BEIJING - China's largest
personal computer maker, Lenovo Group Ltd, announced on
Wednesday that it is buying control of IBM's PC-making
business for US$1.25 billion, capping the US tech
giant's gradual withdrawal from the business it helped
pioneer in 1981.
The agreement, which forms the
world's third largest PC business, calls for Lenovo to
pay IBM $650 million in cash, $600 million in Lenovo
Group common stock and for Lenovo to assume $500 million
in net balance sheet liabilities from IBM. IBM will hold
an 18.9% stake in Lenovo.
With the deal IBM,
Lenovo Group chairman Liu Chuanzhi will retire and
Lenovo chief executive officer (CEO) Yang Yuanqing will
become the new chairman, and Stephen M Ward Jr from IBM
will take over as the new Lenovo CEO.
The deal
closes an era for the world's largest computer company
and kicks off a new age in which China's top PC maker
Lenovo steps onto the world stage as a major PC brand
and IBM partner.
The sale of IBM's PC desktop
and notebook computer lines frees the company to focus
on higher-margin businesses such as computer services,
software, more powerful server computers, and storage as
well as computer chips, analysts say.
For
Lenovo, which is battling intense competition in its
home market, the deal with the world's largest computer
company marks a breakthrough in its efforts to build its
business overseas. It would also make the company part
of a small but growing group of Chinese manufacturers
buying overseas brands.
Lenovo, formerly known
as Legend, will take ownership of the IBM "Think"
trademark family, including its ThinkPad notebook brand
and its ThinkCenter desktop line. Lenovo will also buy
out IBM's interest in its joint venture with Lenovo
rival Great Wall Technology, China's number two PC
maker.
Lenovo will hire 10,000 IBM PC employees
- including about 2,300 in the United States - mostly
product designers, marketers and sales specialists - and
some 7,700 elsewhere, principally in China, where IBM
operates a manufacturing joint venture.
Lenovo
will have combined annual PC revenue of approximately
$12 billion and volume of 11.9 million units, based on
2003 business results - a fourfold increase in Lenovo's
current PC business.
Lenovo's new PC business
will benefit from a powerful worldwide distribution and
sales network covering 160 countries, global brand
recognition through the combination of IBM's highly
regarded "Think" brand notebook franchise and Lenovo's
leading brand recognition in China, enhanced service and
support for consumers and enterprise clients, and
consumer strength and market leadership in China, the
world's fastest growing IT market. After the transaction
is completed, Lenovo will boast leading notebook
enterprise offerings, leading R&D and expertise in
product differentiation, ensuring greater innovation and
enhanced product selection for customers.
As
part of the transaction, Lenovo and IBM will enter a
broad-based, strategic alliance in which IBM will be the
preferred services and customer financing provider to
Lenovo. Lenovo will be the preferred supplier of PCs to
IBM, enabling IBM to offer a full range of personal
computing solutions to its enterprise and small and
medium business clients.
Chuanzhi Liu, current
chairman of Lenovo Group, said, "As Lenovo's founder, I
am excited by this breakthrough in Lenovo's journey
towards becoming an international company. Over the past
20 years, I've watched Lenovo develop into the leading
IT company both in China and throughout Asia. Since the
beginning, however, our unwavering goal has been to
create a truly international enterprise. From 2003 when
we changed our international brand name to 2004 when we
announced our partnership with the International Olympic
Committee, to today's strategic alliance with IBM, I
have been delighted to watch Lenovo become a truly
world-class company."
"Today's announcement
further strengthens IBM's ability to capture the
highest-value opportunities in a rapidly changing
information technology industry," said Samuel J
Palmisano, IBM chairman and chief executive officer.
"Over the past several years, we have aggressively
repositioned IBM to be the world's leading provider of
innovation-enabled solutions for businesses and
institutions of all sizes, in all industries. This
requires single-minded focus on the business client and
significant ongoing investments in R&D and the
creation of intellectual capital. At the same time, 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. Today's
announcement further strengthens IBM's focus on the
enterprise, while creating a new global business that is
better positioned to capture the opportunities in the PC
industry going forward."
While the transaction
is being completed, both companies expect their existing
PC operations, including customer service and product
availability, to continue as usual. Following the
closing of the transaction, Lenovo expects customer
service and product availability will continue as usual
as the two companies' operations are integrated.
Founded in 1984, Lenovo was the first company to
introduce the home computer concept in China, and since
1997 has been the leading PC brand in China and across
Asia with annual revenues of approximately US$3 billion.
IBM's PC business generated over US$9 billion in
revenues in 2003 and offers a full range of desktop and
notebook PC systems.
According to IDC figures
for 2003, the combined unit market share of Lenovo and
IBM's PC businesses worldwide is approximately 8%.
On completion of the transaction, Lenovo will
have approximately 19,000 employees. Approximately
10,000 current IBM employees - more than 40% of whom
already are in China and less than 25% of whom are in
the US - will join Lenovo. The transaction is expected
to have minimal impact in the aggregate on employment,
benefits and compensation in either company.
China's PC makers feel chill of slowdown When Sun Peishu, chief of the Chinese computer maker
Langchao Group, said in 2003 that multinationals would
make all-round attacks on China's IT market, many people
thought he was too pessimistic.
Sun made the
prediction at the 2003 China CEO and CIO summit, one of
the biggest annual gatherings of Chinese information
technology industry executives.
At that time,
Lenovo was still the biggest computer maker in the
country, although IBM took back the number one title in
the notebook segment in the second half of that year.
In the cellphone market, domestic makers took
more than a half of the share.
