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Reports that IBM might spin off or sell its PC business have refocused attention on the evolving role of contract manufacturers and Asian ODMs, those companies who actually build the PCs that are later branded as “Dell” or “HP.”

The same factors that have helped “original device manufacturers” such as Hon Hai Precision Industry (Foxconn) and Compal Electronics develop their own finished products for sale in the marketplace have benefited Lenovo Group, the region’s largest PC manufacturer and reportedly IBM’s suitor for its PC business.

PC makers began turning to Taiwan and other Asian countries in the 1980s and 1990s to manufacture their PCs, in part because of the low cost of labor.

After a Taiwanese ODM finished manufacturing the PC, an OEM’s label was added. That, in turn, led to lower PC prices and the rapid growth of the market. Other “white box” makers and the rise of the DIY market began convincing some that a PC was no greater than the sum of its parts.

PC vendors have said privately that, over time, their own responsibilities have decreased down to brand management, specification and testing of the final products. More and more ODMs and contract manufacturers are taking on more traditional engineering roles, as well as procurement responsibilities.

That has led to concerns that U.S. engineering resources may be drifting overseas, relegating U.S. companies to little more than marketing organizations.

“The market’s slowly becoming aware of that,” said Roger Kay, an analyst with IDC in Framingham, Mass. “It’s becoming more of a factor, but it’s always been a factor.”

That, in turn, has placed more clout in the hands of Asian designers, rather than PC OEMs. According to a report by, for example, Foxconn’s Foxsign Studios employs about 80 designers and aims to bring that figure to about 200 by year’s end.

What IBM seems to be thinking, analysts say, is that there’s simply no profit to be had in the PC space anymore. IBM outsourced its desktop PC and later its server and workstation manufacturing to SCI/Sanmina in 2003, and the company merged its hard-disk-drive operations with Hitachi Global Storage Technologies to essentially exit the hard-drive market.

Earlier this week, Gartner analyst Leslie Fiering wrote that the PC businesses of both Hewlett-Packard and IBM are subject to being spun off if their drag on margins and profitability are deemed too great by their parent companies.

“If IBM is exiting PCs, management is likely making a long-term call that PCs are commodities,” Merrill Lynch analyst Steve Milunovich wrote Friday in a research note that was sent to the company’s clients.

Commodity products, however, become subject to “churn,” where commodity prices help users conclude that the products are replaceable, and therefore have little value. While this helps inflate the volume of products sold, little value is placed upon the individual item.

Next Page: How would a combined IBM-Lenovo PC unit fare in the worldwide market?

Churn was a term first applied to the wireless industry. There, consumers bounce from carrier to carrier, focusing more on the conditions of the contract—how much they’ll have to pay—rather than on the carriers themselves. Consumers are generally “locked in” to a carrier only if they find an acceptable price and the carrier offers them discounts to prevent them from moving to another service.

Interestingly, China has placed restrictions on the number of wireless phones that can be imported into the country, artificially limiting the amount of churn in its own market.

ABI Research, based in Oyster Bay, N.Y., expects wireless handset shipments from Taiwan’s ODMs to reach 60 million in 2005, even though only Dbtel Taiwan Ltd. won a license to produce and sell Dbtel branded wireless handsets in China, ABI analyst Junmei He wrote in a recent report.

A second vendor, BenQ, obtained a license through a joint venture. Still, China’s imports have quadrupled from $104 billion in 1993 to $413 billion last year, according to testimony provided by Nicholas R. Lardy for the Institute for International Economics to a U.S. Senate hearing in March.

While Lenovo Group isn’t a contract manufacturer or an ODM, it has benefited from the same market conditions that have boosted the ODM market—namely cheap labor, close global proximity to component manufacturers and a booming Asian market primed for the latest in technology.

It’s unclear how a combined IBM-Lenovo PC unit would fare in the worldwide market, especially with regards to the ThinkPad, IBM’s notebook line.

IBM ranks third in the world in PC sales, while Lenovo is the top vendor in the Asia-Pacific region. But the merged company would be able to take advantage of China’s low-cost labor force, one that has lagged behind Taiwan in terms of real wages.

As Taiwan gets richer, meanwhile, the pressure to move to a lower-cost market becomes greater. The process is not unique to Asia, either.

“It’s difficult to discuss this subject without swearing,” Brian Mann, managing director of McKechnie Plastics Components and president of the British Plastics Federation, said in a report published by in March.

“So much good work accomplished over the years by U.K. plastic component suppliers has been thrown away by customers in pursuit of lower costs,” Mann said. “And the production gets moved on from one country to the next.

“For example, a multinational will set up in Romania for a while. Then when the employees at the Romanian plant start to expect a lifestyle more like their counterparts in the West, the company moves its production to Hungary and the whole thing starts again.”

In a preview of the first findings ever compiled on China by the Bureau of Labor Statistics, Chinese workers are paid an estimated $1.06 an hour for city-based manufacturing, or 64 cents when rural manufacturing is factored in, BusinessWeek reported Thursday. Previously, Mexican workers were paid the least, according to BLS statistics, at $2.48 an hour.

Even though the economics of PC manufacturing now favor Asia-Pacific vendors, merging with or taking over the company that popularized the personal computer would be significant, analysts say. Meanwhile, IBM has refused to comment on whether it is in fact shopping or will shop its PC business.

“Still, if a Chinese company snapped up a big chunk of an American PC company, that would obviously be a big deal,” IDC’s Kay said.

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