Can Lenovo still ride the Big Blue wave?

To understand Lenovo today, it is worth taking time to understand IBM. It would be safe to say that, historically, the PC has been key to IBM’s history. Before the PC, IBM’s core business was large, monolithic mainframe systems and minicomputers. Its competitors were makers of equally chunky systems, both in the US and the Far East.

When IBM decided to make an open platform and run Microsoft DOS on it, the firm had spent years under the anti-trust cosh, pursued doggedly by the US Department of Justice (DoJ). The DoJ had an axe to grind with IBM in much the same way that it has recently pursued Microsoft; IBM owned the market, ensured that its machines were only compatible with each other, and barred peripherals manufacturers from making kit compatible with IBM equipment. If you bought an IBM computer, you had to buy IBM terminals, printers, cooling and other systems to support it.

Over a number of years, enterprising Far Eastern companies such as Fujitsu had made compatible peripherals, and even cloned entire IBM systems. These plug-compatible firms were a thorn in IBM’s side. In the mean time, the DoJ was trying to loosen IBM’s hold on the US market.

The theory put forward by Charles Ferguson and Charles Morris, authors of Computer Wars, a detailed history of the computer market of the 1970s and 1980s, was that IBM was so terrified of giving the DoJ yet another excuse to rough it up that it made its PC (there were a few others around as well) an open reference platform. An open platform made sure that anyone could take the specifications of the IBM PC and make a compatible system. The IBM-compatible market gave birth to both Compaq and Dell. It also did IBM very little harm, at least at first.

James Governor, principle analyst at IBM watchers RedMonk, said: “A man once said that he robbed banks because that’s where the money was. Well, IBM sold its PC business because that is where the money wasn’t. The PC business was not helping IBM. From the perspective of shareholder value, it had to go.

“That’s not to say that there weren’t some mistakes. The Thinkpad was a fantastic calling card.”

Keith Humphreys, managing consultant at analyst EuroLan, was working for IBM when the first Thinkpad was introduced.

“I think it must have been the first time people actually wanted to buy the product: it was a lovely little thing,” he said. “In the past, manufacturing had gone to the marketing department and set their goals to marketing’s expectations of how many they could sell, which always led to poor sales. This time, it was different – a huge change for the better.”

But how has the PC gone from cash cow to millstone? In 1981, when IBM launched its first PC, the market was new and unexplored. But by the turn of the century, it had become apparent that the market for PCs was matur-ing. For a start, corporate buyers were holding off on buying new desktop machines for their workers longer than before. Partly this holding-off was attributed to the hangover from the Millennium Bug hysteria, but there were other reasons.

The jobs that PCs did had not really changed over the years. Office PCs did not need fancy graphics cards to handle word processing, spreadsheets, database input and email. A PC from the year 2000 was still fully able to do a good job without embarrassing its user too much in 2004. Also, the software that PCs ran had not changed much, either. Windows 2003 still did fundamentally the same job as Office 2000, and it did it with less feature bloat to boot.

Finally, the market was maturing. Moore’s Law observes that processor speeds become higher. The same can be applied, at an even more accelerated rate, to hard drive capabilities.

Perhaps it was unsurprising that IBM’s PC business (in line with the general market) began to slow down. In early December 2004, Lenovo and IBM entered into a complicated deal that gave Lenovo the rights to sell IBM’s PCs under the IBM brands for five years. IBM took an 18.9 per cent stake in Lenovo worth about $1.75bn. In return, Lenovo paid $1.25bn for IBM’s PC unit and took on $500m

of debt, taking the total for the PC business to $1.75bn. As a result of this deal, 10,000 IBM employees became Lenovo staffers.

But then things seemed to get a bit more difficult for Lenovo. In June, despite claiming ‘steady’ progress, Lenovo listed a HK$87m loss in Europe for the year 2005 to 2006. Earlier this month, things were looking up again, after the company unveiled first-half pre-profits of $79m. For the six months ended 30 September, the firm reported turnover up 16 per cent to $7.2bn.

Despite the disappointing performance in June, during which president and chief executive William Amelio admitted to analysts that he was ‘getting impatient’ at the firms’ earnings, the vendor’s latest PC shipments for the first half of 2006 were up 28 per cent year on year.

The vendor cited expenses related to laying off staff, and increasing price competition as a reason for its lacklustre performance. However, the channel points to other reasons for this apparent underachievement. Reports of poor supply have dogged the firm.

In May, Lenovo told CRN (CRN, 15 May) that it wanted to reduce lead time by three days, but a check by CRN recently showed low stock at at least one leading IT distributor.

Ian McGlade, new business generator at European Electronique, said: “If we’re doing a big City Academy project, we need more than several dozen notebooks.

“There seems to be lots of Lenovo items on order, but few that have dropped. Companies such as Toshiba are becoming more competitive.”

However, Gareth Hansford, Lenovo general manager, UK and Ireland, said the firm has put steps in place to help manage demand and stock levels.

“For our TopSeller portfolio we have cut down the number of products, so channel players don’t have an overwhelming number of products to sell,” he said. “We also have a strategy whereby we tell the distributors exactly what products we want them to focus on at a particular time and run offers against them for VARs and we can track availability of this products through their sales data. This means we can effectively then tell our manufacturing teams which products we will need more of a certain date, which means stock levels should be good.”

Hansford said the vendor is currently informing all of its channel partners of this strategy. It is not as if the PC market is not already cut-throat. Acer’s successful invasion of the UK and Italian laptop markets in recent years proved that the old basics of the channel (stock availability, value and marketing) really pay off.

Resellers have also complained of a lack of marketing.

“If you look at the TV or the papers at the moment, there are plenty of ads for competitors such as Dell. There is not much from Lenovo,” one reseller who wished to remain anonymous, told CRN. “Sure, Lenovo is sponsoring the Beijing Olympics. That’s great. But it’s quite a long way away as well.”

Despite all of this gloomy news it would be unfair to point to a terminal decline. The company took a huge

hit in the 2006 financial year of more than HK$542m on a turnover of more than HK$103bn. It has an enormously powerful brand in the form of the Thinkpad – a laptop brand as well-known as Viao and the Apple MacBook.

“For IBM, the Thinkpad and desktop models were purely a vehicle for the firm’s services and desktop integration business,” Humphreys said. “It was a loss leader for IBM’s services.”

For Lenovo, however, it is a different business. The company only makes PC hardware, and it has enormous economies of scale. It also has a ready audience. Despite lacklustre performance in the US and Europe, its core market remains strong.

“There was always going to be a struggle with Lenovo,” Governor said. “It has got the management team right. It’s not going to be painless in the future. Lenovo needs to sort out some issues sooner rather than later.”

It is also worth looking at the competition. Dell in particular is wallowing in the financial doldrums, and few other manufacturers are enjoying themselves.

Original design manufacturers are feeling the pinch at the lower end of the market, where consumer demand for extremely cheap PCs is putting a real crimp on profit margins. It is quite possible to make a successful business on low margins, as some broadline distributors continue to prove. But it is not easy, and it is precarious.

A key issue, it would appear, is getting stock into the channel in a timely fashion. Fundamentally, the channel does not see the brand as being more important than the basic ability to get a pallet of the right kit at the right time. Lenovo has bought a piece of computing heritage, but it has to make this work in a market that is increasingly mature and rapidly commoditising.

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• Topics
• Open Source
• Peripherals