IBM: I know what you did last summer

Analysis Industry reels as huge loss in PC business comes to light after change in financial reporting method.

It's time for IBM to face up to the facts and accept that it needs toter change in financial reporting method. pull out of PC manufacturing, after its phenomenal loss of grip on the market came to light last week.

Shock waves reverberated around the industry as the personal systems group's $992 million pre-tax deficit, incurred in 1998, surfaced (PC Dealer, 31 March). The shortfall was a 516 per cent plunge from a pre-tax loss of $161 million in 1997, after a loss of $39 million in 1996. Turnover last year fell 10.7 per cent to $12.8 billion, from $14.4 billion previously.

The gaping hole only became public knowledge because of a change in US corporate accounting rules by the Financial Accounting Standards Board (FASB) this year. Companies are now required to break down details of earnings and turnover according to each segment of the market in which they operate.

The move was part of a demand by the government for companies to be more accountable to shareholders. This forced IBM to tuck away the incriminating details in a list of notes accompanying its annual report, issued on 23 March.

But stockholders are not the only ones to benefit. For one thing, it has made it possible to assess the effectiveness of IBM's advanced fulfilment initiative (AFI) and channel assembly strategies with a little more clarity.

The schemes were set up 18 months ago to cut PC manufacturing and distribution costs. They were supposed to introduce supply chain efficiencies to bring about reduced lead times and more liquidity to IBM's assets, as less resource would be tied up in inventory.

The vendor even pioneered co-location last year - the practice of channel assembly partners operating out of its own premises - with a view to shortening the supply chain even further. Excess inventory and channel stuffing would be things of the past. But reports since the schemes kicked off suggest no such benefits were reaped.

Last week's revelations tell a further story. At the beginning of this year, IBM reduced its rebate to distributors, cutting margins from 20 per cent to 17 per cent after it revised its Ts&Cs (PC Dealer, 10 February).

The channel was told by Big Blue at the time that it was no longer necessary to provide such an incentive because the market for PCs was expanding anyway.

But IDC figures contradicted the assertion, revealing that IBM lost market share in the UK and Germany during the fourth quarter of 1998. Last week, PSG's income figures from 1996 to 1998 showed anything but growth for IBM PCs. IBM's grand PC strategy went up in flames, some might say.

So, what to do, Big Blue? Is it worth sticking around? The fiasco - in addition to IBM's more recent technology agreements with Dell and EMC, worth nearly $20 billion to the giant - is making IBM's future in PCs look more questionable by the minute.

Utterances by Lou Gerstner, chief executive of IBM, that 'the PC era is over', have given this view more credence. Either way, IBM's vision is pointing away from PC manufacturing.

Speculation is rife and suggestions abound as to what IBM should do instead.

Analysts have recommended that it withdraw from PCs altogether and focus on software and services. According to one, 65 per cent of 1998's turnover came from these subsidiaries.

Andy Brown, research analyst at IDC, suggested IBM outsource its PC operations, along the same lines as Unisys. 'IBM could tailor its PC output to global services. Critical mass has been reached in the desktop market. Notebooks, servers and outsourcing could be the way forward,' he said.

But can a vendor truly be a computer company without a PC operation?

Or will the widely acknowledged absence of margins make outsourcing a respectable option?

This state of affairs must be the tip of the iceberg - the industry can only speculate as to what other PC manufacturers have been up to. With the FASB ruling well and truly in place, the industry's eyes and ears are peeled as it waits with bated breath for the next installment of Whose Loss Is It Anyway?