For Great Wall Computer, they were clearly the government favorite, having been spun out from the Ministry of Electronics Industry in 1986.The other company making major gains is Founder, a firm affiliated with Beijing University, which has nearly tripled its market share since 1997. Founder has used an aggressive sales and pricing strategy to jump into second place with over 10% of the market. Chinese government has been supporting these new entrants to break the monopoly of foreign product.
In 1997, six of the top ten PC makers in China were foreign, accounting for 26% of total PC sales, whereas only four were in the top ten in 1999, accounting for 17% of sales. In contrast, three new Chinese PC makers (Langchao, Shida, and Hisense) entered the top ten in 1998 alone, and together with the three firms in the previous top ten (Legend, Founder, and Great Wall), they accounted for 39% of total PC sales in China. In Table 4, which shows the extent to which domestic PC makers came to the fore between 1997-1999.
Table 4.
In China PC market, Taiwanese firms play a important role. Base on the China mainland PC market expanded, Taiwanese PC makers realized they would have to localize production if they wanted access to China’s large market. Consequently, Taiwanese firms like FIC, GVC, Twinhead, and Huasheng built production facilities in Shenzhen, Beijing, Wuhan, and Chengdu.
They first entered China in search of low-cost labor and production sites for components and peripherals, but have since expanded their production to include PCs. Taiwanese PC makers entered China in the early nineties with low-end, shoestring operations intended to hold costs and risks to a minimum. Taiwanese companies have incredible increased their investment since 1995 in response to price pressures from the U.S. PC companies and fierce competition among Taiwanese suppliers and manufacturers. In addition to the original production base in Guangdong Province in southern China, an eastern base around Shanghai has been created. Most Taiwanese investment is now directed to Jiangsu Province, including Shanghai and nearby cities (Table 5).
Table 5.
In the past 20 years, local PC firms competed with many foreign big brands and Taiwanese PC companies. And, they have broken the market monopolized by foreign companies. Nevertheless, they are also clear that there are still wide gaps between Chinese and foreign computers in terms of quantity, variety, and performance. Their strategy is to focus on mid-range systems, where it is possible that low Chinese development costs may provide a marketing advantage that offsets the attractions of western wares.
The PC market structure has form the pattern shown above, with foreign firms enjoying solid profit margins until domestic firms become competitive, at which time foreign firms abandon the low end of the market. How did China PC market structure form like this? We can use the Michael Porter's Five Forces Model to describe this market, which is described below:
Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are
- The threat of entry of new competitors (new entrants)
- The threat of substitutes
- The bargaining power of buyers
- The bargaining power of suppliers
- The degree of rivalry between existing competitors
Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include
- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes
Bargaining Power of Suppliers (Suppliers are the businesses that supply materials & other products into the industry)
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:
- There are many buyers and few dominant suppliers
- There are undifferentiated, highly valued products
- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
- Buyers do not threaten to integrate backwards into supply
- The industry is not a key customer group to the suppliers
Bargaining Power of Buyers
Buyers are the people / organizations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry
- Products are standardized
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader
- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cut
- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier
- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less
- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.
CHAPTER 2. Legend Group Economic Performance
Legend Group Limited is a diversified IT company in China providing advanced IT products and services from computer products, mobile handsets, digital products, to corporate IT solutions. Established in 1984, Legend has been listed on the Stock Exchange of Hong Kong Limited since 1994, and is one of the constituent stocks of the Hang Seng Index. Its PCs have been the best selling brand for six consecutive years in China since 1997 and the best seller in the Asia Pacific region (excluding Japan) for three consecutive years since 2000.
Legend hopes to be one of the Fortune Global 500 companies, as well as one of the top 100 high-tech companies in the world." Says Mr. Liu. Let’s have a look at its performance in the past 6 years.
Legend PCs entered the U.S. market in July 1997. In the same time, the company also started selling PCs in Russia and parts of Africa and Asia. This year Legend sold more than 400,000 all over the world, valued at $1.9 billion. In the 1997/98 financial year, the Group attained consolidated turnover of HK$5,871 million, representing an increase of 106 per cent against last year's turnover of HK$2,841 million. The total consolidated profit after taxation and minority interests was HK$73 million. By 1997, Legend had surpassed IBM as the biggest seller of PCs in China.
The Legend brand personal computer business, has achieved annual growth rates of around 100 per cent in the past two years, with turnover more than HK$2,700 million, accounting for 34 per cent of the Group's pro-forma consolidated turnover in 1997. In this year, Legend brand personal computers became the best selling brand in China, with an average market share of 10.7 per cent for the year, and further expanded to 12.7 per cent for the first quarter of 1998. This success can be attributable in part to its highly efficient, well-established and extensive sales and distribution network, which covers all the major cities in China and includes more than 2,000 distributors, dealers and retailers.
