Lenovo's IPO withdrawal: Why Lenovo is no longer the golden boy of the Chinese tech industry

Following China's National Day break, the hottest topic in financial markets has been the news of Lenovo withdrawing its application for an A-share listing on the Shanghai Stock Exchange STAR Market, with the "godfather of Chinese entrepreneurs" Lenovo founder Liu Chuanzhi also being the subject of criticism.

Lenovo's listing bid was quiet, with almost no roadshows or hype. The plan was for Lenovo to raise 10 billion RMB (S$2.1 billion) from the biggest IPO on the STAR Market since its establishment.

However, from having its application accepted on 30 September to withdrawing it on 8 October, and taking into account the one-week National Day break, Lenovo's A-share listing was halted after just one working day.

On 10 October, the company issued a statement: "Following the submission of application materials to the SSE in respect of the Proposed Issuance and Admission of CDRs, taking into consideration the Company's business scale and complexity, the validity of the financial information in the Prospectus may lapse during the vetting process of the application. Also, having thoroughly considered the relevant capital market conditions such as the latest circumstances in connection with the listing, the Company decided to withdraw the application for listing and trading of CDRs on the STAR Market."

This explanation is confusing, and there is all sorts of industry talk on the real reasons for Lenovo's hastily pulling the plug on getting listed - the most common guess is that this former star among tech companies does not fit the positioning of the STAR Market.

When the news broke that Lenovo was looking for a STAR listing, there were doubts that Lenovo's tech status was not solid enough.

According to Chinese media reports, Lenovo puts in over 10 billion RMB for research and development (R&D) each year, which is a significant amount in absolute terms, and more than what STAR-listed companies and those applying for listings put into R&D.

However, in terms of proportion, over the past three financial years, Lenovo has channelled about 3% of its profits into R&D, while the 2020 annual report showed that the median for STAR companies was 9%.

Placed alongside Huawei - another Chinese tech company - Lenovo's investments in R&D pale in comparison. From 2018 to 2020, Huawei's R&D investments were 14.1%, 15.3%, and 15.9% of its profits for each of those years.

The STAR Market was set up in 2019 to provide a funding channel for tech innovation companies aligned with the national strategy, which are working on breakthroughs for core technologies, and which have high market recognition. The aborted STAR listing shows that official recognition of Lenovo as a tech company has taken a heavy hit. The formerly shining Lenovo is no longer one of the tech companies that the authorities want to support, that is, those focusing on cutting-edge technology, in the centrestage of economic competition, and catering to major national needs.

As if dealing with a failed listing is not enough, public opinion involving Lenovo has swelled over the past few days. Not only were the exorbitant salaries of Lenovo's senior executives slammed by netizens, but it was also revealed that former Lenovo chairman Liu Chuanzhi, who relinquished his position two years ago, is still receiving an almost 100 million RMB salary. Amid talk about common prosperity, the increasing bad reputation of tech companies, and escalating feelings of hatred towards the wealthy, news of a retired senior tech executive receiving such a high salary sticks out like a sore thumb.

Legend Holdings (parent company of Lenovo) told a media outlet yesterday that the rumours circulating online are untrue. The report emphasised, "The founder and honorary chairman of Lenovo Group, who retired two years ago, no longer receives any salary-based remuneration from the firm." But netizens are unconvinced and still think that Liu Chuanzhi is a rich man who has "grown wealthy first" and is getting richer. Some netizens dug up the news of ride-hailing app Didi's removal from app stores in China three months ago, inviting another round of attack against Liu Chuanzhi and his daughter Liu Qing, who is president of Didi Chuxing. (NB: Reuters recently reported that Liu Qing has plans to leave the company. These claims were vehemently denied by Didi.)

Lenovo's current controversy leads one to reflect on the development route that the company has taken over the years.

In the mid-1990s, Liu Chuanzhi had a difference of views with then Lenovo chief engineer Ni Guangnan. At that time, Liu Chuanzhi wanted to leverage the cost advantage of China's manufacturing industry and thought that Lenovo should take on a trade-centred path focusing on computer sales, followed by processing, and lastly technological research and development. But Ni proposed that the company should first take a technology-centred path focusing on chip development, then processing, and lastly trade. In the end, Ni lost the fight and Lenovo went on a trade-centred path as proposed by Liu Chuanzhi.

This dispute was seen as a battle between two factions, one supporting the market and the other supporting technology. Many companies that chose to prioritise trade and market expansion in those days have indeed achieved great success. After Lenovo decided on its trade-centred path, it quickly expanded the personal computer (PC) market and became China's most influential private enterprise. When Lenovo acquired American enterprise IBM's PC business in 2005, it was once regarded as the pride of the nation. In recent years, however, Lenovo started to lack the stamina for development because of a lack of innovation. As a result, it has been surpassed by up-and-coming tech enterprises and its qualification as a tech enterprise even came into question.

The discussion on Lenovo's development route is to some extent, a reflection of China's manufacturing industry. As their foundations were weak in the early days of reform and opening up, Chinese enterprises then had no choice but to take a trade-centred path, and the drawbacks of such a development path are becoming increasingly apparent in the current unique external environment that China finds itself in. In particular, since the escalation of China-US competition, China is feeling the pain of being at the mercy of others in core technologies such as chip manufacturing, and there is a pressing need for technological innovation and technological research and development.

Lenovo's development path is a microcosm of that of China's manufacturing industry. And the problems facing Lenovo today are also the difficulties that the country's manufacturing industry has to overcome.

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