The IBM/Lenovo Deal: Victory For China? - Knowledge@Wharton

Knolwedge @ Wharton completely nailed with this article. For those following IBM/Lenovo deal closely -- must read this. Americans wont know -- but China is right there, ahead of them.

The IBM/Lenovo Deal: Victory For China? - Knowledge@Wharton

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The IBM/Lenovo Deal: Victory For China?


With the sale of IBM's personal computer business to Chinese company Lenovo Group Limited, two emerging trends quickly move front and center: The increasing commoditization of technology and the emergence of Chinese companies as global players. Wharton professors say both trends warrant watching and raise some key questions. Can Lenovo become a global player and integrate IBM's U.S. managers? Will IBM's PC customers defect to rivals like Dell Computer? Can state-owned Chinese companies become dominant in the international markets?


The deal, announced Dec. 7, is valued at $1.75 billion in cash, stock and assumed liabilities. Once the agreement is finalized in early 2005, Lenovo will have three owners - the state with 46%, public investors with 35% and IBM with 19%. The Chinese government currently owns 57% of Lenovo. The company, to be managed primarily by former IBM executives working out of New York, will have 19,000 employees, with 10,000 of them coming from IBM. Of those 10,000, 40% are currently based in China and 25% in the United States.


IBM benefits from the deal by getting rid of a business -- PCs -- that defined the company in the 1980s, but later became a drag on profit margins. Over the past decade, IBM has transformed itself into a services and software company, and set its sights clearly on China as a potentially huge market. It has shed disk drives, displays, desktop manufacturing and network processor businesses while adding PricewaterhouseCoopers' services firm PwC Consulting. IBM has also acquired software companies such as Tivoli, Rational and Informix.


"Overall, this deal is another indicator of how resilient IBM is," says Wharton management professor Mark J. Zbaracki, who was a staff industrial engineer at IBM from 1982 to 1991. "IBM's strength historically has been reinventing itself." The company has manufactured everything from timekeeping devices to card sorting machines to videodiscs to typewriters and printers, only to jettison those businesses later. "This sale is symbolic of something going away -- the PC business in the U.S.," says Zbaracki.


For Beijing-based Lenovo, the acquisition of IBM's PC business signals the arrival of China as a global player in key industries. Lenovo gains access to the worldwide PC market and quickly becomes a computer maker with more than $12 billion in annual revenues. It also gets exclusive access to the IBM logo for five years and permanently acquires the "ThinkPad" brand. "If you had to pick a U.S. brand to buy, this would be a big one," says Marshall Meyer, a Wharton management professor who has studied Chinese companies and traveled extensively in the country. "Public relations is a big component of Chinese management and a lot of people will see this as a victory for China."


Michael Useem, head of Wharton's Center for Leadership and Change Management, agrees. "This is a brassy move by both IBM and Lenovo," he notes. "It's untrodden ground for a Chinese company to make a sudden, big move to operate on the world stage." Useem says the biggest perk of the deal for IBM is that, by partnering with Lenovo, it gains better access to the market for services in China. In addition, stronger relations with the Chinese government can only boost IBM's standing. "Government relationships are key in China," he says. "IBM sees this as an alliance. Maybe the price wasn't as good as it could have been," but IBM gets a definite payoff in the form of "better relationships."


So the big question is: Can Lenovo acquire the third largest PC business in the world -- behind Dell and Hewlett-Packard -- and become a dominant player?