TCS Daily

The Best Thinkers in the World

By Dominic Basulto - December 9, 2004 12:00 AM

The People's Republic of Computers is ready to invade the USA. At least, that's the spin being put on the $1.75 billion IBM-Lenovo deal by many mainstream journalists concerned by the acquisition of IBM's storied PC unit by a relatively unknown Chinese competitor. Given IBM's role as a creator and developer of the modern PC business and the strength and popularity of models such as the IBM ThinkPad, it is natural that some might view the company's move to sell its PC unit as yet another victory for globalization and a sign that the U.S. tech industry continues to be mired in a permanent malaise of low single-digit growth rates.

For IBM PC users around the world, it certainly feels like an end of an era. Perhaps it is -- but it is also the beginning of a new era in which U.S. tech companies are no longer content to watch the growing commoditization of entire industries -- they are moving aggressively into higher-margin businesses such as IT services and scrapping entire product lines that are not growing fast enough.

On closer inspection, IBM's decision to exit the PC business may actually point to the increasing competitiveness of U.S. businesses and the importance of continual R&D-fueled innovation -- not the failure of U.S. businesses to keep pace with their low-cost overseas competitors. Faced with the commoditization of the PC business, IBM was already migrating into higher-margin businesses such as global technology and consulting services. IBM is not cutting its losses and cowering in a hole -- it is refocusing its energies on the large corporate market. In order to serve its blue-chip e-business customer base, IBM has been spearheading a number of new growth initiatives, such as "On Demand" computing and Web services platforms that take advantage of service-oriented architectures.

Consider the numbers. In 2003, IBM's "Personal Systems Group" (comprising PCs, printers and retail store solutions) accounted for only 12.8% of IBM's total revenues, compared to 48% for the "Global Services Group." At a time when the PC business was growing by only 3.5% and barely managed to break even, the Global Services unit grew at a brisk 16% annual rate and posted impressive double-digit pre-tax net margins. Some analysts expect the revived IBM to improve its gross profit margins by 3% or more after the deal.

In other words, IBM is exiting the PC business not because it was not profitable, but simply because it was not growing fast enough. The move away from low-margin hardware sales and into services and software is part of a concerted IBM strategy to create shareholder value. Plus, as a result of the deal, IBM will acquire an 18.9% equity stake in Lenovo -- effectively giving it expanded access to the potentially lucrative Chinese technology market.

Sure, the inevitable process of globalization is spurring the consolidation of entire industries and forcing leading tech players to cut costs at a breakneck pace. Low-cost tech titans like Dell Computer must now compete with lower-cost competitors like Lenovo, which will become the third-largest PC manufacturer in the world. Without a doubt, IBM had been facing difficulty in premium-pricing its personal computers at a time when the PC business is becoming increasingly commoditized. However, skeptics concerned about the potential exodus of U.S. manufacturing jobs to China should keep in mind that 40% of IBM's 10,000 PC workers already are based in China.

As for concerns about declining global competitiveness -- the IBM ThinkPad still boasts one of the great brands in the tech world, proving that IBM still possesses a fearsome R&D capability. Since its launch nearly 12 years ago, the ThinkPad has consistently been at the forefront of innovations such as color displays, 14-inch displays and removable hard drives. Lenovo, as the New York Times pointed out, is not after IBM's PC business as much as it is after the IBM brand, which is associated with quality and innovation and all the good things that comprise competitiveness. While Lenovo is the world's 8th largest PC manufacturer and the fastest-growing PC maker in the world, it is also realized that it would be unable to penetrate the global PC market without the cachet of a U.S. brand.

At a time when many tech companies are merely looking to survive the downward pressure on prices caused by globalization, IBM is instead making a bet that it can continue to migrate into higher-margin business lines by focusing more on services, less on machines. If anything, IBM no longer stands for International Business Machines -- it now stands for Increasingly Bigger Margins. IBM is not the only major PC maker considering new strategic directions. Anyone notice that Apple is now becoming almost as well-known for its iPods as for its computers?

When IBM unveiled the ThinkPad marketing campaign using the tagline "Where do you do your best thinking?" it was a way of encouraging customers to consider new ways of using the ThinkPad in everyday business. Years later, that same marketing tagline may offer an unintended insight into how U.S. tech giants such as IBM will survive and prosper during the next round of globalization. The power of the "Think" brand is a continual reminder that when it comes to innovation and know-how, the world still does its best thinking in the U.S.


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