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Mike Vizard: So one of the things that I don’t think a lot of people realize, but the ThinkPad X60 was winner of the eWeek Excellence Award this year and was also named as one of the top 50 products for the first half of 2007 on Channel Insider.I guess I’m kind of curious about how that product’s doing in the market place, and what is the demand these days for those types of mobile computing solutions?

Steve Mungall: Well, if you look at the X series, clearly it really falls into two categories. There is what I would call the executive profile standard laptop that a lot of our customers have used and have been around. Then there’s the Tablet, the X model of the Tablet. So I would tell you both have been very successful. Myself, with all my travels, I always choose to use the X series model because of its light form factor. I don’t necessarily need some of the full-blown features you find in, for example, our T series, that I need to carry with me at all times. Clearly I just need the ability to perform the basic functions of the laptop, so that’s great. And then of course, for those that have a little bit more robust needs, you know, the Tablet provides great platform for a lot of the solutions, especially as we talk about the channel, a lot of the solution approaches in the market space. So your question on our success, we’ve seen, for example, the Tablet, some great success in healthcare, the realty market and actually, insurance. We’ve done very well in those three markets. In support of that, from a channel perspective, we put together an ISV solutions kit that sort of takes you through the different ISVs that we work with. We have about six ISVs from a cross-segment perspective. We have a couple in education, one in healthcare, one in real estate and one in consumer package goods. And each of those, we sort of put into different case studies and references that help our sellers, and of course, the partners sell solutions in those different segments with the Tablet products. So all in all, it would seem very good penetration. The X series, as I said, clearly the Tablet I think has been a winner, especially with the channel, as they look to position themselves with unique solutions like services and the Tablet gives them that.

Vizard: I guess the only thing I ever hear is that a lot of people like the Lenovo product line, but there’s some frustration about their ability to get hold of units in supply side. So I’m just kind of curious, have you heard the same thing, or have you stepped up the production end of it? What’s happening on the manufacturing side?

Mungall: We like to say that we’ve stepped up the production line because we’re going in the right direction from a growth perspective. But I would tell you that, at certain times, clearly there might be product shortcomings, and sometimes it would be not just specifically Lenovo, but industry wide, such as the different kind of size screens that we recently went through. So clearly, there are situations like that, but in general, we work with our distributors for what we call our top seller products. Our top seller are the ones that are meant to be in stock at all times, or priced to go, sort of our SMB fighters, if you want to put it that way. I’ll go through the August cycle most recently where we came out with the set of SKUs that we want to go focus on, for a suitable timeframe, 60, 90 days, work with distributors to basically have the stock and then basically put in place the promotions and incentives for the pull through that we work with the partners on. So clearly we make sure those set of products are always available. There might be unique requirements that a specific customer might have. That might be something that you might have heard about, but in general, I would tell you, especially with our top seller products they’re available and ready to sell and especially at our distributors.

Vizard: Where do you think Lenovo’s going to fit in, in the Dell versus HP kind of construct that everybody seems to think that the notebook market has kind of devolved into? When I look at HP, it feels like they put a little more emphasis on style, a little more emphasis on a particular feature, and then try to drop in at about a price point that’s maybe 100 bucks more than the Dell machine that is frequently positioned as a utilitarian appliance, a.k.a., a toaster. It’s not clear to me where Lenovo’s strategy fits in those two spectrums.

ThinkPad’s Niche.

