IBM’s Big Ticket to China

There’s a lot more than what meets the eye with IBM’s deal to sell its Personal Computer Division to Lenovo Group Ltd. for $1.75 billion.

IBM has set in motion a multifaceted strategy that allows it to exit a low-margin PC business but, through an 18.9 percent investment in Lenovo, be able to continue to parlay PC and laptop sales into software and IBM Global Services sales. Most important, however, the deal allows IBM, of Armonk, N.Y., to dramatically expand its reach into the burgeoning Chinese market.

“The face of the new economy is revealed,” said Roger Kay, an analyst with IDC, in Framingham, Mass. “It’s about China coming out from behind the veil. No longer is it about them quietly providing manufacturing workers.”

Although IBM was dubbed the founder of the PC industry with the launch in 1981 of the IBM PC 5150, an atmosphere of recurring price wars and commoditization over the past decade led to increasingly low margins and resulting losses for the IBM PC Division. As a result, the company has been systematically throttling back the business and focusing instead on higher-end, higher-margin servers, software and services.

With the Lenovo deal, IBM will lose that overhead but maintain the ability to sell, support, service and finance ThinkPad notebooks and ThinkCentre desktops, as well as to leverage those to bring in software and services sales.

Meanwhile, Lenovo will continue selling the brand in the United States and elsewhere but will really drive IBM’s presence deeper into China.

“Lenovo will be a formidable competitor [in the PC industry], and our alliance gives IBM an even stronger position in China while strengthening our brand presence there,” IBM Chairman and CEO Sam Palmisano told employees in a memo soon after the deal was announced.

About 95 percent of the homes in China have no PCs, Deepak Advani, vice president of strategy and marketing for IBM’s PC Division, told eWEEK last week. Advani will become the chief marketing officer for Lenovo after the deal closes next spring.

In 2003, about 13.3 million PCs were shipped in China; in the United States, that number was almost 58 million, according to IDC. By 2008, the number for China will jump to 27.6 million units. Last year was the first time more units were sold in China than in Japan, according to IDC.

“Fundamentally, this deal is not about the U.S. market,” said Simon Yates, an analyst with Forrester Research Inc., in Cambridge, Mass. “It’s about China. It’s about Asia. … There’s not much more business in this country beyond the replacement cycle. This is a way for IBM to really reach into the Chinese IT market.”

Currently, the top three PC vendors in China are Chinese companies, with Lenovo holding a 26.8 percent market share, according to IDC. When combined with Founder Computer Systems Co. Ltd. and Tsinghua Tongfang Co. Ltd., the trio holds 46.7 percent. Dell Inc., Hewlett-Packard Co. and IBM trail in the fourth through sixth spots.

For their parts, Dell and HP currently have stronger footholds in China than IBM, Forrester’s Yates said. However, as the market grows, Yates said, he expects demand for local products to increase.

“The strength of local brands will grow over time, which could hurt HP and Dell in the long run,” he said. “But for the next five or six years, people will continue to buy Western brands.”

Competitors aren’t ready to cede China to IBM. “We have a good presence in major cities in Asia-Pacific, and we’re looking to continue expanding into Tier 2, Tier 3 and Tier 4 cities, particularly in China and India,” said Deb Nelson, vice president of marketing for HP’s Personal Systems Group, in Houston.

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