IBM Spins Off PC Division with Chinese Partner - Page 2

Analysts were unclear how a combined IBM-Lenovo PC unit would fare in the worldwide market, especially with regard to the ThinkPad, IBMs notebook line.

IBM ranks third in the world in PC sales, while Lenovo is the top vendor in the Asia-Pacific region. But the merged company would be able to take advantage of Chinas low-cost labor force, one that has lagged behind Taiwan in terms of real wages.

"I dont know if itd be so smart a move," said Charles Wolf, an analyst at Needham & Company in New York in an interview with before the announcement. In 1999, Wolf wrote a report suggesting that IBM outsource all of its manufacturing—three years before it did so.

"If indeed the buyer is Lenovo, they cant make the PCs any cheaper than Dell does," Wolf said. In addition, Wolf said he wasnt sure how Lenovo could break into the U.S. market, especially when competing against Dell and Hewlett-Packard.

/zimages/6/28571.gifCheck out analysts take on whether Lenovo Group, Chinas biggest PC maker, is the right choice to take over IBMs PC business.

"Its a risky gambit," Wolf said, noting that though IBM makes little from the division, the company could be hit with a drop in its core business if customers see a drop in quality or reliability in a product tied to IBMs services and existing server offerings, as the current PC division is.

/zimages/6/28571.gifAnalysts say that IBMs retreat from the PC business could shift the market balance to Asia.

The new company marks the end of a 23-year run from August 1981, when IBM launched its first IBM PC. While then the leader in mainframe computing, IBM hoped its small, personal computer would provide businesses with a new class of computers and add some revenue. But with the acceptance of the PC by enterprises, the move turned out to be much more than that.

/zimages/6/28571.gifRead a historical analysis covering the rise and fall the IBM PC.

Meanwhile, Gartner, a research firm headquartered in Stamford, Conn., recently released a report positing that three of the top 10 PC vendors would depart the market by 2007. Now the countdown begins for the other two makers.

The report cited a halving of sales growth and profit margins for the period 2006-08, compared with 2003-05, as the primary cause. Gartners analysis showed a drop in growth rates from 11.3 percent to 5.7 percent annually, and revenue growth down to 2 percent from 4.7 percent.

The top 10 vendors include Dell, HP, IBM, Fujitsu/Fujitsu Siemens, Toshiba Corp., Acer America Corp., NEC Solutions, Legend, Gateway Inc. and Apple Computer Inc., determined by unit shipment. The report singled out the PC divisions of HP and IBM as vulnerable to being sold or spun off, "if their drag on margins and profitability are deemed too great by their parent companies."

IBMs PC division has not recently shown a loss, but profits have been nearly negligible—less than $100 million in the past year.

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