Made In China: An Update On IBM's $1.25 Billion Sale Of Its PC Group

Will Lenovo Group's $1.25 billion pact to buy IBM's PC business enable it to jettison its low-end reputation and emerge as a blue-chip maker of personal systems? That's the question the channel is pondering in the wake of the blockbuster acquisition, which will transform China's biggest PC vendor into a worldwide powerhouse nipping closely at the heels of Dell and Hewlett-Packard. As the industry's highest-profile PC deal since the 2002 HP-Compaq merger, IBM's ground-breaking sale is also stirring up a hornet's nest of concerns: Can Lenovo continue IBM's tradition of innovation, or will it move swiftly down market in keeping with its low-end heritage? And will IBM's competitors step into the breach and sop up market share before Lenovo settles in?

So it's not surprising that Lenovo and IBM are moving rapidly to assuage worries about assimilation difficulties as they stitch together a mammoth organization that will tote an annual revenue of $12 billion and shipments of 11.9 million units, once IBM's $9.6 billion yearly PC business is factored in (see "9 Things To Know About Lenovo).

"Partners should not see disruptions at all," Stephen Ward, Lenovo's incoming CEO, tells VARBusiness. "What they should see instead is broader product portfolios over time."

Ward, who is currently senior vice president and general manager of IBM's Personal Systems Group, will move over to run the operation for Lenovo once the deal is completed this spring (see "Inside Lenovo's New PC Executive Suite," page 16). Lenovo, formerly known as Legend, will have rights for five years to sell IBM-branded devices. In gearing up Lenovo, Ward will also have access to IBM's sales force, gain entrée to its vaunted PartnerWorld program, and be able to draw upon the resources of IBM Global Finance and IBM Credit.

"I've been spending a tremendous amount of time with customers and with key partners like Intel and Microsoft," Ward adds. "[There has been] overwhelming positive response. One customer after another has been signing deals since we made this announcement. I'm very excited about our prospects."

Rather than being forced to march in lockstep with the PC strategy of IBM past, Lenovo will be able to put its own stamp on the business. According to IBM's top channel executive, Donn Atkins, Lenovo will have the independence to pursue opportunities and channel recruitment. That includes the option to rebrand IBM's PC products as its own, Atkins says. The ThinkPad name is highly prized in the marketplace, raising questions as to whether Lenovo would even consider such a move, but Atkins says he believes over time the company may adopt its own name.

Breaking away from IBM's shortcomings while building on its successes will be the biggest challenge for Lenovo. For some time, IBM's PC business has languished a distant third, with 5.6 percent of the market, according to Gartner's worldwide totals for the third quarter of 2004. That's well behind leader Dell's 16.8 percent share and second-place HP's 15 percent. Though Gartner hasn't issued official numbers, back-of-the-envelope calculations indicate that while the post-deal Lenovo would remain slotted at No. 3, its market share would immediately rise to almost 9 percent.

Whether Lenovo can maintain--or build--on the position may rest on whether it can rewrite the innovative-vs.-value challenge that has dogged IBM. Despite its top-notch, innovative technology, IBM has not been able to compete effectively in a market that has largely gone commodity.

One of IBM's rising competitors thinks that problem will continue to dog Lenovo.

"With the organization they have today, they cannot compete on price," says Rudi Schmidleithner, president of computer-maker Acer's Pan American operations. "No way. So they have to maintain and continue to offer very high value. And they need to have customers who are willing to pay for it."

Solution provider Bob Venero, CEO of IBM business partner Future Tech, in Holbrook, N.Y., agrees. "IBM's whole play is value, not volume," he says.

But with the effective death of margins in low-end client systems, such a strategy seems pretty much obsolete. Nevertheless, if Lenovo can maintain innovation while cutting costs--admittedly a tall order--it could keep its challengers at bay.

"If they can execute better...that will stop Dell's growth," says Bob Huang, CEO of distribution giant Synnex. "That will be good for the channel."

Though competitors often grind their teeth at IBM's heft, they also realize that Big Blue's Titanic-size channel program, in effect, validates the need for indirect sales. "IBM is a very strong channel player, and I hope this stays under the new management, because if they were to go for a bigger direct share, this wouldn't be good for the channel," Schmidleithner says. "I hope they continue to be a strong channel player. I think they can do it."