Legend has become the fourth biggest PC vendor in the Asia-Pacific region, with a 4.6% share of the regional market by 1998.In the 1998/99 financial year, the Group attained consolidated turnover of approximately HK$11,634 million, representing a substantial growth of 46% as compared to the pro-forma turnover of HK$7,995 million last year. As the Group's core business, Legend brand PCs continued to be the best selling brand in China, with a sales growth rate of 85% in 1998/99. The market share further increased to 17.9% in the fourth quarter of calendar year 1998. In addition, Legend brand PCs also ranked third in the Asian Pacific Region (excluding Japan). In this year, the home PCs sales grew nearly 90%. In response, Legend continued to expand its sales network. Furthermore, 11 "Legend 1+1 Home PC Specialty Shops" were set up in Beijing, Shanghai and Guangzhou to expand direct retail channels and strengthen pre-sales and after-sales services to home users. The Group also formulates its strategy to focusing on the development of regional market, accelerating the expansion of its business from the central region into major regional cities.
In the 1999/2000 financial year, the Group achieved consolidated turnover of approximately HK$17.45 billion, representing substantial growth of 50% as compared to the turnover of HK$11.63 billion last year. As the Group's core business, Legend PC business continued to record an excellent performance. During the period under review, turnover for the Legend PC business increased by 77%. Unit shipment of home PCs, commercial PCs and notebook computers surged up 112%, 75% and 229% respectively. Additionally, Legend PC continues to maintain its number one position in China market, with market share increasing from 14.4% in 1998 to 21.5% in 1999, setting Legend even further ahead from its competitors.
Internet frenzy led to PC sales exceptionally high growth in 2000. In the 2000/01 financial year, the Group achieved consolidated turnover of approximately HK$27.22 billion, representing substantial growth of 56% as compared to the turnover of HK$17.45 billion last year. Driven by the surge in demand for PCs in the PRC, the turnover of Legend computers and other Internet access devices increased by 82%. Legend PCs maintain and consolidate their leading position in China PC market and the Asia Pacific regions, with market share in the PRC increased from 21.5% in 1999 to 28.9% in 2000. Sales of consumer computers and notebook computers achieved breakthroughs, with market share substantially increasing from 25.3% and 17.1% to 37% and 23.2% respectively. Sales of pocket PCs also recorded rapid growth.
In 2001, Legend also felt the effects of the global slowdown due to the cooling down of the Internet fever. Legend shipped over 1.4 million PCs in the first half of this year. Demand for PCs has seen a steady decrease over the last three quarters, with shipments falling 48 percent, 28 percent, and 13 percent respectively. Legend adjusted its initial annual projected growth of 30 percent or 3.7 million units down to 20 percent growth, which amounts to 3.4 million units sold. But, in the end of the fiscal year, Legend grew shipments by 24.2 percent, while Dell grew by 18 percent, and everybody else was negative. Legend Pro-forma consolidated turnover for 2001/02 increased 3.2% to HK$19.27 billion. Profit Rises 42.9% to HK$1.026 Billion. The Group's pro-forma gross margin increased from 13.34% to 13.7%. The Group's net margin increased from 3.85% to 5.33%,. Excluding the exceptional gain, net margin increased to 4.48%.
In 2002, Legend has been involved to global economic problems, seeing its growth rate slow to 5 percent in the second quarter because of a decline in Asia-Pacific PC sales. But even in these relatively tough times, it was still able to move into the top 10 of PC manufacturers worldwide with a 2 percent market share. Even in such condition, in the 2nd Quarter of 2002, Legend's home computer sales ranked 3rd in the world, with a score of 3.8%; Legend desktop computers has a 2.9% market share, ranking 5th in the global market, and its business computers rank 6th with a 2.4% market share. In 2002/03 financial year, Turnover increased 5.0% to HK$20.23 billion. Gross margin increased to 14.8% from 13.7% (pro-forma) of previous year. The Group's home PC unit shipments rose by 9.5%. During the year, the Group placed greater emphasis on gross profit margins and profits. The launch of its unique new dual mode home PC helped to improve operating profits. Gross profit margins for this business division increased to 13.3% from last year's 10.8%, while contributing profit surged 55% from last year.
CHAPTER 3. How Legend Group develop customers
How did Legend Group attain this considerable economic performance and enhancing competitive advantage? In my view, Legend has ability to respond to different market conditions rapidly and won the heart of consumers is the key to maintain its dominance role. Legend has a famous slogan ‘How human being develop without dreaming’. In Chinese, the meaning of ‘Legend’ is dreaming. So, this slogan is impressive. Now, I will introduce how Legend development clients and kept their loyalty to ‘Legend’ brand.
Over the past several years, Legend has capitalized on its distribution network to strike deals with various domestic and foreign software companies. In August 1998, Legend spent US$4.5 million to buy a 30 percent stake in a joint venture with Kingsoft Company, one of China's largest software companies. A month later, Legend signed an agreement with IBM to customize the US company's software programs for the China market and pre-install IBM-related software products into Legend computers. Then, in November, Legend formed a joint venture with Computer Associates Company, a US-based software company, to develop and distribute software on the mainland. But Legend's biggest step came in March 1999. At a press conference in Shenzhen, the chairman of Legend Liuchuanzhi and Microsoft CEO Bill Gates announced that the two companies would become strategy partner.2001, it cut a deal with AOL that gives AOL software and services to every customer who buys a Legend PC.
