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IBM Sells PC Business to Chinese Company

Margaret Warner discusses IBM's sale of its personal computer business to one of China's top PC makers with a technology expert and a China analyst.

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  • MARGARET WARNER:

    The company that pioneered the personal computer is leaving the business.

    IBM, which brought the first PC to market in 1981, announced this week it's selling its PC business to China's top personal computer company, Lenovo.

    The $1.75 billion deal will make Lenovo number three in the global PC Market, behind Dell and Hewlett-Packard. Lenovo will move its headquarters to New York City. And the deal gives IBM a 19 percent stake in the Chinese company.

    So why is IBM selling and Lenovo buying, and what does the deal say about China's rising economic power?

    We get two views. Ted Schadler follows the industry for Forrester Research, an independent technology consulting company.

    And David Lampton is dean of faculty and director of the China studies program at the Johns Hopkins University School of Advanced International Studies. And welcome to you both.

    IBM not only brought the first PC to market, but it created a standard for generations of PC's.

    Ted Schadler, why is it selling its business?

  • TED SCHADLER:

    Well, IBM getting out of the PC business that it launched in 1981, it's because the business is no longer central or core to IBM's strategy.

    Under Sam Pomasano's leadership, IBM has been driving towards enterprise, business needs, it means services; it means software enterprise software to help companies work more efficiently with their partners, and mainframe computers and large computer systems, but not PC's.

    PC's are a commodity today; it's driven by price, not driven by value, so the margins are thin, which means they don't make money on PC's, even though they sell a lot of them.

    So it's really time for IBM to shed that business, to get out of that business and focus more directly and more aggressively on its big enterprise and government customers.

  • MARGARET WARNER:

    So what does its decision say more broadly about the computer business?

  • TED SCHADLER:

    Well, the PC business began as a very powerful way to give employees and consumers control over their own computer destiny, word processing and e-mail and now Web browsing and shopping, and it's a very personal device.

    But the PC business is now to the point where it looks more like the television business.

    It's very consumer-oriented, the opportunities are in consumers and small businesses, and in emerging markets, and not in enterprise markets any longer.

    And so what it means is that the PC industry is moving into probably its third mature phase.

  • MARGARET WARNER:

    So, Professor Lampton, tell us about Lenovo. How did this company that I think most of us in the United States never heard of, get itself into position to acquire this icon of American business?

  • DAVID LAMPTON:

    Well, first of all, the company in China was founded as Legend Computer. And it was founded by the Chinese Academy of Sciences, an organ of the Chinese government.

    And it set up shop near Peking University, much as the Silicon Valley near Stanford University did.

    And I early in the 1990s went to their headquarters, and it was a pretty good building in a pretty shabby part of town, and went in and immediately knew I was in a place that was going somewhere.

    The young man that was the chairman at that time, Mr. Lieu, proudly pointed to the map on his wall, there were all these pins with heads of different colors, in different countries.

    And he says we have representative offices in a great number of countries, but we are going to be a global firm.

    And from that modest beginning and that modest office building, I think this represents a great achievement for that firm given what they were planning more than a decade ago.

  • MARGARET WARNER:

    And what does this say more broadly about China's rising economic power, its status as a global economic player?

  • DAVID LAMPTON:

    Well, this week in fact the last couple of weeks IBM is really only one of the stories.

    The Chinese have been composing a free trade area that will include two of our allies, Japan and the Republic of Korea, and Southeast Asian countries.

    The president of China was in Santiago and three other Latin American countries at the middle of November.

    They were signing deals of about $20 billion with Argentina. This is a country that's identified key pillar industries that are going to develop. They're setting up research facilities abroad as well as American and multinationals investing in research.

    If we think China is only a military competitor, they're going to be a competitor in ideas and economics, and that's what we have to keep our eye on.

  • MARGARET WARNER:

    Back to you, Mr. Schadler: If this PC market is as — the profits are as thin as you say, and IBM either loses money or make the thinnest profit, why is it attractive to Lenovo?

    Is there any reason Lenovo can make it more profitably, IBM's PC business than IBM could itself?

  • TED SCHADLER:

    Yeah, well, Lenovo is more profitable. They do make money because that's their entire focus is making money in this very thin margin business.

    So they're good at cost savings; they're good at building products that serve a specific market, the local Chinese market, for example.

    They're very agile; they can innovate quickly and introduce new products quickly.

    And so what they're doing pure and simple is that they're becoming an international company.

    They're buying for a very small amount of money at the end of the day, less than $2 billion, they're buying 10,000 employees; they're buying the IBM brand name, which they will retain for a time, they're buying this high quality notebook and desktop computer PC business, they're buying a customer base of 14 million U.S., corporate desktops.

    And so that's quite, and it's $10 million in — $10 billion in sales. So they're buying a lot for their $2 billion. I'd say they're getting a pretty good deal.

  • MARGARET WARNER:

    Would you agree with that?

  • DAVID LAMPTON:

    Oh, yeah. And I think the Chinese are not only trying to build a brand name in the computer area, they're buying auto companies abroad; they are investing in telecommunications companies, and a broad range.

  • MARGARET WARNER:

    I gather that at first if you get an IBM PC and these are mostly business PC's, at first just say IBM, but then after a time it will say IBM Lenovo, and then finally Lenovo.

    I mean, is this a way for Lenovo to essentially start building a global brand name the way Mitsubishi did or Sony did or whatever, but getting to the western market sort of step by step?

  • DAVID LAMPTON:

    Right, I think the Chinese have been unhappy that they've been producing for other people's brand names, and now they want to start having their own brands or their own recognition and their own value in that brand name.

    And I think this is just the first most notable step in that direction.

  • MARGARET WARNER:

    And Ted Schadler, what else does IBM get out of this? I mean, I gather it was very important to them, they had some other suitors, but that they would get out of this an 18 percent stake in Lenovo.

  • TED SCHADLER:

    They do. It's a pretty big position in a rising star of China, and that gives them a couple of things: Number one, they get 18.9 percent of the profits that Lenovo makes forever.

    They also get a foot in the door in China. So Lenovo today sells to many Chinese companies, large companies, as well as to small businesses and consumers.

    And IBM now has a partner that it can go into these large Chinese enterprises and government agencies to sell services and financing and software and servers.

    And so IBM gets an entry into China, which of course is a huge market, and it will grow and grow and grow over the next 25 years.

  • MARGARET WARNER:

    And PC's probably more rapidly than here. Finally, back to you, professor, this company, Lenovo as I understand, it never operated outside China.

    Do you see any potential obstacles, be they sort of cultural or business practices that may make it a tough fit for them to suddenly become part of IBM in New York and try to retain the customer base of IBM?

  • TED SCHADLER:

    Even in American corporate mergers, you have different corporate cultures that are very hard to put together.

    And of course when you cross the divide of a more developed country and a less developed country and the cultural differences, this is not going to be easy.

    I guess I would think, however, that I would anticipate this is going to be a little easier than some of the mergers between American and Japanese companies.

    I think those are more simpatico culturally that I would expect, Americans and Chinese seem to get along in the workplace, and so I don't expect major difficulties, but it's never easy.

  • MARGARET WARNER:

    All right, Professor Lampton and Ted Schadler, thank you both.

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