Lenovo to take over IBM’s personal computing division

System integrators and distributors are assessing the impact of the sale by IBM of its PC business to a Chinese computer manufacturer.

IBM says there will be little change for partners in the immediate future: Manufacturing of IBM-branded desktop and laptop products will continue and resellers

will still be credited with points for its Partnerworld program.

However, over the next five years the IBM brands on those products will be phased out.

As a result resellers may wonder if buyers will shy away from IBM PCs and laptops, unless their prices fall.

Among the VARs examining the deal closely is Compugen Inc., which has recently been awarded a $38 million deal to supply PCs to the city of Toronto.

Company CEO Harry Zarek wouldn’t say if a supplier has been chosen to fulfill the huge order. But he did say any uncertainty the deal may cause won’t affect deals being worked on.

“We’re confident that whatever agreements we have with our vendors, whether they’re IBM, HP or Toshiba, they will be honoured,” he said. They will deliver on whatever commitments they’ve made.”

Desktops represent about 25 per cent of the Richmond Hill, Ont.-based, company’s business, said Zarek, a “significant amount” of which are IBM PCs and ThinkPads.

Under the US$1.7 billion cash and stock sale — expected to be approved in the spring of next year by shareholders — Lenovo Group Ltd., will acquire IBM’s entire PC division.

The deal will quadruple Lenovo’s personal computing business, the partners figure.

And it will be a partnership: IBM will be the preferred services and customer financing provider to Lenovo, while the Chinese company will be the preferred supplier of PCs to IBM. That means Big Blue will still be able to offer a full range of computer solutions to partners and through its sales force, it said.

More importantly for the channel, IBM will provide marketing and demand generation services for the IBM-branded Lenovo products, as well as the Chinese firm’s hardware.

Lenovo Group will move its PC business worldwide headquarters to New York and add some 10,000 IBM employees — about 40 per cent of whom are already in China.

Among those joining Lenovo will be 400 IBM Canada employees.

Stephen Ward, the vice-president of IBM’s Personal Systems Group, will become Lenovo’s CEO.

IBM will take an 18.9 per cent stake in Lenovo, becoming its second largest shareholder.

According to Mike Quinn IBM Canada public relations manger, when the deal closes Lenovo will inherit the IBM partner relationships, which he said it will assess and renegotiate as appropriate.

“There may be minor changes as to how partners sell Lenovo products, but the intent is for these PC products to remain a very important part of the total solutions they offer their customers,” he said.

“”Partners will likely have the same contact for PC products, essentially the same business partner territories, regions, accounts.”

“Partnerworld will not change at this time. Lenovo sales will continue to contribute to the points totals for Partnerworld. Over time Lenovo will determine what its business partner relationships will look like.”

The deal “could be very good news” for resellers, said Tech Data Canada president Rick Reid.

“Possibly with the introduction of a new low-cost manufacturing model, maybe of new means of going to market that aren’t encumbered by the IBM of old, they may very well become a very aggressive PC manufacturer in time.”

While IBM desktops and laptops and related options accounted for only 10 per cent of Tech Data Canada sales of those products, the brand was one of the fastest-growing, he noted. That in part is because IBM has increasingly relied on distribution to sell its PC line.

While desktops are not a big part of business at the Ram Group, a Markham, Ont. national VAR, the company doesn’t want to see the brand disappear from PCs said Richard Lichtenstein, its vice-president of business development. “We have an uncanny ability to sell full solutions in the SMB space, including IBM desktops, because of our complete IBM offerings. So I would lose out on that revenue.”

As Lichtenstein noted, rumours have been circulating in the industry for years that IBM might get rid of its PC business in the face of intense competition from Dell and white box builders.

While Lenovo’s leap into the PC spotlight with the help of one of the giants of the industry, resellers should note that Gartner Inc. is advising corporate buyers to re-evaluate all contracts with PC vendors — both signed and under consideration — to ensure that they allow for renegotiation of suppliers if the vendor exits the market for any reason.

It also suggests they adopt a dual-vendor strategy, which creates vendor diversity and helps minimize the risk of a sole-source relationship.

In an advisory Gartner observes that the PC industry is under intense competitive pressures and that consolidation among manufacturers is likely: It predicts three of the top 10 vendors will disappear by 2007.

“There is a possibility (companies) may re-evaluate who their PC provider is, which might open an opportunity for Dell and HP,”” observed George Bulat, an IDC Canada analyst who covers the PC industry.

Rob Enderle, principal analyst at the Enderle Group, a San Jose, Calif. who advises vendors on personal computing issues, is skeptical of the deal’s value.

About half of IBM’s customers are large enterprise and government accounts who primarily buy on the strength of its name, he said. “Governments in particular are going to have significant issues with products coming out of China from a company that is partially owned by the Chinese government. Most governments do not like the idea of computing technology coming with the influence of a foreign government, and this will probably be a bigger risk for them.

“Large enterprise accounts, of course, tend to be very committed to the vendor, and in particular to IBM across all lines, but this will no longer be an IBM line. I think you’ll find Dell and HP will be incredibly effective at convincing these folks that not only shouldn’t they be buying PCs from the new entity, but the probably shouldn’t be buying a lot else from IBM, anticipating the sell-off of products like the [Intel-based] xSeries [servers].””

With the loss of its PCs, IBM server costs will go up, he argued, because they share some components. That will lower volume and cut into sales.

Attention will now focus on Hewlett-Packard amid news reports that over the past five years its board has considered splitting up the company several times.

Lenovo says the deal will make it the world’s third largest PC maker, giving it reach beyond China and Asia.

Based on 2003 results, it would have had combined annual PC revenue of US$12 billion on sales of 11.9 million desktops and laptops.

It also makes servers,mobile handsets and peripherals.

The exit of IBM from the PC market — even if it is done over a period of several years — would be a sad event, said Zarek. IBM gave legitimacy to the personal computer in 1980 when it became the first international computing giant to bring out a desktop computer.

At the time, of course, no one thought about millions of interconnected PCs being a standard feature on corporate desktops and the billion-dollar companies that would win — and lose — from its inception.

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Howard Solomon
Howard Solomon
Currently a freelance writer. Former editor of ITWorldCanada.com and Computing Canada. An IT journalist since 1997, Howard has written for several of ITWC's sister publications, including ITBusiness.ca. Before arriving at ITWC he served as a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times.

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