose to have “a global location” to “send a strong, clear message” to its investors. 66 In addition, Lenovo announced on June 26, 2007, that it would develop a new, state- of-the-art U.S. Fulfillment Center in the town of Whitsett in Guilford County, North Carolina and celebrated its grand opening 10 months later.                                                          64 See Lenovo’s news releases, Lenovo News- United States, retrieved 1 April 1, 2011 <http://www.Lenovo.com/news/us/en/press.html>. 65 See Note 62. 66 Ibid.   45 Steven Ward, “Mr. ThinkPad” and the first CEO, acknowledged the diversity of the new Lenovo executives—a group that was half Chinese, half American. 67 Below is a list of high-ranking personnel of the new Lenovo.                                                          67 See Note 11.   46 Table 4. Lenovo’s High-ranking Personnel Appointment after the Acquisition Date Appointee Position 08/17/2005 James P. Shaughnessy Senior Vice President, General Counsel 09/26/2005 Steven J. Bandrowczak Chief Information Officer 12/20/2005 William J. Amelio (succeeding Stephen M. Ward, JR) Chief Executive Officer and President 08/04/2006 Kenneth DiPietro Senior Vice President, Human Resources 08/07/2006 Rory Read Senior Vice President, Operations 12/13/2006 Cuong Do Senior Vice President and Chief Strategy Officer 02/19/2007 Yolanda Conyers Vice President, Cultural Integration and Diversity 03/20/2007 Gary Ng Vice President, Investor Relations 05/23/2007 Mary Ma (formerly Chief Financial Officer) Vice Chairman 07/18/2007 Michael J. O’Neill Senior Vice President, General Counsel 10/25/2007 Liu Jun Senior Vice President and President, Consumer Business Group 11/02/2007 Scott DiValerio Senior Vice President and President, Americas Group Source: Lenovo   47 Lenovo hires people from different nationalities, ethnicities, and from a wide range of different professional backgrounds. About 50% of its 19,000 employees came from the old Lenovo, the rest from IBM. The official language of the company is English, but many Chinese staffers didn’t speak it. Language classes were offered at Lenovo, and, according to mainland press reports, Chairman Yang not only moved his office to New York, but has been taking courses to brush up on his English. 68 Message III: Lenovo is a quality brand name. Strategy: Retain high consumer rating for Think products, and increase overall awareness and favorability of the brand name Lenovo TBR reports concluded that the company held firm to its No. 1 ranking in customer satisfaction for ThinkPad notebooks in the years 2005, 2006, 2007, and 2008. Lenovo not only achieved top rankings in notebook brand awareness (as ThinkPad is consistently strongest Notebook PC brand), but the company also won two Gold Awards at the 2006 Industrial Design Excellence Awards (IDEAs), entered global consumer desktop market with its own “IdeaCenter” Brand. 69 4.2.2. Suggestions and Observations For Chinese companies that are seeking expansion in the United States, there are several suggestions: 1. Change the perceptions about acquirer’s M&A knowledge and capabilities                                                          68 See Note 19. 69 See Note 64.   48 PR should stress the attributes that define a company’s market leadership and the advantage of the merger or acquisition: (A) the marketing channels built, (B) sales traction gained, (C) the value a company brings to the marketplace, (D) the human talent gained, and (E) the service/support infrastructure built. Among these attributes, human resources is a critical aspect in that spokespersons, ideally CEO or Chairman of the company, should not leave a vacuum for speculation and rumors, but financial, engineering and R&D teams are also viewed as an important asset. 