Still, some VARs remain wary that they'll be left on the hook if there's any pullback of existing Big Blue partner programs. That's the case at Future Tech, which recently invested more than $1 million building one of the largest ThinkVantage technology centers outside of IBM. It's a world-class facility where Future Tech customers can try out some of IBM's most advanced PCs, and it is dedicated solely to IBM. Now, however, Venero, a loyal IBM partner, is wondering whether he should bring in other vendors.

Those are precisely the fears incoming CEO Ward is intent on eliminating. "Bob Venero? I've talked to him already," Ward says. "ThinkVantage continues. We're all about business, and we're actually going to see ThinkVantage expand into a much broader marketplace."

Ward is also rushing to put to rest worries that Lenovo might take IBM's ThinkPad notebook brand down market. "The CEO of Lenovo worldwide is me, and I'm totally committed to ThinkPad," Ward says. "I managed that brand when we started it up; I'm managing it now. I know what our customers are asking for. I expect you to see a very, very exciting ThinkPad lineup."

For other partners of IBM's PC business, including the elite members of the VARBusiness 500 ranking of the largest solution providers in North America, the Lenovo deal raises questions about the long-term business landscape.

"It's the ultimate commoditization of the PC," says Robert Schaffer, president of Source Micro, a Randolph, N.J.-based systems builder. "Having the PC business doesn't hold value for IBM anymore."

Another IBM partner, Jeff Medeiros, president of rs-unix, a San Francisco-based software solutions house, doesn't think IBM's brand will take a hit. "I would only imagine it would create repositioning of the volume guys as they find out who the new mother ship is," he says.

Dan Love, vice president at Siwel Consulting, sees the deal as net-neutral. "If Lenovo manufactures PCs under the IBM brand name, I don't think it makes any difference," he says.

There's a similar take at one of the biggest distribution houses. Roger Arndt, vice president of marketing for Avnet Partner Solutions' IBM Americas division, sees long-term benefits from the move, even though his company has long steered clear of commodity PCs.

"Certainly, if IBM can unhook itself from a business that was pulling it down, then that's a positive," he says. "It's the best of both worlds for IBM because the PCs will still carry the IBM name and brand."

For VARs, the relentless pricing pressures of the past decade have created a market where PCs are often a necessary evil. "The channel is more into a personal business model, where you're not selling the hardware--you're selling the relationship," Source Micro's Schaffer says. "The PC is still the focus of the sale, but it's kind of along for the ride. You're really selling your relationship with the customer."

Even if it has yet to be borne out, a consensus is building that the deal will cause the channel to feel the pinch of further consolidation in the PC space. "It's a signal that Dell is getting stronger," says Ray Rueda, president of Honor International, a Miami-based systems builder. "IBM was feeling that the intense competition in PCs wasn't worth it."

Rueda believes a sale would further squeeze HP and put VARs in an even more intense battle with Dell. "The gap between Dell and systems builders is as small as it can be--we're extremely close on costs," he says. "In some cases, we're less. In others, they're less."

One vendor sure to be affected by IBM's move is HP. Despite immense pressure to divest itself of commodity lines, HP continues to believe that having a portfolio that ranges from handhelds to mainframe-class systems is advantageous.

"It does give us and our channel partners a great opportunity to go in and offer more stability because we're there," Duane Zitzner, executive vice president of HP's PSG division, recently told financial analysts. "We don't have a plan per se at this stage of the game, but we certainly are looking at what we can do to go in and target accounts to try to take advantage of the current situation."

Ann Livermore, head of HP's vast services arm, added in the same analysts session that HP is "seeing a lot of services where we will have the opportunity to do the whole implementation with servers as well as the notebooks or the desktops associated with that."

Another angle on the deal relates to the healthy business IBM has in selling PCs to the U.S. government. Asked whether the feds might take issue with buying PCs from a company that is partially owned by the Chinese government, Atkins says he fully expects the company to continue competing for government business.

As IBM's partner base continues to grapple with the implications of this huge channel deal, Ward is emphasizing that there will be little real upheaval. "We will start with the basic premise of the business partner charter that IBM has," he pledges. "We'll start with a commitment to our partner's business--a commitment to pass on leads, to pass on opportunities. IBM will continue to have a commitment to business partners to put their solutions into Lenovo's solutions."

This story was reported by Carolyn April, T.C. Doyle, Steven Lang, Jeffrey Schwartz, Alexander Wolfe and Rob Wright.