The End of an Era: IBM &Lenova

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The End of an Era
In a remarkable move, IBM has sold its personal computing division to a Chinese company. Where does the industry go from here?
Though overtaken in recent years by Dell and Hewlett-Packard, IBM remains a major PC manufacturer, especially in the notebook market
Donna McWilliam / AP
Though overtaken in recent years by Dell and Hewlett-Packard, IBM remains a major PC manufacturer, especially in the notebook market
       

Dec. 4 - IBM will no longer sell personal computers. It’s an understatedly simple statement, but it describes a fundamental shift in the global PC market. On Dec. 7, Big Blue announced the sale of its PC division for $1.75 billion to Lenova, a Chinese PC manufacturer ranked eighth globally but virtually unknown in the United States. How did America’s top PC maker end up as nothing more than lunch for an Asian Tiger? PC analyst Roger Kay of IDC answered that question and others for NEWSWEEK’s Carl Sullivan in an interview conducted a few days before the sale was officially announced.
NEWSWEEK: What does it say about American computing prowess if IBM exits the PC market?
Roger Kay: This is a remarkable turning point for a company that has been synonymous with personal computing, which was a hobbyist sort of thing in the 1970s until Apple came along around 1980. IBM took notice and recruited Intel and Microsoft—both of which were pretty much unknown—to help it get to market quickly. That was a very atypical move for IBM because most of its development had always been done internally. Microsoft and Intel provided key parts, but IBM supplied all the glue; in many ways it really created the PC business as we know it.


Roger Kay
So IBM can be at least partially credited with creating Microsoft and Intel?
Yes, but it also created an Achilles’ tendon immediately, which is that it didn’t really own the technology. The important technology over time turned out to be in the microprocessor and in the operating system, which are the Intel and Microsoft pieces.… The issue was speed. IBM could have [built its own PC to compete with Apple] if it had had a three- or four-year development cycle. But the market moved suddenly. Apple began to sell a lot of these things quickly.

It sounds like IBM didn’t have much choice about bringing in these other companies, but in a way it was their undoing.
There was a critical moment in 1994 when Microsoft publicly said it was no longer going to develop OS2, which was IBM’s operating system. It was a really good operating system. It didn’t break and it was very robust. IBM actually had better technology, but the company had aleady misunderstood the nature of the game. It wasn’t about better technology, it was about commonality of platform. Users wanted a common platform so everybody could open each other’s files and Windows became that platform.

But even today, IBM sells a lot of computers.
IBM is the third largest maker of PCs. It has a 6 percent share worldwide. It's No. 1 in notebooks in Asia/Pacific.

       
So why would IBM want to exit that business?
The PC industry has been undergoing consolidation for at least a decade. Consolidation is the nature of mature businesses. It’s instructive to look at the automobile industry. Once you get into a market where it’s entirely a replacement market, then you end up with three automakers and a few more around the world. The economics are very much an economy of scale and you can’t play unless you’re big. … Making computers isn’t as lucrative as the corporate-server and services business, which is where IBM is really focusing right now. IBM personal computing is profitable, but it’s not profitable enough.

What will happen to the IBM brand?
IBM has a lot of great stuff. The company spends more on [research & development] than any other PC company, it has great notebooks, it has some of the best customers in the world. IBM still has a tremendous international presence. And a lot of that is tied up in the brand itself. IBM is still considered a premium brand. That leads me to believe it’s more likely that this will be a joint venture than an outright sale—because Lenovo has to be able to use the IBM brand and the only way to do that is if IBM retains some ownership.… There might be other bidders like Samsung or more likely Acer because both of those companies would like to move beyond their traditional markets and have the money to do it. If it’s Lenovo, it’s a win-win for both companies because IBM gets out from under this underperforming division and even potentially could claim it's still in the PC business. Lenovo gets to get outside of China, get into notebooks, associate with a premium brand.

Who is Lenovo anyway?
Lenovo is essentially a desktop company based in China. It's No. 1 in Asia/Pacific, but mostly because it's No. 1 in China. Lenovo has have very little presence outside China. … The company has been exploring ways to come to the United States and Europe for a long time. So if it gets access to IBM, Lenovo is in both those markets instantly. It also get access to the notebooks; right now, it's primarily a desktop company. Lenovo is No. 1 in notebooks in China by only a hair and right behind it is IBM … so Lenovo would take out its biggest competitor in its own region.

What does this say about Asia in the PC market?
This is a big watershed. Asia has been rising in importance; 70 percent of the notebooks in the world are made by Taiwanese [design manufacturers] and built in Chinese factories. The Chinese themselves are rapidly acquiring a lot of that. This is when the mask comes off. All those American companies that you know, the Gateways, the IBMs, even the Dells turn out not to be so American after all. They are only at the brand level. Much of the labor and increasingly the intellectual property are coming from Asia. … If Lenovo turns out to be the [buyer], it’s a big deal if the original grand dame flagship of the industry goes over to an entirely Chinese company.

Should IBM customers be worried?
People who love Thinkpads—we worry. My sense is that [Lenovo will] continue development the way it is. It could keep both brands. … One company: two brands. Lenovo could be the consumer brand and IBM could be the business brand.


Any dangers for IBM?
Immediately Dell and Hewlett-Packard will start throwing rotten fruit at them. They start getting customers all worried about IBM: “There’s a lot of uncertainty; maybe they’ll leave the business.” You can be sure that’s what the competitors will do with this.
© 2004 Newsweek, Inc.

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lenova?
lenovo?....