Lenovo, IBM Deal Raise Hard Questions
Lenovo has agreed to purchase IBM's PC business unit
for US$1.75 billion in cash and stock. About 9,500 employees
of IBM will become Lenovo employees, and Lenovo will get
ownership of the "ThinkPad" and "ThinkCentre"
name, two major product lines. IBM will get 18.9% ownership
in the new company.
While some commentators have suggested that the Lenovo
acquisition shows that China has come of age, in fact,
it raises other questions. The most basic question is:
"How is the new business going to become profitable
in a field which has not been profitable for IBM or Lenovo?"
The selloff
of the unit allows IBM to focus on selling global
services and consulting, an area which has become much
more profitable than PC manufacture for the IT giant.
In recent years, IBM has devoted a good part of its energy
to selling corporate customers on the open-source Linux
operating system worldwide. While the Linux operating
system is free and openly distributed, it needs considerable
configuration on the customer side to integrate it with
most corporations' current IT architecture. This has become
a major revenue source for IBM, and has performed very
well.
On the client, or PC, side though, Microsoft continues
to dominate the operating system and basic business applications
with Microsoft Office. In the past three years, hardware
manufacture has headed towards commoditization, meaning
that it has become harder for hardware makers to differentiate
themselves, and protect their margins. The only hardware
maker which has been able to prosper has been Dell, and
this success is based on Dell's superior supply management
system.
Because Dell relies on a "just in time" arrangement
with its suppliers, Dell has been able to cut its inventory
to a minimum, while maintaining quality. Normally, Dell
is paid immediately when the order is made, but pays it
component suppliers 30 days after the original order is
made. The result is a huge cash float, which other makers
do not have. Since Dell does not have a complicated distribution
channel structure to manage, those costs are saved as
well.
The commoditization of the PC has even affected the software
giant Microsoft. In the past two years, Microsoft has
pushed out new versions of the Windows operating system,
most notably the Tablet PC operating system (for pen input)
and the Media Center operating system (for home entertainment).
In the past two years, Dell has had significant successes
in China, while Lenovo has suffered
setbacks. So far, Dell has been the only company which
has been able to deliver profits on an ongoing basis on
PC manufacture alone.
The challenge for Lenovo will be how to integrate the
IBM PC business into Lenovo, and to make it profitable
on an ongoing basis.
That's a huge challenge.
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