Mungall:And I don’t know if you’ve heard the term that we’re using from a company perspective, referring to the products we offer as the best engineered PCs, and I think that is probably a good way of describing how we’re going to position ourselves against all our competitors. The ThinkPad clearly has a name that is well-known in the market space. It is well sought out as the best laptop from a ruggedness perspective, etc., that you can buy in a standard form without going to the full military specifications. And if you look at, for example, the most recent laptops we came out with, being the T series, the R61, T61s, and some of the features we brought in, one, it exemplifies the point about best engineered, but I think it also exemplifies the positioning that we’re going to do with our machines. So if you look at some of the features of the Santa Rosa box that we came out with, the T61, and we were one of the first ones out there with it, when we put the roll cage, not just in the base of the unit, we now put it in the top, in the screen. So as customers carry their machines around by the edges, down the hall and in business settings, etc., and in a non-roll cage type machine, you put straps and solder joints, etc., and reliability factors are impacted. This gives you a better machine for ruggedness, in that respect. We also found in protecting the screen with this roll cage, we actually isolated some of the LCD noise that all manufacturers have to put up with in reference to wireless reception, and we found by isolating in this roll cage, we actually get the best wireless reception in the market by eliminating the LCD noise that impacts to wireless reception. And, you know, we did things — you put in a brand new chip set that is faster, the first thing you think is hotter, and clearly needing more fan noise, making the machines louder. We implemented new designs that actually make it 10-percent cooler than the prior machine, actually three decibels quieter, because of a new fan feature in the machine. And we also put other features in, such as security. So once again, as you ask the question about positioning, we’re making sure the ThinkPad line especially comes out of the box as the most secure PC an individual can buy from a client perspective, with all the different features we put around it, including the ThinkPad’s technologies, which have a robust suite of different tools. We have the fingerprint reader, and clearly, we also go out and team with select third parties that help us improve the solutions we’re trying to deliver, for example, the security, you have people like Utimaco that we team with to improve what we have from a security-offering perspective.

Vizard: Given that the history of the ThinkPad has always been, you’ve got all these great features, but you kind of paid a premium price for that, under Lenovo, are you guys being more aggressive on the price points. To deliver, say for the same dollar I might pay for another machine, I get all those extra features, versus paying extra for the value of those features?

Mungall: I think the way we like to see it is, clearly, we are going to deliver and manufacture our machines as cost-effectively as possible, but we are not going to cut corners in reference to what we think helps improve the overall end-user experience. So clearly, we want to make sure that when you buy a laptop, which does get beat up a lot more because it’s being moved around, etc., that it has a ruggedness factor to it. I’ll tell you that in the last three years — and, of course, a couple of those years have been at Lenovo — we looked at our repair records on our laptops. We’ve actually improved repair records over 30 percent, and that’s also selling more machines. We want to make sure that if somebody is looking for a laptop that is going to be something they can rely on, and we’re going to be priced competitively, that the ThinkPad would be the machine for them to pick, and the products from Lenovo.

Vizard: I guess one of the questions I always hear as I walk around the channel and talking to people is, there’s always concern, is there money to be made in hardware? Can I be profitable in hardware, or has hardware simply become a means to an end? So what are you telling partners about the profitability around hardware these days?

Partner Relationships.

Mungall: To your point, I go round as I talk to partners, and as we all know, there is no one partner that is a stereotype, per se. They each survive in different ways. Each has found different ways to be successful. So if I was to sort of take a semblance of a lot of different discussions, to your question on hardware, I find that there are some partners that see that the client, being something like a laptop or desktop, and just the opportunity to provide that to a customer is their inroad into getting into a customer. Clearly, they ensure that the experience around just delivering this hardware product is one that the customer likes, and from there they leverage it into the broader discussion on their overall needs, their services, requirements, etc. I know of several of our best partners that have really done well with us, that have used the client platform sort of as the entry point into a brand new customer. And that relationship does not just stop during the hardware side. They have gone into the services side, etc. There are other partners out there that say that the only way you can get an account and keep yourself profitable is on the services platform, and limit the amount of hardware. That’s just the way they choose to perform. And by the way, we team with them also and are very successful with those. So I think it’s one of, not all approaches probably have hardware as the main point of what they provide. Some partners out there don’t even want to do hardware, and are doing it in an influencing type of way. But as I say, it seems that there are partners out there that clearly have found hardware as a cornerstone and a very important aspect of how they sell the market space, to be successful and to garner their services revenue. I’ll add to that, I think what positions Lenovo well with the channel is, because of our focus on, for example, ThinkPad’s technology tools and trying to put not just the machine together, but other tools, for example, that look at total cost of ownership, ease of installing, ease of deploying, ease of managing, that those kinds of tools fit into a lot of what the partners are trying to do in a larger fashion across the enterprise. So the tools that we provide integrate well into a lot of the offerings that our partners have, to make them more successful in how they manage a customer and the different aspects of managing a client product.