These alliances could go a long way in establishing Legend as a global brand. Furthermore, Legend PC has many pre-installed original software by this way. This measure certainly gave the customers many convenient.
Many people know that Dell offers online ordering and home delivery. Imitate this model, Legend offer online sale service to develop customers. All this is enough to get the attention of Michael Dell himself, who says that he fears Legend more than any other company in the world.
- Service of Pre-sales and After-sales
"In China, you cannot be successful if you simply sell computers." says Chairman of Legend group, Liuchuanzhi. Before a consumer make a decision to buy a Legend PC, Legend helps consumers how to buy their first PCs, then teach them how to use the boxes. Legend offers free computer classes at its 520 retail outlets, as well as at shopping malls, schools, and community centers in dozens of cities. In the Zhongguancun district of Beijing, dozens of people - ranging from 15 to 79 years old, enter a store. In the room, they sit in blue plastic chairs. An instructor greets them. "Welcome to the Introduction to PC course. And welcome" On the main floor of the store, a salesman is explaining to consumers how to get on the Web with a Legend PC. He will encourage them to take the computer home for a week before deciding whether to buy it.
After sales service is very important and providing that in China means you have to be everywhere. The support network is key. So far, Legend has opened more than 700 tech-service centers all over China to provide walk-in support. "You must gently hold the hands of people who are intimidated by technology and who, in many cases, have never spent this much money on a single purchase." Says Mr. Liuchuanzhi.
In April 2003, Legend unveiled a new logo ‘Lenovo’. The new logo, which will be used in China accompanied by its existing Chinese-language logo ‘Legend’. Legend Group remains the company's corporate name.
Brand itself is not merely a logo. Its value is built on the recognition of society and people in general. In order to make a well-known international brand, Legend decided to choose a single branding structure, which will facilitate us to concentrate resources on the accumulation of our brand value.
(old Logo) (new Logo)
- Aggressive market strategy
In order to satisfy for the specific needs of users, Legend is actively implementing a localized product strategy. In 1999, it introduced application and function PCs, providing users with total application solutions, integrating hardware and software in the design package. In addition, Legend also introduced a series of unique functional applications software that are leading market trends.
During 2000, Legend had put in full strength into the development of Internet business. Focusing on Internet application, Legend had developed a number of new computer models, including the first generation Internet PC - Legend Conet PC. With regard to the difficulties encountered by China users in accessing Internet, Legend Conet PC has "one touch to the net" function with nationwide roaming account. In cooperation with China Telecom, Legend Conet PC offers users a one-year free Internet dial-up service. To complement the launch of these Internet computer products, the Group launched Legend's FM365.com portal. This portal is the default portal for Legend Internet PC through its "one touch to the net" function. FM365.com had already signed cooperation agreements with nearly few hundreds content providers, allowing users to quickly access information from the Internet. Also realize the great potential for broadband Internet in the China market, the Group formed a strategic alliance with Pacific Century CyberWorks Limited to jointly develop the broadband Internet products and services.
Also in 2000, as ERP systems became available, operational processes were integrated, and each and every department throughout the enterprise had its own information system and Enterprise Resource Planning (ERP) system. As the enterprise continued to grow, product lines increased, sales volumes shot up and subsidiary bodies of the enterprise spanned out even further? These independent information systems could no longer accommodate the requirements.
In 2001, Legend is dedicated to the development of personalized consumer computers and launched 4 innovative products to satisfy the specific needs of different customer groups: "Tianhui" for children; "Future Pioneer" for high school students; "Tianlu" for adults, and "Tianle" for the middle-aged and elderly. During the year, the Group launched its "Tianji" series of pocket PC products. In this year, Legend has been expanding its product distribution network, which includes 260 "Legend 1+1 Home PC Specialty Shops" and over 3,700 distributors. The network is extending into many of the medium and small cities. In addition, Legend established a call center with 400 engineers providing customers with 24-hour x 7 days telephone consultation to provide services including pre-sales consultation, after-sales technical support, sales services and the collection of customer feedback, not only bringing the Group closer to customers and but also enabling it to gain first hand market information.
CONCLUSION
China has become a major force in the global PC industry, as both the most attractive growth market and as a large producer. It has done so through a combination of industry promotion and entrepreneurial energy that has taken
advantage of the country’s unique characteristics. New challenges loom as China joins the World Trade Organization and faces more pressure to completely open its market to foreign competition. By now, however, China’s PC makers are strong enough to compete on an even footing in their home market. Some may also be ready to compete in other markets as well, potentially presenting a new challenge to today’s global PC leaders.
Legend has a long ways to go before it achieves its goal of becoming a global player. It has the largest market share in the mainland because it designs a product for Chinese people. But their research and development and technology is still far behind. There is no reason why the next revolutionary computer breakthrough can't come out of China. I believe China's chances of creating significant world-class players like Yahoo or Microsoft are much higher than Japan's.
REFERANCE
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Bill, Powell. (2002) ‘The Legend of Legend’ (cited 22 Oct 2002). Available from <>.
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