IBM PC Retreat Would Shift Market Balance to Asia

Analysis: Reports that IBM might sell its PC business to China's Lenovo Group refocus attention on the evolving role of contract manufacturers and Asian ODMs, those companies that actually build the PCs.

Reports that IBM might spin off or sell its PC business have refocused attention on the evolving role of contract manufacturers and Asian ODMs, those companies who actually build the PCs that are later branded as "Dell" or "HP."

The same factors that have helped "original device manufacturers" such as Hon Hai Precision Industry (Foxconn) and Compal Electronics develop their own finished products for sale in the marketplace have benefited Lenovo Group, the regions largest PC manufacturer and reportedly IBMs suitor for its PC business.

PC makers began turning to Taiwan and other Asian countries in the 1980s and 1990s to manufacture their PCs, in part because of the low cost of labor.

After a Taiwanese ODM finished manufacturing the PC, an OEMs label was added. That, in turn, led to lower PC prices and the rapid growth of the market. Other "white box" makers and the rise of the DIY market began convincing some that a PC was no greater than the sum of its parts.

PC vendors have said privately that, over time, their own responsibilities have decreased down to brand management, specification and testing of the final products. More and more ODMs and contract manufacturers are taking on more traditional engineering roles, as well as procurement responsibilities.

That has led to concerns that U.S. engineering resources may be drifting overseas, relegating U.S. companies to little more than marketing organizations.

"The markets slowly becoming aware of that," said Roger Kay, an analyst with IDC in Framingham, Mass. "Its becoming more of a factor, but its always been a factor."

That, in turn, has placed more clout in the hands of Asian designers, rather than PC OEMs. According to a report by, for example, Foxconns Foxsign Studios employs about 80 designers and aims to bring that figure to about 200 by years end.

What IBM seems to be thinking, analysts say, is that theres simply no profit to be had in the PC space anymore. IBM outsourced its desktop PC and later its server and workstation manufacturing to SCI/Sanmina in 2003, and the company merged its hard-disk-drive operations with Hitachi Global Storage Technologies to essentially exit the hard-drive market.

Earlier this week, Gartner analyst Leslie Fiering wrote that the PC businesses of both Hewlett-Packard and IBM are subject to being spun off if their drag on margins and profitability are deemed too great by their parent companies.

"If IBM is exiting PCs, management is likely making a long-term call that PCs are commodities," Merrill Lynch analyst Steve Milunovich wrote Friday in a research note that was sent to the companys clients.

Commodity products, however, become subject to "churn," where commodity prices help users conclude that the products are replaceable, and therefore have little value. While this helps inflate the volume of products sold, little value is placed upon the individual item.

Next Page: How would a combined IBM-Lenovo PC unit fare in the worldwide market?