Great leap forward

A little-known Chinese company becomes the world's third largest PC manufacturer in a $1.75 billion deal with IBM.

Published December 9, 2004 3:23PM (EST)

IBM Wednesday sold its personal computer business to China's leading manufacturer, Lenovo, in a deal that reflects the profound changes taking place in the economic world order and marks the end of an era for one of America's most iconic companies.

The sale is a great leap forward for China, still nominally a Communist country, onto the global business stage. The deal is the largest overseas acquisition by a Chinese company, and Lenovo will become the third largest maker of personal computers in the world.

As a part of the $1.75 billion deal Lenovo will have use of the IBM name on personal computers and laptops for at least five years. IBM, founded in 1911, has been one of the most enduring symbols of corporate America and played a crucial role in shaping the modern era. The company, known as the Big Blue, ushered computers into homes and offices when it launched its first desktop in 1981. In the early years IBM became the standard in PC manufacturing, at one stage selling 70 percent of all computers made. Information technology departments fell back on the adage that nobody ever got fired for choosing IBM. The company's technology bled into everyday life, providing software for the first cashier machines and supermarket scanners in the 1970s.

IBM was not the first to the market in the early 1980s, but lending its experience in mainframes to the desktop computer moved it into the mainstream. The speed with which the PC made its mark was reflected in 1982 when Time magazine broke with tradition and chose the personal computer as its "Man of the Year."

IBM also shaped the industry in another way. Its first desktop computer opened the door for a still fledgling Microsoft, while Intel produced the processor. That decision has been hugely criticized by historians for allowing the two suppliers to build a stranglehold on the computing industry. The move effectively ceded control to Microsoft, which set the standard for software and continues to make billions of dollars in profits.

The disposal of the IBM's PC division illustrates how computers have become a pervasive part of everyday life. The PC is now little more than a commodity item in an intensely competitive market, offering manufacturers the hope of only slim profits. IBM Chief Executive Sam Palmisano said the PC market "continues to take on characteristics of the home and consumer electronics industry, which favors enormous economies of scale."

Although a symbolic wrench with the past, IBM's decision to shed the computer division came as little surprise to anyone who has watched the industry. IBM has been transforming its business for years, shifting from the building and sale of PCs to more lucrative areas like services and consulting work for the world's largest corporations. The sale of desktop and laptop computers today accounts only for around 12 percent of IBM's annual revenue of $92 billion. This year the division was expected to make less than $100 million in profits -- peanuts for a company of IBM's size -- on sales of around $10 billion.

IBM led the market until 1994, but the firm then began to lose ground, suffering as the likes of Dell began to put pressure on prices. IBM had around 6 percent of the global market for PC sales before Wednesday's deal was announced, putting it a distant third behind Hewlett Packard with 16.1 percent and Dell with 18 percent.

IBM has been under pressure for years to sell its PC business. By 1993, the company's annual losses had reached $8 billion. In an effort to stem the problem, IBM retreated from the retail market and began focusing on corporate customers. It sold its manufacturing plants three years ago and had confined itself to design, product development and sales. The Lenovo deal covers IBM's desktop and laptop business, including the Think brand. Lenovo is paying IBM $1.25 billion in cash and shares and assuming an additional $500 million in debt from the U.S. company. IBM as a result will own an 18.9 percent stake in the Chinese firm.

Lenovo, founded in 1984 and already the leading brand in China with more than a quarter of the market, is expected to have $12 billion in annual revenues and around 8 percent global share. The company's founder, Chuanzhi Liu, described the deal as a breakthrough in its ambition to become a global business. "Our unwavering goal has been to create a truly international enterprise," he said. Lenovo will gain access to 160 countries by taking over IBM's sales and distribution network.

The company will open a new U.S. headquarters in New York, with its principal operations based in Beijing and Raleigh, N.C. American management imported from IBM will lead the company, a nod to the still greater experience of the U.S. on the international scene.

Lenovo's rapid rise to international prominence is typical of the path taken by China's leading corporations since the launch of the country's market-oriented economic reforms in 1978. The firm, known until last year as Legend, was founded in 1984 by a group of Chinese government scientists and financed from public coffers. For most of its first decade, the company merely distributed foreign-built computers, but its engineers quickly learned how to copy and adapt the designs. In 1997 -- only four years after the start of its manufacturing operations -- Legend overtook IBM as the leading seller of PCs in China.

Further deals from Chinese firms can be expected in the future as the government in Beijing pushes ahead with an industrial strategy that aims to turn at least one domestic producer into an international competitor in every field of business.

Flush with cash from an export industry in overdrive and a domestic economy that has hurtled forward at an annual rate of more than 9 percent for the past two decades, Chinese firms are being encouraged to step out from the shadows of joint ventures with foreign multinationals and establish their own global brands.

"It's a signpost, and a really prominent one, on what's the next phase for China, which is moving outwards," said Bob Broadfoot of the Political and Economic Risk consultancy in Hong Kong. Employment will not be affected -- about 10,000 IBM workers, more than 40 percent already in China, will be joining Lenovo.

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