Lenovo Must Invest to Keep IBM Brand's LureBy David Coursey | Print
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Opinion: In taking over IBM's struggling PC business, China's biggest PC maker should realize that holding onto brand loyalty will demand a heavy investement in R&D.This is one of these "and then the other shoe dropped" stories, and it involves the IBM-Lenovo deal that sent Big Blue's PC business to the Chinese. It turns out, according to SEC filings reported in The Register, that IBM's PC business wasn't just a low-margin business. Rather, it had lost nearly a billion dollars.
What does this mean for people who love their IBM ThinkPads? Will Lenovo be a good foster parent, or did IBM sell to the only company idiot enough to buy?
Here are the basics: IBM's PC business unit lost $397 million in 2001, $171 million in 2002, and $258 million in 2003. It was on the same pace through the first half of 2004, during which it lost another $139 million. So, in less than four years, IBM lost nearly a billion dollars selling personal computers.
That isn't likely, alone, to make Lenovo profitable, but it could help. On the other hand, IBM is a premium brand, and that's something new to the Chinese. Maintaining that brand requires a big investment in research and developmentan investment that might go away if Lenovo can't quickly turn the business around.
IBM's ThinkPads enjoy a level of brand loyalty that borders on fanaticism. Customers love the ruggedness, build quality, innovative features and support for corporate IT infrastructure that ThinkPads have always offered. I know many people who will only buy ThinkPads. But will they want to in the future?
Conventional thinking, Version 1, is that Lenovo (whose major shareholder in the Chinese government) knows it's buying a premium brand and is smart enough not to squander it. That suggests that the company has access to resources greater than IBM was willing to commit and is in it for the long term. Lenovo could be China's first attempt at selling quality and features as well as low price.
Conventional thinking, Version 2, is that Lenovo bought a company in trouble, took on some additional debt, and maybe has a year of product designs in the can. Lenovo must find a way to do what IBM couldn't: turn a profit. We really don't know how much Lenovo has to invest, but when that money runs out, so will the IBM PC and ThinkPad brands.
It will, however, be a while before we know which scenario is closest to true. Lenovo is taking on a boatload of IBM employees and initially will be shipping current IBM product.
Whatever changes the company makes, if they result in lower levels of quality or innovation, will be hard to hide. But they also may not show up for a couple of years, especially since we know little of Lenovo's financials.
For companies that currently purchase ThinkPads and other IBM PC products, it's safe to continue doing so, provided you re-evaluate every six months or before each major purchase, whichever comes first. Publications need to be especially vigilant in their reviews of future Lenovo-designed and -manufactured, IBM-branded products.
China is best-known as a lowest-cost, lowest-innovation producer of, well, most everything. A Chinese company's purchase of IBM's PC business will be a test of whether the country can step up and play in the global value-added market.
To do this, Lenovo must become more than a lowest-cost producer and invest in R&D at a level that, to my knowledge, would be unprecedented in China.
I think Chinalike Taiwan before itis capable of making this great leap forward into the premium, value-added arena. Whether it will, however, won't be known until 2007 or so.
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