Wharton’s Take on the IBM-Lenovo Deal: Out of Touch

In the Hutong, Hiding from the Snow

I like Wharton’s Knowledge website. There are some extremely smart people at Penn’s B-school and they usually have something brilliant and insightful to say about most things.

Which is probably why their article about the Lenovo deal, The IBM/Lenovo Deal: Victory for China was such a disappointment. Some concerns:

1. Wharton Does Not Understand Public Relations: Marshall Meyer (IMHO one of the giants in organizational theory) who is touted as having “studied Chinese companies and travelled extensively in China,” says “Public relations is a big component of Chinese Management and a lot of people will see [the IBM/Lenovo deal] as a victory for China.” Now, either the esteemed Dr. Meyer doesn’t know the difference between “face” and “public relations,” or he doesn’t know much about Chinese companies and the way they are run. Or both.

As someone with just a little bit of experience with Chinese companies and public relations will tell you, Chinese companies care about face. Full stop. But public relations? Most Chinese companies think P.R. stands for “press release” or “Payoff the Reporter.” Chinese companies and their executives are notoriously unsophisticated when it comes to any form of corporate communications, and that’s a distinction I’m genuinely shocked Dr. Meyer missed. As an organizational theorist, he should know that despite a widely accepted practice to the contrary elsewhere in the world, Chinese companies still insist on placing public relations beneath marketing and 23 levels removed from the C-suite.

2. Wharton Thinks Lenovo is the Only Chinese Company on the World Stage: This pains me, because I really respect the work Dr. Michael Useem has done on leadership. But when he says “It is untrodden ground for a Chinese company to make a sudden, big move to operate on the world stage,” I can’t let that pass. Other Chinese companies going boldly down that direction who have preceded Lenovo:
a. Haier opening a factory to build refrigerators in South Carolina.
b. Huawei and 3Com creating a joint venture to sell each other’s gear around the world
c. China Netcom’s purchase of Asian Global Crossing
d. The TCL/Thompson merger that brought the RCA brand to China
Not to mention the recent move by China Minmetals to purchase a major Canadian mining company. C’mon, Dr. Useem. If I were in your class and made such a blatantly inaccurate statement in a paper, you’d nail me for it, and rightfully so.

3. Wharton Thinks Guanxi is Worth Hundreds of Millions of Dollars to IBM: Dr. Useem is not finished with himself, as he goes on to note that “‘government relationships are key in China. IBM sees this as an alliance. Maybe the price wasn’t as good as it could have been’ but IBM gets a definite payoff in the form of ‘better relationships.'”

As anyone on the ground here understands clearly, IBM doesn’t need to forego hundreds of millions of dollars (or tens of millions, or even a few million) in order to enhance its standing with the Chinese government. A recent study my firm conducted for an entirely different I.T. client made clear that IBM’s government relations were outstanding, that no doors were closed to it, and that this had all been accomplished simply by operating in China as a good corporate citizen. If IBM knowingly left any money on the table in the name of “better relationships,” I think shareholders are entitled to an explanation of why they paid for something they already had.

There is a bigger issue here, and it concerns me deeply. Dr. Useem, and many other highly respected academics, seem to be laboring under the mistaken impression that government relationships, or guanxi in the local vernacular, are critical to the success of a business. Don’t get me wrong, building and maintaining good contacts with the government is important in China. But it is far, far less important than it was a decade ago, and it is certainly no determinant of success. The two generational changes in leadership that have taken place in China over the past 15 years have had a major effect on the way governments and foreign enterprises work together. Bureaucrats, regulators, and ministers are much more comfortable evaluating and working with business executives, and there are sufficient regulatory and procedural measures in place to ensure this takes place systematically enough of the time that you don’t need Hu Jintao’s help to get a business license.

Even if IBM didn’t have the kind of relationships that it has built over the years, it would not need to spend millions to build those relations. I’ve helped much smaller companies do very well for a lot less, and the cost is dropping all the time because the process is getting so much more straightforward.

3. Wharton Doesn’t Understand the Value of Brand: Professor Christian Terwiesch, a professor of operations management, can’t understand why Lenovo paid so much for “the number three company in the PC market.” Apparently Dr. Terwiesch is having a hard time comprehending that perhaps Lenovo (whose brand name, let’s face it, sounds more like a French economy car than a computer) saw some very real value in the IBM and Thinkpad brands. Certainly BusinessWeek and Interbrand recognize that the IBM brand alone is probably worth something on the order of $53 billion. For the privilege of using that brand for 5 years, Lenovo pays about $350 million a year. Some would call that a bargain, but only if they understood the value of a great brand to a company that lacks one.

There are other mistakes, mainly small ones (spelling the name of the infamous techno-gadfly Fang Xingdong as Fang Zingdong, etc), but what really jumps out is how much better the insights and analysis are when they come from Gartner and the Chinese, and how unplugged Wharton comes across when it comes to both China and Technology.

If I were a trustee or an alumnus at Wharton, I’d be very worried. This is a clear sign that Wharton is in deep danger of losing whatever relevance it has outside of the Boston-Washington corridor.