Vizard: Given that that there’s also a lot of talk these days about what the impact of what Intel’s vPro technology is going to be in the mobile space, do you see a lot more partners starting to talk about some kind of managed service, enabled by the technology and the platform makes it easier to deliver that?

Mungall: I’m not as versed in this space as I’d like to, in reference to answering your question crisply, but I will tell you that Lenovo is looking at a lot of different approaches to how we go about doing that. Additional toolsets, for example, that maybe is the approach we do, that we add into the TBT tools that help that even become a more robust solution. So I tell you, that’s an evolving area, and clearly one that we’re focused on in making sure we provide a good solution.

Vizard: What do you guys see happening with Vista in the mobile space around B2B? There’s talk that ranges from God’s gift to mobile computing, to this is going to be an orphan, and nobody’s ever going to migrate to Vista, because by the time they get around to migrating, the next great OS will be out. What do you see as the opportunity/challenges around Vista?

Mungall: Well, I have to say, clearly the market will determine how they want to go with Vista. Based on Microsoft’s past history of bringing products to market, there’s always an acceptance period and then acceptance occurs. So I think it’s one that, clearly, that Vista, I’m sure Microsoft will have Vista become successful. They have, of course, pushed out the definitive date when we move to Vista as the standard preload on all of the machines that come from Lenovo. But I think at some point, Vista will become de facto the installed base of what the operating system is on the client products coming from companies like ourselves.

Vizard: Are you, as a hardware manufacturer, reaching out more to ISVs specifically, to create more targeted opportunities for the partners? Rather than just selling the hardware, you’re making an effort to introduce the partner to the ISV that might have the killer app in a particular vertical?

Mungall: We’d like, of course, to do a lot more in the ISV space because clearly it gets into a solution-selling approach to the client. It’s only a client product. But from Lenovo’s current position in the market space, the product portfolio we have, of course we’re very limited in reference to how vertical we can go. Clearly when you have a product like a Tablet, you need to go that route. Hence, we did go the route of working with some ISVs, specifically as it was around the Tablet. And as you know, we would add more products to our portfolio over time, and we’ve become a larger company. The need for verticalization, for lack of a better word, is something that we go and pursue further. Today I would tell you, we’re probably more horizontally focused, just because of the nature of the products we have today, the size of our company, etc.

China Portfolio.

Vizard: So given that, when I look at the portfolio products that Lenovo carries in China, I can’t help but wonder, when are those products going to come to the U.S., if ever, or if there’s any kind of game plan for you guys along that line?

Mungall:Well, let’s put it this way. No disclosures can occur, but I would say, of course, this is something that even our chairman in analyst meetings has talked about what he called the product horizon of when we bring different products to market throughout the world, and to your point, a lot of those same products, of course, being already in China. So there is a plan that over time will come to the channel to disclose them, get them prepared for it, etc., as each of these new product lines come to fruition.

Vizard: Sounds like a big, giant “stay tuned” that something will happen.

Mungall: Exactly.

Vizard: The other thing that you hear a lot of people talking about these days is what is going to be the relationship between a notebook and these smarter, hand-held devices that are coming out that can do just about everything a notebook does, except maybe create the content. What do you think the relationship is going to be between, say, a smart phone and a notebook as people increasingly rely on that smart phone for their mobile experience?

