December 8, 2004 4:37 AM PST
IBM sells PC group to Lenovo
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go to consumers and very few systems get sold outside China, where it has strong ties to the government.
IBM sells to the cream of the corporate crop and often to customers that have invested heavily in IBM services and software. Its flagship ThinkPad notebooks come with novel design features like fingerprint readers for additional data security and hard drives that can survive a six-foot drop.
"This is going to be a bigger challenge than both companies think. You are talking about a company (Lenovo) that has no experience internationally. They are very shrewd, but they are only used to dealing in the Chinese market," said Joe D'Elia, research director for client computing at iSuppli. "It is going to take quite a long time to consummate, and the only way I see this running properly is that if a lot of blood is shed at IBM PC."
The deal also won't just require that IBM and Lenovo get along with each other. Sanmina-SCI owns the factories where IBM PCs for North America are produced and its contract to make those PCs is up for renewal next year. Because Lenovo does not have the factory capacity in place, the joint venture will have to negotiate a new relationship with Sanmina.
In China, IBM manufactures ThinkPad notebook models in a joint venture with Lenovo arch-rival Great Wall Technology. Lenovo will gain the ThinkPad factory in Shenzhen, known as the International Information Products Co., but it said IBM server manufacturing located there was not included in the deal.
Maintaining good relations with IBM's customers will be another concern for the PC group's new owner.
One IBM customer said that as long as products such as the ThinkPad follow familiar paths, he will be satisfied.
"We tend to base our decisions on quality control, features and functionality," said Shawn Nunley, director of technology development for NetScaler in San Jose, Calif. "So if it's the same product, where it's coming from probably won't make a huge difference. However, if they go the commoditization route...and it's no longer the ThinkPad way, then it might change my view."
Nunley said he appreciates the work that IBM has done to integrate security features into its latest ThinkPads.
For Steve Evans, vice president of information systems for the PGA Tour, sticking with IBM will depend on the details of the transaction and how much of the new company will be concentrated nearby. The PGA buys ThinkPads, servers and other IBM hardware.
"We would need to figure out what the presence this company is going to have in the U.S.," Evans said, adding that it will also depend on the product lineup.
One move that may reassure customers is that IBM Global Financing will become Lenovo's preferred provider for leasing and financing services, and IBM Global Services will be its preferred provider for warranty and maintenance services.
Lenovo who? Lenovo, formerly known as Legend, is the largest PC maker in China. The company was founded in 1984 as a distributor of IT products. Over the years it started its own PC business, growing into the No. 1 spot in China. It also sells products ranging from cellular phones to supercomputers.
During 2002, it ramped up plans to sell PCs globally. It even opened a Silicon Valley office and started selling laptops in Spain under its QDI brand. But it has been beaten back by competition from multinational PC makers, such as Dell, which have been growing rapidly in China. Dell, for instance, recently won a $10 million contract with Beijing's municipal government to supply Optiplex to primary and middle schools.
Lenovo said it has responded to "irrational price competition among second-tier PC vendors and increased effort of foreign brands" with price cuts of its own.
Despite the concerns of customers, industry analysts have said it could be a wise move for IBM to get out of building PCs. The timing could also be favorable. Although 2005 is expected to be a relatively good year for the PC industry, those good returns will give way to several years of slower sales of PC hardware, analysts have predicted.
By the end of 2005, many businesses and consumers will have replaced their oldest computers, completing the latest PC replacement cycle, Gartner said in a report last week. Given that owners typically replace desktops every four years and notebooks every three years, there is likely to be a drop in demand between 2006 and 2008. That period will see average annual unit shipments slow to 5.7 percent and revenue growth drop to 2 percent, Gartner predicted.
So-called emerging markets such as China are expected to see the best growth during that time, a boon for a potential IBM-Lenovo joint venture. But that could be offset by slack demand elsewhere, the Gartner report added, leading to further consolidation if PC makers don't prepare now by lowering their costs.
Still, potential rivals are already throwing cold water on the deal.
"We're not a big fan of the idea of taking companies and smashing them together. When was the last time you saw a successful acquisition or merger in the computer industry?" Michael Dell, chairman of Dell, said
ZDNet China contributed to this report.
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