2. Get to know the legacy of the target company and define the operating model for the new company early on Prior to M&A, there should be a viable business model of how the new company will operate and this plan should be communicated effectively. Will there be a new (global) headquarters? What is the composition of the new personnel? Where are the strongest market segments? Be more decisive, move more quickly and above all, shape the agenda of your marketplace and define your own story. 3. Integrate internal and external communication strategy to be a part of the M&A implementation Internal communication should focus on retaining talents of both companies and incorporating different organizational structures and distinctive cultures. Lenovo did publish a booklet circulated within the company to talk about the bright future of the new company.   49 External communication boosts customer confidence. PR should feed this with a sustained stream of customer-focused visibility. There are so many ways to showcase customer traction beyond the basic press release. Lenovo, however, didn’t take full advantage of the attractive consumer feedback. Text-heavy advertisements without a human touch were not the way to gain attention. 4. New Challenge and opportunity brought by Social Media Social media like blogs, Tweets, podcasts and RSS feeds – are a natural way to broaden discussions and stir up conversations. Companies should utilize relevant Web 2.0 and social networking tools to increase their chances of being noticed and to engage with stakeholders.   50 Chapter 5: Closing Remarks The Lenovo-IBM acquisition deal is a landmark case of China’s foreign direct investment in the United States. On the one hand, media coverage differed in the United States and in China, and Western media opted to be more critical and negative toward Chinese-based companies’ capabilities and legitimacy to go global. On the other hand, the U.S. media may have telescoped distrust of China among the public, but the people who are deciding whether to support or resist Chinese investment efforts are not much swayed by this. They depend on their own analyses. U.S. politicians and government agencies exert strong influence on Chinese investment deals. At times, they direct the tone of the conversations and dominate the public discourse on such topics. The Committee on Foreign Investment in the United States could single-handedly determine the outcome of supposedly free-market economic activities, if such activities were ruled by the agency as posing threats to national security. There are signs that the U.S. government is more welcoming of Chinese investment, which is of strategic importance to the United States. For better or worse, America’s economic capacity and its technological capabilities will be closely intertwined with China. Chinese companies, such as Lenovo and CNOOC, show the U.S. public the scale of ambitions swelling in Chinese corporate hearts. Their acquisition deals or proposals also highlight the degree to which they are backed by the Chinese government keen for global influence and resources. Names like TCL, Haier,   51 Huawei and Pearl River will soon become well known to Americans. It also bears watching if the backlash and media attention to this issue will single out China. In the meantime, one can expect a continued growth of Chinese foreign direct investment, including acquisitions by Chinese companies, be it private or state-controlled, in the United States. The weaker the U.S. economy becomes, the greater Americans will be ambivalent, torn between the need for jobs and the fear that Americans are going to end up “working for the Chinese.” 70 In addition, American firms are reluctant to welcome Chinese investments into the U.S. market, especially in the high-tech arena. Three major factors account for this reluctance: (a) the belief that the Chinese government unfairly manipulates the value of its currency; (b) the belief that intellectual property and privacy is not respected in China; and (c) the belief that the Chinese government unfairly subsidizes its exporters. It is open to dispute whether buying foreign companies is the best way for Chinese enterprises to succeed. But the trend is irreversible for China’s investment in developing and developed economies to continue to grow. In January 2011, Lenovo demonstrated its insatiable ambition for growth again—it is partnering up with Japanese computer maker NEC for a “strategic alliance.” 