Mungall: Let me sort of answer that with a step back on Lenovo’s approach — I made the comment about best engineered PCs. We had continued to focus heavily in having research and development around the products we want to sell in the market space. Lenovo had that already as part of their approach to the market in China. Clearly, IBM had that within its PCD division. Of course that facet moved over as part of the sale to Lenovo. So that new combined organization continued focus on what we needed to improve the total cost of ownership, the overall end-user experience as it applies to clients, etc. So I would tell you that with that kind of a foundation in our R&D, as you go look at the question you asked, which is the convergence of the laptop and of the smart phones, and what those devices look like, and how they will operate, clearly we have folks that are working on that. As you and I both know, there are a lot of things that I’m sure all companies have on the drawing board that will never come to fruition, that will never work. I’m with you in reference to there will be a convergence. Who knows what exactly that will look like and entail? But I’ll tell you that because we have invested in the research and development teams needed to understand where that’s going and the kinds of products that might be needed by a market space, I think we’re better prepared to address it when the convergence begins.

Vizard: So that’s kind of the equivalent of the Detroit concept car, and then will eventually come to market, but we’ll see about 50 different versions first.

Mungall: Exactly.

Vizard: What are your goals, running the channel program? When you come to work in the morning and before 3,000 other things happen and everybody dumps their problems in your lap, what would you say are the three strategic things you’re trying to get done?

Mungall: Let me answer the three strategic things that are really the three areas that I would tell you I focus on. And I use these words — we just had a series of advisory councils where clearly we have put together some of our key partners, but we’ve actually focused this a little bit deeper, in that we’re really trying to focus these advisory councils into the different segments they sell to, such as public sector, large enterprise, mid-market SMB. And the intent of that is so we can really ensure that we’re getting feedback from all the different partner types, and based on all the different customer segments they serve. With that recent feedback, I would put to you that, from my view, one of the three things that I want to always focus on, in anything I do from a channel perspective — and this is loud and clear, what came from the partners is, “How do I team with you, Lenovo?” Teaming meaning, how do I sell specifically to an end user? How does your end user sales team interact with me? How do we get together on acquiring new customers, etc.? The second one is, “How, Lenovo, do you fund me?” In other words, what are the different kinds of incentive programs to market development funds that you have available, to help me be successful with Lenovo. And then the third one is really the channel coverage. I’ll call it channel support. What are the things that are going to make my relationship with you, Lenovo, different than a lot of companies that maybe only want to choose to basically give you a great price, being that this is the reseller, a great price, and really don’t have people there to help out the team, etc., but from a channel perspective, one that looks at the total relationship. So I look at each of those and I try to ensure that we Lenovo are doing the right things. Let me just take you through each of those areas. So from a teaming perspective, we’ve announced a new program we call TEAMS, which is Targeted End User Approach to Marketing. It’s Lenovo’s targeted approach to end-user marketing. And basically this is in conjunction with the way we have gone to market, from an end-user perspective, around customer side. So the intent there is to have our segment sales teams working with partners that are focused on the specific segments. The best one, of course, to point out is the public sector. You want to find public sector partners and fully ensure that they’re teamed and working with our public sector sales specialists. We also put something else called the new customer acquisition program, which we actually just announced in August. It basically allows partners to go to a third-party company and get preapproved for lists of acquisition customers. And then we’ll provide them basically acquisition tactics to go after those customers, and they don’t necessarily share with us who those customers are. They have approval for it, but we of course ensure that they’re net new to Lenovo, so it’s a win-win situation for the partner and ourselves. Then as you look at funding, we’re looking at putting more funding in the marketing programs and basically co-marketing efforts with a lot more partners than we’ve done in the past. We put out funding for advocate roles for larger partners, to ensure that there is a Lenovo champion within their business, helping making sure that the Lenovo communications are there, the teaming’s done, etc. And then from a channel coverage perspective, two points to make there. We redid our coverage model to actually make sure we had more channel coverage on our SMB-sized resellers, and that was something that began July 1. We also then announced, starting October 1, Club Lenovo, which is an all-encompassing program to ensure that we can educate, provide, communicate, to our SMB resellers, our SMB offerings, which is our top seller products.