Interview: Lenovo CFO Wong Wai Ming

LENOVO may be the world’s biggest manufacturer of personal computers and have earned its right to dine at the high table of global Fortune 500 brands – courtesy of its $46bn (£29.8bn) valuation – alongside super-brands like Coca Cola, but in mid-August 2015 it reported one of its worst ever quarters.

The Chinese computer and smartphone behemoth revealed its first-quarter net profits had plunged by a staggering 51% to $105m (£67m) after it had faced “severe challenges” in its core markets. Despite this, revenues were up some 3% at $10.7bn, but this was still significantly below market expectations.

In a bid to calm a stunned market, Lenovo duly announced it would be culling 3,200 jobs from its worldwide payroll – equivalent to 10% of its non-manufacturing workforce and 5% of the total company head count.
One of the main sources of the poor performance was a dramatic plunge in sales at its mobile division. Yet it was only in January last year that Lenovo made a brace of big announcements in quick succession.

First up was its $2.3bn deal to snaffle up IBM’s server business and then, just a few days later, came the $2.9bn purchase from Google of its struggling smartphone outfit Motorola, although it was devoid of the bulk of its sizeable patent portfolio. Both buys were of former market ‘stars’ whose salad days were decidedly behind them.

Both acquisitions were made just a few months after the Beijing-based computer maker was knocked back in its hush-hush efforts to secure distressed BlackBerry – when its offer was rebuffed on security grounds by the Canadian government.
While some market watchers may have baulked at the deals, the IBM acquisition catapulted Lenovo to third in the world’s $40bn x86 server market.

Troubled conditions

Despite the troubled trading conditions, there is still the important business of unifying all the disparate elements of the global operation – rapidly expanding into the myriad markets outside its traditional theatre of operation in China – and ensuring the finances are primed to be in as rude health as possible. This task falls to Wong Wai Ming, Lenovo’s chief financial officer.

Educated at the Victoria University of Manchester, Wai Ming was studying for his accounting degree in the early to mid 1980s when the gritty Northern city was exporting some of its finest musical creations in the guise of The Smiths, Joy Division and The Happy Mondays.

Fast forward to 2015 when Financial Director met the Hong Kong Chinese chartered accountant in a penthouse suite at the Berkeley hotel and Wai Ming, who spent three years with Moore Stephens in London early in his career, is quick to share the key challenges that confront him as CFO of such a huge company.

The big challenge is the fact that Lenovo has recently shifted from a “100% Chinese company” where the management, the way it conducts itself in the Chinese language in meetings, and where the market is primarily in China – to acquiring IBM’s PC division and becoming “suddenly exposed to challenges of operating in 100 countries and time zones”, he explains.

“As a finance person, the basic thing you look at is P&L – expenses, revenue and gross margin, all are different,” says Wai Ming, who joined Lenovo in the mid-90s after 15 years in investment banking.

“China as an emerging market and country runs a very different profile in terms of cost effectiveness and margins. In short, the really big challenge was integration – merging a primarily Chinese business into a global business that is a couple of times bigger than the Chinese business, and the global business was not doing that well at that time.”

While Lenovo was upbeat about undoubted initial successes, it was also in 2009/10 that it recorded a loss on a quarterly basis for the first time in its corporate history.

The factors that led to such an unwelcome milestone were a combination of the global financial meltdown and the fact at “that time we didn’t have enough consumer business outside China”, coupled with the reality that “when we acquired the IBM PC Think Pad business, it was primarily commercial and mostly a US and mature market” that had “actually dried up and we needed to deal with the challenges”.

That deal – completed in 2005 – involved a transaction of $1.25bn in cash, with IBM taking an 18.9% equity stake in Lenovo.

And while it catapulted Lenovo to a fourfold increase of its then PC business to about $12bn – based on its 2003 business results – it also ensured that it would benefit from a muscular worldwide distribution and sales network covering 160 countries, and the global brand recognition of IBM’s Think Pad brand notebook franchise and Lenovo’s big brand awareness in China.

“Since then, we have rebuilt ourselves and it looks like that is going very well, getting from number three or four to number two or one,” says Wai Ming. “We know the challenges and changes in the industry, and as we get bigger, it will not be easy to get 20-25% growth and profitability every year. The top line is because you’re already number one and it’s been double-digit growth in the past – but for quite a while now the market has actually been contracting. We have to look at what we have to do as a company so that we can continue to grow the business and continue to provide value to shareholders.”

Wai Ming says Lenovo now wants to get even deeper into the server market as more business-critical processes migrate to the cloud and servers become “another must-have product”. The company sees a change in the profile of the server market as it shifts “from a standalone enterprise having X number of servers into the big e-commerce player that does a lot of the work that used to be done on a standalone PC” and believes it has “a reasonable chance of being number one in the market”.

The slings and arrows

But despite all the slings and arrows of outrageous fortune, “we have a reasonably balanced business between commercial and consumer – so the challenge remains integration”, he explains. Few will doubt his ability to deliver on that vision.

The father of two – who only manages to spend one day out of seven at his Hong Kong home, due to the pressing geographic demands of the Beijing- and US-based business – stepped up to the CFO role in May 2007 on the retirement of the formidable and widely respected Mary Ma. Ma is widely acknowledged as helping bring in the Western discipline of sound corporate governance and raising the standards for financial reporting and transparency for publicly listed companies in China.

Part of managing that mammoth integration effort involves a fairly ambitious juggling act of various forward contracts and options that make up its UN-esque hedging strategy, as Wai Ming explains.

“We hedge all our business but then hedging is only really smoothing out the increasing costs – so rather than getting away with it, you have to pay for it. So it’s about hedging and being very disciplined in terms of pricing. And then you have volatility that has an impact on your hedging costs so we have to deal with that day in day out, and make sure that not only is the policy in place, but the execution is there throughout the organisation to best mitigate against risk.”

Continuing “operational efficiency” is another key driver for Wai Ming, especially as the server and smartphone/tablet side of the business is still relatively new to the PC maker. He wants to “ensure we have the right control, incentive and capital” to grow the business – as “at the moment the PC business continues to be very strong and profitable despite the relatively weak market”, he says, but with “a lot of competition” in the smart device and enterprise spaces, there’s “still a lot of work to do” in managing the financial system in a bid to “continue to grow the business profitably”.

The question of how to best allocate capital to fund the growth of the business – as well as being attuned to any “attractive inorganic opportunities” – indicates the Lenovo appetite for acquisition is far from dimmed.

“For the time being, our main focus is to get the integration right – certainly, that’s the biggest challenge for me,” explains Wai Ming, now focused on the ongoing and near simultaneous fusion of two multibillion-pound businesses, replete with their own unique cultures – he must ensure they align and slot into the wider Lenovo value system.

While this will be far from a walk in the proverbial park for the self-confessed fan of hiking in the foothills of Hong Kong – especially given the current stormy market conditions – his penchant for seeing a job through to the end looks set to continue with quiet determination. ?

NB: This interview was conducted a month before Lenovo’s most recent results. Despite repeated attempts to address these issues with the company, no response has been forthcoming by the time of publication.

IN BLACK AND WHITE

Chief financial officer, Lenovo Group
Senior vice president, Lenovo Group
Chief executive officer, Roly International Holdings
Chief executive officer, Sing Tao News Corp
Chartered accountant, Moore Stephens