China's Lenovo Group has revealed growing warranty costs in the PC business it is buying from IBM, raising questions about quality control on Big Blue's product lines.
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Yesterday, the companies announced that Lenovo would pay $1.25bn (£652m) in cash for IBM's PC business and that IBM would take an 18.9% stake in Lenovo, which is China's largest PC maker.
According to a statement from Lenovo detailing the agreement, IBM faced increasing and exceptionally high warranty expenses between January 2003 and June 2004 due to faulty components in some of its PCs.
The company did not specify which components were causing the problems, what the problems were or which PC products were affected. Nor did it say whether the problems had been resolved.
According to Lenovo, warranty costs were approximately $452m (4.5% of net revenue) in 2001, $430m (4.7%) in 2002, $586m (6.1%) in 2003 and $365m (7%) in the first six months of 2004.
IBM refused to comment.
Eric Arnum, editor of Warranty Week, said it was difficult to break down warranty expense costs in diversified companies. "While the overall warranty expense for IBM may be around 3% of hardware revenue, it's much higher for the PC line," he said. "One can safely infer that it must be lower for servers, mainframes and other hardware if the overall corporate average is close to 3%."
Arnum said Dell, Gateway and Apple consistently maintained overall warranty claims rates below 3%, while Hewlett-Packard remained in the 3-4% range although it had a non-standard warranty cost structure for its printers.
The only large computer-related manufacturers with overall warranty claims rates in excess of 5% of hardware revenue are Sun, Lexmark and PalmOne. "In my experience, 5% has been the demarcation line for danger," said Arnum. "Anything above this level suggests a problem."
But Arnum warned that direct warranty cost comparisons between companies could be tricky because much of what is and isn't classified as a warranty expense is left up to individual companies to decide. Also, the overall company average may not reflect the true experience of just the PC line of business.
According to Gartner analyst Brian Gammage, there has been no indication that IBM's warranty costs are any heavier than those of its competitors or that consumers are concerned about IBM product quality.
"It is completely the other way around," he said. "Customers have indicated that quality has risen for IBM. Where quality has become more difficult for some other manufacturers in this highly competitive market, IBM has been able to keep itself ahead of the rest on the quality issue."
IDC analyst Ian Gibb said that quality would be a key issue for both Lenovo and IBM in reassuring customers that PCs with the IBM brand - which Lenovo can use for the next five years - would still be a mark of quality.
"I would assume that IBM is already in the process of talking individually to its large corporate customers to reassure them about the benefits of the new arrangement," Gibb said. "SMEs will be a tougher challenge. IBM will need to pass the necessary information out to channels and let them reach out to SMEs. In that case, it becomes very much about channel education."
Laura Rohde writes for IDG News Service