71 For some countries, China’s growth is formidable. They say that Napoleon was                                                          70 See Note 37. 71 Vlad Savov, “Lenovo and NEC partner up to become Japan's biggest PC vendor,” Engadget (27 January 2011), retrieved 1 April 2011 <http://www.engadget.com/2011/01/27/lenovo-and-nec-partner-up-to- become-japans-biggest-pc-vendor/>.   52 right about the hidden might of China, “for when she awakes, she will shake the world.”   53 References Barboza, David, and Julia Werdigier, “Alcoa and Chinese Rival Buy 12% Stake in Rio Tinto,” New York Times. 2 February 2008: B1. Cha, Ariana Eunjung. “Telecom Firm in China Sets Sights on U.S. Market,” Washington Post. 6 January 2008, A1. Cha, Ariana Eunjung. “Weak Dollar Fuels China’s Buying Spree of U.S. Firms; Foreign Cash Ignites Political Concerns,” The Washington Post. 28 January 2008: A1. Chan, Elaine. “Taking Charge.” South China Morning Post. 14 December 2005: 16. “China’s Sovereign Wealth Fund Favors Real Economy", Economic Observer. 2 March 2009. “Chinese marketers bent on going global.” Advertising Age. 14 March 2005: 16. “Chinese Takeovers - The coming wave.” The Economist (2010). Audio. Committee on Foreign Investments in the United States (CFIUS). U.S. Department of Treasury, Office of the Assistant Secretary International Affairs, Office of Investment Security. Retrieved 1 April 2011 <http://www.treas.gov/offices/internation-affairs/cfius/>. Crowell, Todd. “Ever heard of Lenovo, Haier, CNOOC? You will.” Christian Science Monitor. 30 June 2005. De Swaan, JC. “China Goes to Wall Street.” Foreign Affairs. 29 April 2010. Retrieved 1 April 2011 <http://www.foreignaffairs.com/articles/66398/jc-de-swaan/china- goes-to-wall-street?page=show>. Dickie, Mure, Francesco Guerrera, Justine Lau and Simon London. “Lenovo buys IBM’s PC unit for $1.75bn.” Financial Times. 9 December 2004. Dickie, Mure, Justine Lau and Simon London. “IBM brand loyalty holds the key for Lenovo.” Financial Times. 9 December 2004. Economy, Elizabeth, C. “Continuing Calls for More Democracy in China As Party Congress Begins [Interview with Bernard Gwertzman].” Council on Foreign Relations. October 15, 2007. Retrieved 1 April, 2011 <http://www.cfr.org/publication/14502/economy.html>. Enright, Michael and Sun Hung Kai, “China’s Economy Into the Future,” China Into the Future: Making Sense of the World’s Most Dynamic Economy, ed.   54 W. John Hoffmann and Michael J. Enright. Singapore: John Wiley & Sons (Asia) Pte. Ltd. “Gartner Says Worldwide PC Market Grew 13 Percent in 2007.” Gartner press releases. Retrieve 1 April 2011 <http://www.gartner.com/it/page.jsp?id=584210>. Gu, Zhibin, and Andre Gunder Frank. China's global reach: markets, multinationals, and globalization. Fultus Corporation, 2006. Guerrera, Francesco and Richard McGregor. “Deal devides opinion over future M&A trends.” FT Report - China Goes Global. May 2005: 18. Hsing, You-tien and Ching Kwan Lee (editors). Reclaiming Chinese Society: The New Social Activism. London: Routlege, 2009: 48. Kessler, Michelle. “Lenovo chief says it's still the same IBM ThinkPad.” USA TODAY. 25 July 2005: 1B. Lohr, Steve. “U.S. clears IBM sale to Lenovo; Chinese firm making several concessions to buy PC unit.” The International Herald Tribune. 11 March 2005: 13. Mellor, William and Le-Min Lim. “Lou Suffers Blackstone’s ‘Fat Rabbits’ in China Fund (Update 1).” Bloomberg. 27 February 2008. Retrieved 1 April 2011 <http://www.bloomberg.com/apps/news?pid=newsarchive&sid=at7tC Lylbz2U>. Parekh, Rupal. “Three Agencies Competing for Lenovo Global Ad Duties.” Retrieved 1 April 2011 <http://adage.com/agencynews/article?article_id=148001>. Perez, Bien. “Lenovo off like a rocket with IBM unit under its belt.” South China Morning Post. 9 May 2005: 3. Pfanner, Eric. “Lenovo tries to win the West; on Advertisting.” The International Herald Tribune. 