Lenovo Must Invest to Keep IBM Brands Lure

Opinion: In taking over IBM's struggling PC business, China's biggest PC maker should realize that holding onto brand loyalty will demand a heavy investement in R&D.

This is one of these "and then the other shoe dropped" stories, and it involves the IBM-Lenovo deal that sent Big Blues PC business to the Chinese. It turns out, according to SEC filings reported in The Register, that IBMs PC business wasnt just a low-margin business. Rather, it had lost nearly a billion dollars. What does this mean for people who love their IBM ThinkPads? Will Lenovo be a good foster parent, or did IBM sell to the only company idiot enough to buy? Here are the basics: IBMs PC business unit lost $397 million in 2001, $171 million in 2002, and $258 million in 2003. It was on the same pace through the first half of 2004, during which it lost another $139 million. So, in less than four years, IBM lost nearly a billion dollars selling personal computers.
IBM doesnt normally make these numbers public, lumping them with others so its impossible to tell where the company makes money and where it doesnt. Having these losses come to light, however, explains why IBM sold a business with $10 billion a year in revenue to Lenovo for only $650 million in cash. To make its new flagship a success, Lenovo must be counting on doing business more efficiently than IBM. Some of this will be the loss of "IBM accounting," which may (or may not) have forced the PC business to carry much more IBM corporate overhead expense than it actually required. In other words: Lenovo could run precisely the same business for less money simply because it doesnt do things "the IBM way." That isnt likely, alone, to make Lenovo profitable, but it could help. On the other hand, IBM is a premium brand, and thats something new to the Chinese. Maintaining that brand requires a big investment in research and development—an investment that might go away if Lenovo cant quickly turn the business around. IBMs ThinkPads enjoy a level of brand loyalty that borders on fanaticism. Customers love the ruggedness, build quality, innovative features and support for corporate IT infrastructure that ThinkPads have always offered. I know many people who will only buy ThinkPads. But will they want to in the future? Conventional thinking, Version 1, is that Lenovo (whose major shareholder in the Chinese government) knows its buying a premium brand and is smart enough not to squander it. That suggests that the company has access to resources greater than IBM was willing to commit and is in it for the long term. Lenovo could be Chinas first attempt at selling quality and features as well as low price. Conventional thinking, Version 2, is that Lenovo bought a company in trouble, took on some additional debt, and maybe has a year of product designs in the can. Lenovo must find a way to do what IBM couldnt: turn a profit. We really dont know how much Lenovo has to invest, but when that money runs out, so will the IBM PC and ThinkPad brands. It will, however, be a while before we know which scenario is closest to true. Lenovo is taking on a boatload of IBM employees and initially will be shipping current IBM product. What does Dell think of the IBM-Lenovo deal? Click here to find out more. Whatever changes the company makes, if they result in lower levels of quality or innovation, will be hard to hide. But they also may not show up for a couple of years, especially since we know little of Lenovos financials. For companies that currently purchase ThinkPads and other IBM PC products, its safe to continue doing so, provided you re-evaluate every six months or before each major purchase, whichever comes first. Publications need to be especially vigilant in their reviews of future Lenovo-designed and -manufactured, IBM-branded products. China is best-known as a lowest-cost, lowest-innovation producer of, well, most everything. A Chinese companys purchase of IBMs PC business will be a test of whether the country can step up and play in the global value-added market. To do this, Lenovo must become more than a lowest-cost producer and invest in R&D at a level that, to my knowledge, would be unprecedented in China. I think China—like Taiwan before it—is capable of making this great leap forward into the premium, value-added arena. Whether it will, however, wont be known until 2007 or so. Check out eWEEK.coms for the latest news in desktop and notebook computing.