China's leading IT (information technology) solutions provider AsiaInfo expects focusing on human resources and information security will help its newly acquired Lenovo's non-telecoms IT services business, which is losing money, to make profit within 12 months. However, analysts are not very optimistic.

"We are quite confident that AsiaInfo's net revenues will increase 40-50 per cent after the deal," said Han Ying, chief financial officer of NASDAQ-listed AsiaInfo Holdings, last week.

Moreover, the operation under deal is expected to be profitable "in 12 months," said Han.

AsiaInfo last week acquired non-telecoms IT services business from the country's leading IT firm Lenovo, valued at 300 million yuan (US$36.14 million), by transferring 15 per cent of its shares and convertible bonds.

The two parties said they expect the long-term investment will foster a home-grown IT services giant that will be able to compete with foreign rivals -- including IBM and Hewlett-Packard.

Yu Bin, who will head the purchased operation, renamed Lenovo-AsiaInfo Technologies Co Ltd after the deal, said Lenovo-AsiaInfo will focus its non-telecoms IT services on those sectors in which it has core competitiveness, especially "human resources and information security."

Lenovo's IT services, which started in 2001, cover a wide range of sectors including telecoms, finance, government, manufacturing and information security.

Although the business last year achieved a surprisingly fast annual growth -- 200 per cent, it contributed only US$29.4 million, only 2.4 per cent of Lenovo's total revenues for the fiscal year ending March 31, and, moreover, is still losing money.

"A business losing money will not necessarily lose money in the future," said Zhang Xingsheng, AsiaInfo's chief executive officer (CEO).

He cited Sony and Ericsson's successful merger of their mobile phones operations, previously money losers, as an example.

"We have been focusing on telecoms IT services and some people mistake our move as a way to deal with the falling price of our shares," said Ding Jian, AsiaInfo's chairman.

AsiaInfo's share price is now at rock bottom, as investors are concerned over the absence of a clearcut growing point.

"Actually we decided to expand into the non-telecoms IT service market two years ago, and we have been seeking an excellent partner," said Ding.

AsiaInfo's strategic partnership with Lenovo is expected to create a home-grown IT service giant, rivaling IBM and HP, said the executives.

"The profitability of the IT service business is based on large-scale operation, and only co-operation between leading companies can guarantee success -- which is enjoyed by both Lenovo and AsiaInfo," said Ding.

"Lenovo's established brand-awareness in China, its strong performance in the capital market,and its long-devotion to IT services, together with our rich experience in IT services, will contribute to future success," said Ding.

Moreover, IT services require highly individualized solutions based on specific needs and therefore vary significantly according to customers. As a domestic firm, AsiaInfo is better at understanding the local market and can respond more rapidly than foreign rivals, he stressed.

Lenovo's IT services commanded 3.5 per cent of the China market last year, behind IBM at 11 per cent and Hewlett-Packard at 8 per cent, according to a report released by international data tracking company IDC in June.

Yet, Xie Yibing, vice-president and analyst of IDC China, holds that AsiaInfo, or the new company, is facing great challenges.

"AsiaInfo will find it difficult to integrate the different management models and company cultures into one smoothly," he said.

Lenovo started its business in the manufacturing sector, while AsiaInfo has been engaged in IT service throughout its existence, he explained.

"Problems, during the integration, are almost unavoidable," he said.

It is hard to forecast the new company's business prospects, but the facts show that AsiaInfo is yet to be good at non-telecoms IT service.

AsiaInfo acquired Pacific Software two years ago at a cost of US$9 million last October, tiptoeing into the market; however, "its performance is below investors' previous expectations," said Xie.

Other analysts also think that AsiaInfo, deep-rooted in telecoms IT services, may find it difficult to expand into an unfamiliar area.

For Lenovo, merger and acquisition (M&A), instead of research and development (R&D), is a better approach to obtain the latest technology and enhance its competency, as the former takes less time and saves energy, Xie noted.

Many international giants such as IBM and HP have grown stronger through M&A, he said.

It is wise for Lenovo to make the move, yet the company "should be more aggressive in making such moves," he suggested.

Lenovo's CEO Yang Yuanqing said the move is a strategic alliance to better tap China's fast-growing IT service market.

"China's IT service market is full of potential and we will not ignore it," he said. "But we will not necessarily develop it into 100 per cent ownership."

Lenovo decided to refocus on its core PC business in the first quarter, after failing to meet the firm's domestic sales targets over the past three years amid fierce competition from foreign companies, including IBM and Dell.

Lenovo will deal with non-core business -- including digital products and IT service -- "in a more flexible way," said Liu Chuanzhi, Lenovo's chairman, earlier this year.

"The move is part of our restructuring, but Lenovo is not going to offload its IT service business," said Yu.

During the talks, Lenovo promised not to reduce its investment in AsiaInfo within five years. Originally it was two years, Ding added.

Statistics released by CCW, a leading domestic market research house, indicate that by 2008, demand in China's IT market will be valued at 500 billion yuan (US$60.24 billion). Software and IT service, the biggest contributor, will take the lead, with an annual compound growth rate of 27 per cent.

(China Daily August 3, 2004)