Watch out HP, Lenovo is coming. Indications are that following the $2.6bn acquisition of IBM’s x86 business, Lenovo will price its server products aggressively to win customers.
Announcing the deal, Yang Yuanqing, chairman and CEO of Lenovo, said: "With the right strategy, great execution, continued innovation and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long term, just as we have done with our worldwide PC business."
In the PC market, Lenovo has been vying with HP for the top spot and has become the world’s biggest PC maker.
A Lenovo brand strength index report from analyst Gartner, published in December 2013, noted: "Lenovo has inherited one of the best R&D teams for professional-grade PCs through the acquisition of IBM's Personal Computing Division (PCD). Lenovo has successfully preserved the strength of its R&D and introduced innovative client devices that fulfil enterprise need. Lenovo's technology innovation in the commercial PC space certainly affects positive brand attitude to overall Lenovo branding."
Gartner’s PC market share data for the fourth quarter of 2013 showed that Lenovo led the PC market with an 18.1% share, HP was second with 16.4%, while Dell placed third with 11.8%.
As Computer Weekly’s sister title MicroScope has previously reported, Lenovo has been trying to grow its server business. The acquisition of IBM’s x86 server business certainly looks set to boost Lenovo's credibility and enable it to establish a footing in the PC server market.
But IBM saw a massive decline in server shipments in the fourth quarter of 2013, shipping 37% less than in 2012, according to Gartner figures.
Lenovo expected to play low-cost server game
The smart money is betting that Lenovo will emulate its successes in the PC market by undercutting the established competitors, especially HP and Dell.
More on Lenovo
Gartner analyst Errol Rajit said: "There is an opportunity for Lenovo to build extra efficiency into IBM’s server business model to build in better margins or to be more price competitive. Lenovo can go further and offer low-cost products that could even compete with the original design manufacturers such as Quanta and Wywinn."
Open source hardware, for scale-out datacentre designs, may be the future for Lenovo, he said, citing Facebook’s] Open Compute Platform and Project Scorpio from Alibab in China. This would enable Lenovo to build and sell open source datacentre hardware and remain price competitive against other mainstream suppliers.
"The challenge Lenovo has is there is a strong desire for this sort of model in the market and it may not be unique in offering lower pricing," said Rajit.
IBM partnership gives Lenovo strength
On the other hand, the deal means Lenovo will have a role in IBM’s appliance strategy going forward. Through the acquisition of the x86 server business, Lenovo and IBM plan to enter into a strategic relationship which will include a global manufacturing and reseller agreement for sales of IBM’s entry-level and mid-range Storwize disk storage systems, tape storage systems, General Parallel File System software, SmartCloud Entry offering, and elements of IBM’s system software portfolio, including Systems Director and Platform Computing products.
Giorgio Nebuloni, research manager, servers, at IDC Europe, noted: "The fact that integrated solutions such as PureSystems and blades are included in the deal raises the profile of Lenovo, even within large accounts. All of these elements have typically been the gap that prevented Asian companies, such as Acer and Lenovo itself, from expanding their market share and relevance in the past.
"For competitors such as Dell and HP, this could potentially mean stronger competition in SME environments, where IBM had been less aggressive in the past, especially given that Lenovo has experience in building and growing an acquired business in the form of IBM's PC business."
Lenovo is expected to emulate its successes in the PC market by undercutting the established competitors, especially HP and Dell
Nebuloni said Lenovo would need to work alongside IBM to support those larger customers running IBM x servers, PureSystems, Power and z series mainframe computers.
"IBM will retain only the Power-based portion of blade environments, yet this will require long-term joint work with Lenovo in several customers currently using both x86 blades and Power or System z mainframe environments or even storage blocks, which IBM will keep in its portfolio," he said.
Beyond large enterprises, Lenovo is already building its SME partner programme. MicroScope reported that Lenovo did 95% of its European business through partners last year, and upped channel sales by €1.5bn (£1.2bn). The company is working with partners to grow its share in the SME market.
In Lenovo's favour
The acquisition of IBM’s x86 business will help Lenovo establish its enterprise credentials. Its continued partnership with IBM should enable it to provide appliances that integrate IBM software and storage products.
Given its impact in the PC market, Lenovo could drive down prices in the server space, which will hurt the established server makers, especially HP and Dell.
It could also join Dell and HP as a sponsor of the Open Compute Project, or give a boost in credibility to the rival Chinese project, Scorpio, which Intel sponsors.
As a final point, the latest revelations concerning the US National Security Agency (NSA) spying on consumers and businesses and forcing US IT firms to hand over customer data could play in Lenovo’s favour.