At the summit's
2004 session, on November 14, Li Jianhang, vice
president of the third largest domestic computer maker
Tsinghua Tongfang, said that 2004 was the most difficult
time for the PC sector in the last five years.
This time, however, his feeling was echoed by
peers. Domestic computer makers have surely felt the
chill of a slowdown in market growth and a lack of
sufficient customer demand.
The third quarter is
usually a hot season for computer sales, as students
purchase computers during the summer vocation in July
and August and parents buy computers to their children
going to universities in September. Government
departments and enterprises also add purchases of
computers for their employees during the period.
However, this year's third quarter was not a
golden harvest for computer makers. According to
Beijing-based domestic research house Analysys, the
shipment of desktop PCs reached 3.33 million units in
the July-September period, growing 14% over the second
quarter and 9% year-on-year. The growth of notebook
computer sales, usually a driver for the growth of the
whole PC market, also slowed down in the third quarter.
Analysys' statistics indicate the shipment of
notebook computers in the third quarter was 637,000
units, rising 34% year-on-year and 11%
quarter-on-quarter. Figures from another domestic
industry consulting firm CCID Consulting also showed a
similar trend.
According to its report on the
third quarter PC market, desktop computer shipments rose
to 3.71 million units in the third quarter, with a
25.84% growth year-on-year and 9.55% quarter-on-quarter.
More than 544,000 notebook computers were sold during
those three months, growing 17.7% over the second
quarter, much lower than the previous growth rate of
some 40%.
While multinational giants such as
IBM, Dell and HP mainly focus on high-end enterprise and
notebook sectors, local Chinese companies, which are
mainly in the low-end segment and rely on prices as a
major competition strategy, felt the mounting pressure
from a slower growth rate.
"It is just like we
planned in the beginning of the year that we would have
a full cooker of rice and should eat two bowls of rice,
but when we opened the cover, there is only a half
cooker of rice there, so I can only eat one bowl of
rice," said Li Jianhang with Tsinghua Tongfang.
He explained many players took it for granted
that they would maintain similar growth as in previous
years, so they purchased more materials and employed
more people, but when they saw the real situation, their
high expectations were met with harsh reality. Li said
he believed that macro-economic control in some
overheated industrial sectors suppressed purchase
demands.
Huang Qi, vice-president of CCID
Consulting, agreed with Li's point and said the large
scale replacement of desktop computers with notebooks
did not happen this year, as enterprises concentrated on
their core businesses and the procurement of new
computers was delayed or cancelled.
Price wars
intensified the difficulties computer vendors faced. The
Lenovo Group, faced with slow growth of its PC business
and lack of breakthroughs in handset manufacturing and
IT services, began to sell computers at a price of 2,999
yuan (US$362) in August. Although Lenovo achieved good
growth in low-price computers and sold 16,000 to schools
in northeast China's Liaoning province, the move dragged
more firms into price wars.
"Fights among
computer makers further diluted their profits," said
Zhang Shiwei, a computer analyst with Analysys. "The
situation for small and medium players was worsened and
their shares might be bitten into by first-tier
companies."
At the same time, Chinese computer
makers also encountered increasing competition from
international vendors. US giants HP and Dell both
launched aggressive pricing strategies this year and
price gaps between their entry-level products and those
of domestic Chinese companies narrowed significantly.
IBM, which is already the biggest notebook vendor in the
Chinese market, gained some ground in the commercial
desktop PC market with new products and its reputation
of quality among high-end users.
Price wars and
international competition have been part of the local
market for many years, but one unique characteristic
this year was lack of technological drives. Li Jianhang
said that as part of the technology industry, PC
development is always related to technological advances.
Progress brings richer applications and lowers the cost
of computers, which finally stimulates consumers'
demands.
However, 2004 has been a flat year in
terms of technological applications. The development of
the PC industry is suffering the heavy impact of
microprocessor giant Intel and software behemoth
Microsoft. While Intel spared no efforts to promote its
chips with the hyper-thread technology and wireless
Internet connection function last year, there is no
breakthrough technology from the US chip giant this
year.
Instead, it announced in October that the
plan for a 4 gigahertz chip was cancelled and Intel
would stress total performance, rather than only clock
speed. The news was a shock to Chinese computer makers,
who had almost worshipped Intel in the past year because
of its promotion on clock speed and Pentium 4.
The slow progress in the sales of Windows Media
Center and lack of other powerful PC applications added
to the worries of domestic computer makers on technology
drives.
Last year, while many computer makers
thronged to embrace the Windows Media Center version and
believed that it would become the center of people's
home entertainment, this year there was no such major
attraction.
With fierce competition and lack of
significant market drives, the industry needs to make
significant changes. "There are many changes in this
market, but the point is the growth of the PC market
will decline and nobody can get away with it," said Ye
Lei, a Shanghai-based computer analyst with the US
market research house Gartner. He said he believed that
only those with a good control of the supply chain and
efficiency could win in the game and survive falls in
profits and price wars.
Li Jianhang said he
believed computer makers should have closer relations
with software partners to develop richer and more useful
solutions for customers. "Before 2000, we offered buyers
many choices of software installations, but now, the
amount of installed software fell dramatically, even for
operation systems," said Li. "The problem is not that
customers do not need software, but software that is
valuable to them."
Yang Weiqiang, general
manager of TCL Computer, another major domestic player,
said entertainment was one characteristic that
differentiated his company from other players. The
company released a game computer this year to target
games fans. It will also use the resources of its parent
company TCL in consumer electronics and bundle other
electronic devices, such as digital cameras with
computers.
(Asia Pulse/XIC)
Dec 9, 2004
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