IBM Gives Shanghai a Real Surprise

IBM's decision to sell its personal computer business to China-based Lenovo gives the nation the distinction of housing what will soon be the world's third-largest PC maker. On a deeper level, the deal also marks a changing of the guard in the PC business and rearranges the game board for rivals Dell and Hewlett-Packard.

The Washington Post had one of the better examinations of its impact: "The $1.75 billion deal is the latest upheaval in an industry in which personal computers and the components that go into them have largely become commodities, parked on desktops everywhere and available at Wal-Mart for under $300.”

The Post noted that the deal also is another sign of China's growing stake in the PC market. "IBM once dominated the PC industry, but it has been eclipsed by Dell Inc. and its success in selling made-to-order computers over the Internet, as well as other rivals including Hewlett-Packard Co. IBM has steadily focused more on providing computer services to businesses. The takeover by Lenovo is another step in China's efforts to integrate itself into the world economy, as companies hope to build their own global brands by acquiring companies internationally. The country's power as an exporter of cheap consumer goods, and its ability to churn out electronics sold under other brand names, is unchallenged. With deals like the Lenovo-IBM combination, the nation aspires to show it can put its own products on the shelf, competing alongside the Samsungs and Toshibas of the world," the Post wrote. Lenovo recently changed its name from Legend Group Ltd.
• The Washington Post: IBM Sells PC Business to Chinese Firm In $1.75 Billion Deal (Registration required)

Not all the tea in China would have kept Dell from criticizing the deal. Chairman Michael Dell spoke at an Oracle conference yesterday before the official IBM-Lenovo announcement, CNET's News.com reported. "[Dell] said a deal between Lenovo and IBM would likely follow a pattern seen in many mergers where two very different organizations fail to mesh. 'We're not big fans of the idea of taking companies and smashing them together,' Dell said. 'When was the last time you saw a successful acquisition or merger in the computer industry? It hasn't happened in a long, long time...I don't see this one as being all that different.'" And more sharp words from Dell: "When asked how a deal would affect the Round Rock, Texas, computer maker, Dell was oblique but said the deal is part of a longer trend at IBM to move out of technology that's not part of back-end computer systems. By contrast, manufacturing is one of Dell's chief strengths." Mr. Dell had better hope his words don't come back to haunt him. After all, the thought of IBM exiting the PC business would have been unthinkable several years ago. Who knows what a few more years could bring?

Meantime, Lenovo is already putting up its dukes. "We are not satisfied to be only number three,” Yang Yuanqing, the company president's said, as quoted by the Financial Times. Yang "said it would pave the way for Lenovo to challenge global market leaders Dell Computer and Hewlett-Packard."
• CNET's News.com: Michael Dell: IBM Deal A Dud
• Financial Times: Lenovo to Acquire IBM PC Business In $1.75bn Deal

Dell is not alone in its criticism. Michael Kanellos, editor-at-large for CNET, gave the deal mixed reviews. "How comfortable are business customers going to be with a joint venture owned mostly by a company based 10 time zones away? More likely, they'd rather call Round Rock, Texas, home of Dell. In addition, IBM will likely be uneasy about having its brand name of products coming out of a group it does not fully control. Another problem stems from the nature of joint ventures. They usually don't work. Typically, one company has to become a passive partner (AMD and Fujitsu's flash venture Spansion), or direct competition between partners has to be an extremely remote possibility (EMC and Dell), for a venture to have a chance of success," Kanellos wrote. "IBM and Lenovo will compete for customers in China, as they will both still make servers. Also, you've got to wonder how long Lenovo will be content to serve as the passive voice in a joint venture where it owns the most shares. As the old saying goes, no one ever got fired for buying IBM. But no one ever got hired for buying Lenovo."
• CNET's News.com: Why Lenovo-IBM Is A Tough Sell

Chinalysis

The Los Angeles Times zeroed in on the deal's implications for China's economy and role in the technology industry. "For China, the move would be far more important symbolically than financially. After more than two decades of market reform and establishing itself as the low-cost manufacturer of shoes, toys and radios, the country wants to step up to the next level and compete globally in the market for high-value goods, with technical expertise and respected brands. Tuesday's announcement 'represents China's maturation as an economy,' said Donald Straszheim, a Los Angeles business consultant who specializes in China. 'This could not have happened two or three years ago.'"
• Los Angeles Times: IBM To Sell Its PC Division (Registration required)

The Post's Peter S. Goodman, who covers business news from China, highlighted the transformation of Lenovo, which began as a type of PC delivery service some 20 years ago and now "has captured one of the most glittering names in capitalism." "The deal is a dramatic sign of the ongoing transformation of the still nominally communist People's Republic of China into an increasingly outward-looking nation integrating itself into the world economy. The purchase twins one of the classic names in U.S. business with a society that officially reveres Chairman Mao and Karl Marx, even as its daily life increasingly revolves around Bill Gates and Warren Buffett. Lenovo's move 'will encourage other Chinese companies to go overseas,' said Fang Xingdong, an information technology expert at Tsinghua University in Beijing."
• The Washington Post: IBM Deal Puts Lenovo On Center Stage (Registration required)

The New York Times wrote that the deal "reflects the industrial and economic ambitions of not only the two companies but also their two nations... [It] points to the rising global aspirations of corporate China as it strives to become a trusted supplier to Western companies and consumers. The sale also signals a recognition by I.B.M., the prototypical American multinational, that its own future lies even farther up the economic ladder, in technology services and consulting, in software and in the larger computers that power corporate networks and the Internet. All are businesses far more profitable for I.B.M. than its personal computer unit. But the move signals an acknowledgment by I.B.M. that its future in China may be best served by a close partnership with a local market leader -- particularly one, as in Lenovo's case, that is partly owned by the Chinese government."
• The New York Times: Sale of I.B.M. PC Unit Is A Bridge Between Companies and Cultures (Registration required)

An article in the Wall Street Journal said that the deal is "instantly vaulting the company that has been dominant only in China to become the No. 3 global player -- behind Dell Inc. and Hewlett-Packard Co. -- with an estimated 9% of the world market. In doing so, the company returns to the ambition regularly displayed in driving foreign competitors from the China market in the 1990s." The article said the deal was a long time in the making. "Now, with one stroke, the purchase of IBM's PC business would give Lenovo world-wide reach. Tentative negotiations began three years ago, but they entered an earnest phase only late last year, with [Chief financial officer Mary Ma] Ms. Ma taking charge, people familiar with the talks said."