Lessons for Lenovo

If IBM couldn’t make a go of its PC business, what chance does Lenovo have?

A deal to buy the division and operate it as a joint venture with Big Blue was reached late last year and isn’t expected to close for several months, but there are questions being raised about how the Chinese company

might succeed where IBM failed.

Some of IBM’s problems became more apparent when it recently released some numbers as part of a regulatory filing. Normally, Big Blue doesn’t break out earnings for its divisions, but reported a cumulative loss of almost US$1 billion over three years for its PC business.

According to IDC Canada, IBM registered year-over-year growth of 4.9 per cent in the third quarter of 2004, based largely on sales of its ThinkPad line of notebooks, which grew 13.2 per cent. It came in third place, however, after Dell, which owns 24.6 per cent share of the Canadian PC market, and HP, though HP saw shipment growth of 4.8 per cent.

The transition may be a tough one for Lenovo, according to one Hamilton, Ont., reseller, who says that the company may have to counter the perception that a move away from IBM is a move away from quality.

“”They’re a relatively unknown entity on this side of the ocean,”” said Paul Furtado, vice-president of Audcomp Computer Systems.

“”I don’t have an easy answer for how they’re going to get around that. I think they’re really going to need to strengthen their IBM PC partner program in order to get the backing of those that are out in front of the customers.””

Discounting Lenovo computers and laptops may not equate to an increase in sales, he added. Machines from chief rivals Dell and HP are already priced competitively.

The key may be for Lenovo to concentrate on operational efficiency, said Harry Zarek, president of Richmond Hill, Ont.-based Compugen Inc.

“”Long term success for Lenovo will be for them to figure out a lower cost model. I’m not convinced that lower cost means lower costs of goods — just a more lean operation. If Lenovo understands that that’s the only business their in, they should really work hard to get their operating costs down,”” he said.

Lenovo’s position as a powerhouse in Asia should make that a reasonable goal for the company, said Dean McCarron, analyst with Scottsdale, Ariz.-based Mercury Research. It’s name in that part of the world, combined with the influence of IBM in the West should help increase sales globally, as well as drive down the cost of PC components through volume pricing from suppliers.

“”Lenovo and IBM combined are going to have greater purchasing power than either of them alone,”” said McCarron.

IBM branding on PCs will continue for the immediate future and as part of the deal, IBM will hold a 19 per cent stake in Lenovo.

McCarron said that there will not be a great deal of overlap between the two companies since the former focuses on the consumer PC market and the latter on the corporate customer.

Many of the same faces that partners recognize from IBM’s PC division will transfer over to Lenovo, according to IBM Canada‘s manager of corporate public relations Mike Quinn. “”It’s really business as usual for the next five or six months,”” he said. “”There are various people that have dealt with our channel relationships — for the most part, they’ll remain the same.””

In Canada, Heather Ross, who is currently in charge of IBM Canada’s PC business, will take the reins of Lenovo Canada — a company that will be established here once the overall deal between IBM and Lenovo closes. Ross was unavailable for comment at press time.

The next six months will be vital in terms of securing channel relationships and reassuring customers, said Furtado.

“”Everybody always labelled IBM as being quality product and they had Big Blue supporting them in the background. What’s going to happen to that level of support?”” he said. “”If they can’t satisfy their existing user base, it’s going to be even more difficult to go out and get new business.””

But most customers will be able to see the deal for what it is, said Zarek. “”What is the product made up of at the end of the day? It’s an Intel motherboard with Microsoft software,”” he said.

“”It’s really more of a naming change. I think most customers are sophisticated enough to understand today that where product gets assembled and who assembles it is not (the same as) the label that’s on the box.””

Zarek added that while IBM’s deep losses from its PC division are troubling, sales of IBM PCs in Canada were brisk compared with much of the rest of the world. He said he plans to keep selling IBM PCs and would also sell Lenovo-branded machines.

IBM’s channel conference, PartnerWorld, will be held in Las Vegas next month. Quinn said that some the questions that resellers may have about the transition from IBM to Lenovo will be answered then.

Comment: info@itbusiness.ca

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