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May, 2018

Amidst Sino-US trade spat, Lenovo comes under increased scrutiny

Original article: The Herald Sun

As the Sino-U.S. trade spat simmers, American intelligence experts are calling for increased scrutiny of Beijing-based tech firm Lenovo. In an April report, consultants working with the U.S.-China Economic and Security Review Commission said the consumer electronics and server maker is a "cyberespionage risk" and recommended U.S. government agencies not procure its equipment. 

Analysis:

At first blush, the allegations against Lenovo seem far-fetched. The world's No. 1 PC maker is among China's most reputed tech companies, with a diverse leadership team from China, the U.S., Europe and Australia. Lenovo's 2005 acquisition of IBM's personal-computing unit was adroit - such that it has become a textbook case study in business schools worldwide of how a Chinese firm should conduct M&A in the West. 


The 2018 BrandZ Top 50 Chinese Global Brand Builders Report - produced by WPP, Kantar Millward Brown and Google - names Lenovo as China's top global brand for the second year in a row. “Younger consumers are turning to brands such as Lenovo, Alibaba and JD.com because they are united by their love of cool, affordable products and services, regardless of their country of origin," said Doreen Wang, global head of Brand Z, in a February statement. 


Lenovo is also a proponent of intellectual property rights. “Intellectual property is a strategic asset for Lenovo. It not only protects our investment in invention and innovation, but also positions Lenovo’s businesses to flourish and grow," said Laura Quatela, the company's Chief Legal Officer and SVP, in an April statement. 


The statement notes that in 2013 Lenovo became the first Chinese company to join the World Intellectual Property Organization's Hague System, under which 68+ countries have agreed upon a standard for the registration and protection of industrial designs. In 2016, Lenovo was No. 6 overall in terms of patent applications among companies in the Hague System. 


However, an April report by the U.S.-China Economic and Security Review Commission paints Lenovo in a less flattering light. The report states that Lenovo has been associated with cyberespionage activities led by the Chinese state. To support that assertion, researchers point out that intelligence agencies in the U.S., U.K., Canada, Australia and New Zealand have banned Lenovo products since the mid-2000s, after British intelligence agents discovered they contained "backdoors" and vulnerable firmware." 


In addition, the report says that Lenovo permitted Superfish adware that compromised the security of users to be installed on some of its computer products. The pre-loaded software supposedly boosted advertising by monitoring internet browser traffic. But it acted more like malware: Hackers used Superfish to access encrypted browser traffic, such as banking transactions, passwords, emails, and instant messages. 


In September 2017, Lenovo agreed to a $3.5 million settlement with 32 state attorneys general in the U.S. over the Superfish program. “This settlement will reform Lenovo’s policies and procedures to prevent this breakdown from occurring in the future," former New York Attorney General Eric Schneiderman said in a statement. 


Lenovo also settled a Federal Trade Commission lawsuit over the Superfish adware. The company promised to receive affirmative consent for any future adware programs, as well as audited security checks of their software for the next two decades. 


Meanwhile, Beijing has a larger stake in Lenovo than most of China's private-sector technology companies, which concerns Washington. The Chinese government holds almost 35% of Lenovo's stock through Legends Holdings Limited, which is affiliated with the state-backed China Academy of Sciences Institute of Computing Technology. 


Fortunately for Lenovo, it has already begun to diversify away from the U.S. market. It is possible that increased scrutiny of Lenovo's operations by the U.S. government could lead to a further drop in the company's U.S. market share, "but overall the impact should be very limited," says Tseng Kou-han, a PC notebook analyst at the Taipei-based research firm TrendForce. Lenovo has been focusing more on its home market of China, Europe and emerging markets "after suffering setbacks in the U.S. market," she observes. With organizational restructuring complete, "Lenovo is expected to further benefit from resource integration and more comprehensive marketing strategies," Tseng adds. 

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