16 May 2005: 9 Prabhakar, Rahul. “Deal-Breaker: FDI, CFIUS, and Congressional Response to State Ownership of Foreign Firms” 13 May 2009. Retrived 1 April 2011 <http://ssrn.com/abstract=1420790>. Rash, Wayne. “Suppose IBM-Lenovo Deal Doesn’t Happen.” eWeek. 24 January 2005. n.pag. Ritson, Mark. “LENOVO IS ALL OVER THE PLACE (NOT IN A GOOD WAY).” Marketing. 8 June 2005: 22. Savov, Vlad.“Lenovo and NEC partner up to become Japan's biggest PC   55 vendor.” Engadget. 27 January 2011. Retrieved 1 April 2011 <http://www.engadget.com/2011/01/27/lenovo-and-nec-partner-up-to- become-japans-biggest-pc-vendor/>. Smith, Mark, and Dominic Rushe. “Devoured by the dragon.” Sundy Times (London). 12 December 2004. n.pag. “Special Report: The Dragon Tucks in - Chinese Companies Abroad; Chinese Companies Abroad." The Economist. 2005: 71. Subler, Jason. “Update-China investment inflows brisk despite scrutiny.” Reuters. 19 January 2008. Retrieved 1 April 2011 <http://www.reuters.com/article/companyNews/idUSPEK32105200801 19>. Timmons, Heather. “Britain, France and U.S. Squirm Amid Growing Wave of Foreign Takeovers: 1R Edition.” International Herald Tribune. 2006: 15. Wang, Guoqing. Speech in the International PR Conference. Beijing. 2006. Retrieved 1 April 2011 <http://www.scio.gov.cn/gzdt/ldhd/200606/t98646.htm> (translated from Chinese). Wang, Jay. “Consumer nationalism and corporate reputation management in the global era.” Corporate Communications. Vol 10 No. 3, 2005: 223. Wang, Jian and Zhiying Wang. “The political symbolism of business.” Journal of Communication Management. Vol. 11 No.2, 2007: 134. Wilcox, Dennis L. et al. Public Relations Strategies and Tactics (8th Edition). Boston: Allyn and Bacon, 2005: 378. “With Lenovo, from Legend to IBM.” Bloomberg Businessweek. 5 May 2005. Retrieved 1 April 2011 <http://www.businessweek.com/technology/content/may2005/tc200505 5_0366_tc121.htm>. “Worldwide circulation vitality.” The Economist. Retrieved 1 April 1, 2011 <http://ads.economist.com/the-economist/circulation/worldwide- circulation/>. 
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University of Southern California Dissertations and Theses 
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Asset Metadata
Creator Liang, Shuyan (author) 
Core Title China's investment in the United States and the public relations implications: A case study of the Lenovo-IBM acquisition 
School Annenberg School for Communication 
Degree Master of Arts 
Degree Program Strategic Public Relations 
Publication Date 05/04/2011 
Defense Date 04/30/2011 
Publisher University of Southern California (original), University of Southern California. Libraries (digital) 
Tag China,foreign direct investment (FDI),IBM,Lenovo,mergers and acquisition (M,North America,OAI-PMH Harvest,public relations (PR) 
Place Name China (countries), USA (countries) 
Language English
Contributor Electronically uploaded by the author (provenance) 
Advisor Kotler, Jonathan (committee chair), Floto, Jennifer (committee member), Wang, Jian (Jay) (committee member) 
Creator Email shuyanli@usc.edu,shuyanliang.usc@gmail.com 
Permanent Link (DOI) https://doi.org/10.25549/usctheses-m3902
Unique identifier UC1276133 
Identifier etd-Liang-4567 (filename),usctheses-m40 (legacy collection record id),usctheses-c127-469621 (legacy record id),usctheses-m3902 (legacy record id) 
Legacy Identifier etd-Liang-4567.pdf 
Dmrecord 469621 
Document Type Thesis 
Rights Liang, Shuyan 
Type texts
Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection) 
Repository Name Libraries, University of Southern California
Repository Location Los Angeles, California
Repository Email cisadmin@lib.usc.edu
Tags
foreign direct investment (FDI)
Lenovo
mergers and acquisition (M
public relations (PR)