IBM's decision to form a joint venture with China's
Lenovo Group underscores the challenges that manufacturers face in
the modern PC business, even for a company synonymous with the
product.
In terms of shipments, for the last few quarters IBM has ranked
a distant third among PC makers worldwide, behind Dell and
Hewlett-Packard.
That said, though, its ThinkPad notebooks enjoy a strong
reputation among corporate customers, who are impressed by their
security and reliability features. And IBM's historical role in the
development of the PC also gives its extra cachet with some
customers.
So why would IBM seek a gradual exit from the PC business?
Quite simply, it's just too difficult for most companies to
generate steady profits selling PCs, according to Roger Kay, a
vice-president with market research company IDC.
Of the top-tier PC makers, Kay said, only Dell's direct-sales
model and vigorous inventory management consistently brought it
profits.
Components such as memory and displays are subject to wild
fluctuations in price. PCs are also harder than ever to
differentiate, given that most PC makers employ many of the same
contract design and manufacturing firms in China and Taiwan.
Traditional hardware companies have spent much of the last few
years looking for opportunities to expand their revenue outside the
rapidly maturing PC market.
Dell and HP have developed consumer electronics divisions, but
IBM has spent more time boosting its high-end server and software
businesses, as well as expanding its already huge services arm with
the 2002 purchase of PwC Consulting. IBM has cut costs in its PC
division by outsourcing production and dumping its hard-drive
business, but financial analysts looking for better margins have
long called for IBM to sell off its PC operation.
Kay said that the deal with Lenovo gave IBM almost a decade's
worth of cash earnings from the PC business in a single deal. At
the same time, IBM will still be able to retain its important
enterprise customers that have come to rely on ThinkPads as the
basic computing device for their workforces. The company's primary
argument against dropping PCs until now has been that it needs
notebooks in order to provide a complete IT package for corporate
customers.
As for leading Chinese PC maker Lenovo, the deal with IBM gives
it a foothold in the lucrative US and European markets. While most
of the exciting growth in the PC market is taking place in emerging
markets in Asia, Eastern Europe and South America, corporate
customers are attractive because products for that segment command
higher margins than PCs for personal customers.
Kay also pointed out that Lenovo would be acquiring the
second-largest notebook PC business in China, putting it in a
dominant position in its home market.
But Stephen Baker, director of research at NPD Techworld, said
IBM and Lenovo had an uphill battle on their hands trying to
convince corporate customers that the ThinkPad of tomorrow would be
just like the ThinkPad of today.
According to Baker, IBM is taking a big risk in allowing Lenovo
to keep the ThinkPad brand name. ThinkPad customers have already
demonstrated they care more about features and product design than
price, and it may be difficult for Lenovo to reassure customers
that the ThinkPad's reputation will endure on Lenovo's watch.
If the ThinkPad evolves into just another notebook or turns into
an inferior product, then IBM will have damaged its reputation and
brand among corporate customers, which could hurt the very software
and server businesses that IBM is trying to enhance.
It's too early to know exactly how enterprise ThinkPad users
will be affected by the new company, but smaller businesses will
probably find themselves on the receiving end of a marketing
barrage from Dell and HP as they try to capture accounts IBM will
not have time to service, according to Sam Bhavnani of Current
Analysis.
Both IBM and Lenovo will have to devote a great deal of their
energy to convincing large corporate customers that life will go on
for the ThinkPad customer. Bhavnani said these enterprises would
demand to know whether they would still have IBM support in two
years, or whether they could order a new batch of notebooks with
their custom software image if they needed to expand.
One thing all of IBM's corporate notebook customers should
expect to see, several analysts agreed, was a classic cycle of FUD:
fear, uncertainty and doubt, much of it spawned by IBM's rivals. IT
companies prey on user uncertainty whenever the industry undergoes
an upheaval.
While IBM appears to be kicking off the latest round of
consolidation in the PC market, it will probably not be the last
hardware maker to rethink its approach. Analyst company Gartner
recently predicted that three of the top 10 PC makers would exit
the market by 2007.
With IBM, the number three PC company, and Lenovo, the number
eight PC company, joining forces, the spotlight now switches to HP.
Chairman and chief executive Carly Fiorina is still having a hard
time convincing analysts that the acquisition of Compaq was worth
the time and effort.
At a HP analyst meeting yesterday, Fiorina acknowledged that
HP's board had considered a breakup in the past. If growth in the
PC market stagnates in 2005, as predicted by Gartner and IDC, HP
might find itself pondering the same set of options that led to the
IBM-Lenovo deal.
Tom Krazit writes for IDG News Service