Q&A with Lenovo Founder Liu Chuanzhi

The current president of Legend Holdings discusses the evolution of the Chinese PC maker, the role of Chairman Yang, and the acquisition of IBM's PC division

As founder of Lenovo (LNVGY)—then known as Legend Group—Liu Chuanzhi has been one of the most important figures in China's emerging powerhouse economy. Over more than two decades, Liu, who helped form the company while working as a researcher at Beijing's Chinese Academy of Sciences, has presided over Lenovo's transformation into China's first multinational company. Liu, 62, has played a key role in choosing, nurturing, and developing much of the company's top management, including Lenovo Chairman Yang Yuanqing.

BusinessWeek's Beijing bureau chief Dexter Roberts met with Liu in Lenovo's Beijing offices. In a wide-ranging, two-hour interview, Liu, who now serves as president of parent company Legend Holdings, talked about Yang Yuanqing's rise to prominence as a Chinese business leader, the runup to the historic purchase of the IBM (IBM) PC division, and the State Dept. ban on using the company's laptops for classified work. Edited excerpts follow.

In the early 1990s, Lenovo was just entering the PC business and was faced with an onslaught of competition from Western PC firms. The stress was so great that you were hospitalized. How did that experience help you decide to more aggressively expand Lenovo's PC business?

In 1993 the Legend [the previous name for Lenovo] brand PC was not performing very well and our business was not going very well. We held a series of meetings to analyze the problem. We decided that there were some problems with our structure. We had one vice-president in charge of all sales, one in charge of all manufacturing, and one in charge of all research and development. This was a very scattered structure.

The key issue we faced was a lack of talent. Unlike other state enterprises that were restricted in their decision-making, Lenovo was free to make any changes it wanted within the company. So our real issue was talent: Could we find a really good person to run the PC business? We decided to promote Yang Yuanqing (now Lenovo's chairman) but were not 100% confident he was the right person. We had seen his many achievements but whether he could be successful running such a big business, we still did not know.

Because our business was going very badly, I was not able to sleep properly for a long time. This damaged my health so that I had to go to the hospital and stay there for three or so months. But this time in the hospital gave me an unusual opportunity. It enabled me to focus my energies on the most critical issues at Lenovo. During my stay in the hospital I thought long and hard about what direction the company should take and how it should be restructured, and who should be in charge of this new business.

The PC division was very successful from 1996 to 2000. Why was it such a success?

During those years Yuanqing used his deep understanding of the PC industry as well as his ability to quickly learn new things, and so was able to very successfully build the business. This also won him respect and trust from his team as a leader.

For example, Yuanqing realized that a key issue for success was to not keep inventory for too long. So he took several actions to reduce the operation cycle of the PC, to cut costs, and to reduce inventory. Second, Yuanqing paid much attention to the user in the market. For example, he promoted our one-button access to the Internet computer. At that time, it was very hard to access the Internet in China. One had to buy a modem, install software, and then go to the post office to buy a user's account. However, for our PC we had already installed hardware and software, and we helped the user register for an Internet account. So the end user could just take the PC home, press one button, and they were able to access the Internet—that helped us win a large share of the Chinese market.