PC deal is symbolic of a business gone soft IBM sold its personal-computer unit to a Chinese firm. The big money these days is in services and software.

Posted: December 09, 2004

There is much less profit to be had in making personal computers than there used to be - witness PC pioneer IBM's announcement yesterday that it was bowing out of the game, selling its personal-computing business to Beijing-based Lenovo Group Ltd. for $1.75 billion.

With the move, International Business Machines Corp. continued a long march away from sales of consumer hardware and toward supplying more lucrative software and services to businesses.

"The PC segment of the industry continues to take on characteristics of the home and consumer electronics industry, which favors enormous economies of scale and a focus on individual users and buyers," IBM chief executive officer Samuel J. Palmisano said in a statement yesterday.

Translation: The personal computer has become a cheap and cutthroat business. Desktop units that used to fetch more than $1,000 in the late 1990s have been replaced today by much more powerful machines costing $500 or less, including the monitor. Profit margins have shrunk razor-thin.

One of the reasons: manufacturing in extremely low-cost countries, including China, Lenovo's base. Forty percent of the workers in IBM's PC division are in China now.

"The hardware is gradually commoditizing more and more," said Peter Labe, an analyst with Nutmeg Securities Ltd. "Where is the growth, and where is the profit? If it's not in the hardware, it's in the service and in the software."

Specifically, it is in products and services such as business consulting, outsourcing work, and the building of complex high-end computer systems needed to run modern companies.

IBM's move was no shocker, Labe added; that has been the direction of multi-sector information technology firms, such as Unisys Corp., of Blue Bell, for years.

For IBM, though, with its entrenched identity, it was a gutsy move, said Larraine Segil, a partner and mergers expert with Boston-based consulting firm Vantage Partners L.L.C.

"There's a huge commitment within IBM to put aside history and ego and look at the margins," Segil said. "That is a very hard thing to do. . . . The company was instrumental in introducing the PC to the human race."

Elizabeth Douglass, a spokeswoman for IBM competitor Unisys, declined to address the IBM deal specifically.

"What it's fair to say is: Seven years ago, when Lawrence A. Weinbach joined as chief executive officer, he realized the future was in services, but still keeping a strong link with technology," Douglass said. "We started that transformation seven years ago - before many of our competitors."

In a meeting with financial analysts this week, Unisys said that trend will continue as it ramps up in specialty service sectors such as security - although it disappointed Wall Street by saying its earnings next year will likely be flat, in part because companies won't spend much on information technology.

Even so, Merrill Lynch Global Securities analyst Jennifer Dugan said Unisys was on the right track strategically, pointing to its "improving traction in services and growing ability to cross-sell additional services to both existing and new clients."

Labe said that, for now, IBM's stated efforts to focus on higher-margin products and services is little threat to Unisys or others in the space, because the market for such services, at about $300 billion annually, is so big.

But merger expert Segil said other U.S.-based PC-makers - notably top-ranked Dell Inc. and second-place Hewlett-Packard Co. - should be worried. Lenovo, she said, benefits from "the China syndrome of low-cost manufacturing, exploding consumer demand, and real penetration to the China market and world markets from that base."

For all the potent symbolism of a Chinese company's buying a piece of such an American emblem as IBM, it appears the culture of IBM's PC arm - including the powerful IBM brand, the "Think" logo, and its worldwide sales apparatus - will survive relatively intact.

Some 10,000 IBM employees worldwide will get a new boss in Lenovo, which itself employs 9,000 workers; the new company will have its headquarters in New York, with major operations in Beijing and Raleigh, N.C.

IBM will have an 18.9 percent ownership share in Lenovo Group, and Stephen M. Ward Jr., currently general manager of IBM's Personal Systems Group, will serve as chief executive officer of Lenovo.

Also, IBM will buy Lenovo-made computers for itself and the business clients it is so aggressively courting.

Contact staff writer Akweli Parker

at 215-854-5986 or aparker@phillynews.com.

This article includes information from the Associated Press.

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