Big Blue's Chinese takeaway

IBM’s decision to sell off its PC division to Chinese PC giant Lenovo has attracted acres of media coverage. Has IBM turned its back on PCs and notebooks as some sensationalist headlines have made out? Don’t believe that for a second.

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By  Stuart Wilson Published  December 8, 2004

IBM’s decision to sell off its PC division to Chinese PC giant Lenovo has attracted acres of media coverage. Has IBM turned its back on PCs and notebooks as some sensationalist headlines have made out? Don’t believe that for a second.

Rather, IBM has taken a logical outsourcing decision that will improve its ability to compete aggressively on cost against HP and Dell and opens the door for IBM-branded PCs to make a welcome return to the consumer PC space.

For those thinking that IBM has sold out of the PC space, it is necessary to take a close look at the terms of the deal. As part of the total US$1.75bn package coughed up by Lenovo, IBM will accept some US$600m in stock making it the second largest shareholder in the expanded group. With some of these shares locked up for three years, the value that IBM derives from this deal will be intrinsically linked to the success of Lenovo.

Putting the deal in perspective, it is actually a pretty good fit all round. Lenovo holds 26% of the Chinese PC market, is particularly strong in the consumer segment and has massive economies of scale. It wants to go global but needs the brand and the channel to turn this dream into a reality. On the other side we have IBM: technically advanced PC products with strong value-added features, a global presence in the business PC market, a channel to match but held back by slightly higher prices than close rivals.

Put these two together and you’ve actually got a pretty compelling picture. Lenovo gets global reach and IBM gets a wider product portfolio at more competitive prices. The tantalising prospect of IBM’s product quality and channel reach coupled with Lenovo’s manufacturing efficiency and huge purchasing power will be giving Mr. Dell and Ms. Fiorina plenty to ponder in the months ahead.

Spinning off a low margin business unit is a great way for a vendor to unlock the true value of its organisation. If you trawl through IBM’s financials the Personal Systems Group (PSG) has always stood out as a low margin anomaly at Big Blue. In the third quarter of 2004, PSG recorded pre-tax margins of just 1.6% compared to 10.8% for the company as a whole.

HP finds itself in a similar position and persistent whispers that it could eventually follow IBM’s lead and separate low margin business units such as its Personal Systems Group (PSG) refuse to go away.

IBM has set its PC business free, given it the resources to challenge the global PC superpowers and wagered that the new Lenovo will be a success in the market by taking a sizeable equity stake. The products stay the same, the brand remains intact but the pricing points are set to fall.

Sameh Farid, operations manager at IBM Middle East, explained: “One of the best assets that Lenovo is buying and acquiring from IBM is the channel structure and the international experience of its sales force. For a company currently operating in its domestic market this is the biggest asset because it gives access to a wealth of experience and a global channel structure that has been built over 20 years.”

IBM has not sold out of the PC and notebook space. This is just business process outsourcing on a mammoth scale. The deal gives IBM’s PC range the opportunity to flourish and removes a low margin business unit from Big Blue’s empire. It also gives the company a solid stake in a global PC manufacturing giant with the economies of scale needed to take on Dell and HP.

Contract assembly has become the norm in the PC and notebook space. Lenovo and IBM currently work with an array of Far East contract assemblers including ECS, MSI, Foxconn, Sanmina-SCI, Compal, MTC, Wistron and Quanta to supply the PCs and notebooks they take to market.

Combining IBM’s PC division with Lenovo enables the enlarged group to drive even better deals from these suppliers. The streamlined IBM organisation that is left behind becomes the sales and marketing juggernaut creating the channels required to take the products to market.

It is a model that other major vendors already have in place. Take Acer as a prime example. It uses a variety of contract assemblers and does not actually manufacture the products it sells. Acer is a pure sales and marketing organisation and IBM’s deal with Lenovo puts Big Blue in a similar position.

“IBM is not exiting the market. The new PCs will be branded IBM and IBM will be the biggest channel to market. There is no change in the channel structure and the impact is that partners get more breadth to the product line and more competitiveness on the existing products,” added Farid.

Lenovo means a wider product portfolio, better pricing and the continuation of the IBM brand. The channel should be sitting up and taking note of the opportunities this presents in the years to come.

Selling its PC division has not sounded a death knell for IBM PCs and notebooks; it has given the brand a whole new lease of life.

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