09/12/2021

096- China joins the top table – 2004

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The single most important factor in our overall performance
was that Intel and Microsoft controlled the key hardware and software architectures
and were able to price accordingly.  Louis Gerstner, IBM

In building IBM into the leading computer company, Thomas Watson’s philosophy had been to follow the herd, this meant that IBM was behind the curve of each technology.  IBM was scourged through the 1970s by anti-trust actions, the US Department of Justice only withdrawing its case in 1982. 

By then IBM had been forced in to a hasty solution for the IBM PC that opened the door for clones to further erode its position.  Microsoft Windows and Intel spawned the Wintel products that took a valuable market share in which IBM might have been dominant.

1993 IBM’s mainframe business imploded, dropping by 42% and recording losses of $800m.  By October 1999 the IBM PC was withdrawn from retail and sold only directly or via the Internet.  IBM started to close its factories, the last in 2003.

2004 Gartner Research stated IBM had a low 5.6% share of the desktop, laptop and notebook business.  The PC had become a commodity product offering low margins and this had always been at odds with the IBM philosophy.

IBM looked around for a buyer.  Toshiba, the sixth largest PC maker and third largest laptop manufacturer, was an early prospect but Toshiba turned it down.  Toshiba suffered the consequence of its decision when the market saw IBM quality combined with Chinese low-overhead manufacturing as compelling.

Chinese PC makers first emerged when Great Wall allied with IBM, and Sitong with Compaq.  Founder Technology Group worked with Dell and became one of the top ten world PC suppliers.

Lenovo had just 12% of its business in computer equipment when in 1994 Yang Yuanqing was appointed to run its computer department.  He is credited with turning around the company fortunes.

1994 Yang Yuanqing was appointed to run its computer department.  He is credited with turning around the company fortunes.  He had attended Shanghai’s Jiatong University and a postgraduate course at the Chinese Science & Technology University.

His task was assisted by a strengthening home market with over 40% of Beijing households saying they wished to buy a PC within a year, another 45% within two years.  Lenovo created the E-Series, for economy, and by 1999 it had built an 8.5% market share across the Asia-Pacific.

December 2004 Lenovo Group of China did what would have previously been unimaginable and bought IBM’s PC business.  It paid $1.75bn for IBM’s PC division, its global desktop and notebook computer business, including R&D and manufacturing.  $650m was in cash and the balance gave IBM an 18.9% share in Lenovo, becoming its second largest stakeholder.

IBM was turning over $9bn in PCs so the deal did not appear that great.  The PC market at the time was valued at over $180bn a year; Gartner projected annual growth of 5.7% pa for the next three years and IDC more optimistically was talking of 10% growth.

But it was IBM’s low profitability that dragged the acquisition price down, plus the $500m in liabilities that Lenovo had to assume.  This deal represented the largest overseas acquisition by a Chinese technology company.  When the deal was completed on 1st May 2005 IBM, an octogenarian organisation, exited the PC business in which it had been active for under twenty-four years.

Lenovo turnover quadrupled to $12bn with sales of 11.9million units to become the third largest PC maker, behind Dell and HP.  Lenovo’s perspective was opposite to that of IBM that considered 20% margins to be dire. Lenovo, with fierce home and Asia-Pacific competition, was content to settle for 15%.

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