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Little-Known PC Maker Is Legend in the Making

Technology: China's No. 1 computer firm seems poised for expansion beyond its borders, but it has chosen a cautious global strategy.


"By developing more applications, you can expand the market for the product as a whole," Yang said, explaining the logic of Legend's alliance with AOL.

In the fiscal year ended in March, Legend registered profit of $117 million and had a market value of just over $5.1 billion. It recently was rated by Business Week as China's fifth-largest emerging market company, behind telecom giants China Mobile Ltd. and China Unicom Ltd., national offshore oil company CNOOC Ltd. and infrastructure conglomerate Citic Pacific Ltd.

Legend's joint venture with AOL is the latest in a series of deals with top American information technology companies that many see as a key ingredient in the Chinese computer giant's success.

Nearly a decade of working closely with these companies and their products has allowed Legend to absorb invaluable knowledge, according to those who have watched the company grow.

When Liu and his colleagues left the security of academic life at the Chinese Academy of Sciences in the mid-1980s with a mandate to commercialize some of the organization's research results, they shared a common bond: None had any business experience.

Although quickly applauded for developing hardware that gave personal computers Chinese-language capabilities, they were denied a government license to manufacture computers. As a result, they were forced into trading and distributing imported machines.

According to Philip Sohmen, whose recently completed master's thesis at Stanford University details Legend's rise, that initial setback became a godsend. It forced Legend's people to grow quickly on two fronts: They suddenly had to learn the intricacies of state-of-the-art foreign-made computers, and they had to learn China's consumer market from shoe-top level.

"They learned the benefits and drawbacks of each computer and the ins and outs of the market," Sohmen said, adding that Legend's strong technical skills gave it a competence that attracted both suppliers and customers. With no manufacturing license for mainland China, Legend was forced to go to Hong Kong to produce motherboards, the main circuit boards in computers. Life in Hong Kong exposed Legend to the intense commercial pressures of an international marketplace.

As Legend grew into a leading motherboard producer, it forged an alliance with Intel, the world's premier chip maker, testing its components in a deal that later would help sell Legend's own computers.

When China slashed tariffs on imported computers and boldly opened its domestic market to all comers in 1992, once-protected computer makers were crushed. Within a year, the domestic producers' market share had dropped from 70% to about 30%. Only one Chinese company was ready to counterattack: Legend.

Liu reorganized for the fight. He coaxed the Chinese Academy of Sciences to give the company's old guard employees 35% of Legend's equity for a dignified retirement. He then brought in young talent to produce computers. He listed his Hong Kong motherboard operation on the stock market--as much for the corporate transparency it imposed as for additional funding it brought, Sohmen speculated.

By 1995, Legend had carved out an 8% share of China's PC market and was outmaneuvering its foreign competitors. It offered computers designed for Chinese consumers, armed with Intel's latest chip, at prices that undercut imported PCs offering older technology.

After discovering that the majority of China's prospective PC owners wanted to surf the Net but had no idea how to get there, the company developed the Tianxi computer, with simple one-button access to the Internet, and it waived the first year's online fees. For older people befuddled by keyboards, it produced a model activated by touching the screen.

Positioning for strong PC growth among small and medium business enterprises, Legend last October launched a service package tailored for office automation, offering individual business solutions.

The result of all this: Legend's share of China's personal computer market jumped from 14% in 1998 to about 30% last year. However, in notebook computer sales, Legend is locked in a battle with IBM for leadership, with both companies holding about 20%.

With plenty of growth left in the nation's fast-expanding computer markets, Yang leaves little doubt that Legend's short-term game plan is focused almost exclusively within China. Independent analysts agree that this concentration makes sense. Market research firm International Data Corp., for example, predicts China's PC market will grow 25% to 30% this year before settling into a slightly slower growth rate of about 15% over the next five years.

"There's still good growth in this market and Legend definitely has its advantage," said Kitty Fok, IDC's associate director in Hong Kong. "I believe they will hold their top position."

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