Analysis: Legend looks for growth outside mainland China

At a time when 3-D graphics cards and application suites come standard with consumer PCs, it’s hard to imagine a more stripped-down line of PCs than those that mainland China’s largest PC maker, Legend Holdings Ltd., put on sale in Hong Kong in late 1999.

Those first Legend consumer PCs offered little in the way of sexy hardware other than a sound card with speakers and an internal modem and they were sold with just the traditional-Chinese version of Microsoft Corp.’s Windows 98 operating system installed – no other software applications were available.

While those PCs were hardly the user-friendly machines loaded with options that most consumers want, that didn’t matter. What did matter was that about 1,000 of these PCs – modified versions of Legend’s Sunchase and Luna commercial PCs -were sold in Hong Kong between October 1999 and June 2000. For Legend executives, this small success proved that cultural differences and consumer concerns about the quality of Chinese-made PCs could be overcome in Hong Kong.

“It demonstrated that Hong Kong can accept Legend PCs,” said Alvin Chan, the deputy general manager of overseas business development at Legend. It also demonstrated that Legend – which hopes to see 20 to 30 per cent of its revenue come from international sales by 2010, according to Chan – was looking outside its traditional domestic markets for growth.

As the volume of PCs sold domestically by Legend continues to grow, a decline in its share of the consumer-PC market in China is inevitable, said Fung-Ee Lim, an analyst at UBS Warburg, in a research note published in August. Legend will lose market share because consumer-PC markets in major cities have been saturated and the company’s distribution network that serves secondary cities is still being developed, Lim said.

With Legend’s growth rate in China seen slowing by analysts, the company is looking to international markets to maintain its momentum. It now sells motherboards under the QDI brand in Europe and has signed commercial-PC distribution agreements with companies in several Asian countries, including PT. Aneka Infokom Tekindo in Indonesia, Photokina Marketing Corp. in the Philippines, and Cyber Mega (Pvt.) Ltd. in Sri Lanka. Legend has also experimented in Hong Kong, agreeing in 1999 to sell those modified Sunchase and Luna PCs through the now-defunct AdMart delivery service run by AD Marketing Ltd.

Breaking into Hong Kong hasn’t been easy. Legend began selling commercial PCs there in 1998 but had little luck finding customers, other than the local operations of mainland-Chinese companies who were willing to buy from a mainland-Chinese brand, Chan said.

On paper, Hong Kong looks like it should be an easy market for Legend to break into. It’s an affluent, well-educated market that has close business links with the rest of China. And its jungles of drab concrete apartment blocks and gleaming office towers are located within a couple hours’ drive of Legend’s main PC manufacturing plant in Huiyang, Guangdong province.

But Hong Kong’s proximity is deceiving.

“It’s not an easy task for Legend,” said Kitty Fok, a senior PC analyst at International Data Corp. (IDC). “The culture and buying behavior are very different in Hong Kong.”

Easy task or not, Legend feels ready. In September, the company introduced the Future Pioneer 711T, which Legend officials said is the first PC designed by the company specifically for Hong Kong consumers.

Clad in a futuristic blue and silver case, the 711T ships with a 1.5GHz Intel Corp. Pentium 4 processor, 128MB of RDRAM (Rambus DRAM), a 12x DVD-ROM drive, a 40GB hard-disk drive, an NVidia Corp. TNT2 M64 graphics card with 32MB of memory, a 15-inch TFT-LCD (thin film transistor liquid crystal display) monitor, and a keyboard that includes an integrated writing pad for inputting Chinese characters. Bundled with a Xerox Corp. C4 colour printer, the 711T sells for HK$8,988 (US$1,153).

To bridge that cultural divide, Legend has had to produce bilingual computer manuals in English and Chinese, with the traditional-style characters used in Hong Kong rather than the simplified versions used in Mainland China. The company also conducted compatibility testing to make sure the 711T’s hardware is fully compatible with the English and traditional Chinese versions of Windows ME. And engineers had to make sure the keyboard’s writing pad would recognize the traditional-style characters.

The software side required fine-tuning too. Legend subsidiary Kingsoft Corp., a Beijing-based software company, developed a version of its PowerWord dictionary for the 711T that supports traditional characters. The dictionary, which is included as a standard feature on the 711T, allows users to translate words from Chinese into English, or vice versa, by clicking on a word using the mouse.

Legend executives hope the extra work spent adapting the 711T for Hong Kong will pay off. Over the next 12 months, the company hopes to sell 10,000 711Ts in Hong Kong through an agreement with Watson Enterprises Ltd.’s Fortress chain of electronics stores, Chan said. If successful, that will give Legend a 5-percent share of the Hong Kong consumer market, he said.

That’s where pricing comes in to play, Chan said. At HK$8,988, the 711T is slightly cheaper than comparable systems offered by larger, more established PC makers, such as IBM Corp.’s NetVista A22p. Also based on a 1.5GHz Pentium 4 processor, the NetVista A22p includes 128M bytes of SDRAM (Synchronous DRAM), a 40G-byte hard-disk drive, and a 15-inch TFT-LCD monitor for HK$9,788.

Legend’s deal with Fortress gives it a retail partner with more than 60 shops in Hong Kong and extensive experience selling PCs to consumers. Last year, Fortress sold around 65,000 PCs, accounting for up to 35 percent of all consumer-PC sales in Hong Kong, Chan said. However, while Fortress is known for selling large numbers of PCs, the chain is also known to demand high margins from vendors in return — a trade-off that Legend believes was worth it.

“We sacrificed a lot for the 711T,” Chan said, referring to the deal with Fortress. “We earn nothing for the PC hardware.”

But the 711T is not about making short-term profits for Legend, Chan said. It’s an investment that the company is making in order to build market share – and develop recognition of the Legend brand among consumers – in Hong Kong’s PC market.

Legend has been encouraged by the market’s response to the 711T since its launch, Chan said. And the company is planning to introduce other consumer PC models in Hong Kong, including one model that uses SDRAM, which is slightly cheaper than the RDRAM used in the 711T.

“We’re also thinking of introducing (an Intel) Celeron-based PC before the end of the year,” Chan said. “We want to catch the Christmas selling season.”

Legend Holdings Ltd. can be reached in Hong Kong at