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Big business news this past week was made by IBM’s sale of its PC business. And it raised a lot of eyebrows, as well it should. Here was IBM, one of the original major players in the PC business—in fact, the company that gave that business the moniker, “PC”—selling it off.
But there were a lot more reasons for eyebrows to be raised—reasons that were hardly discussed in the press at all.
Why was IBM selling a business that grosses over $9 billion a year, for a paltry $1.8 billion? After all, just a few years ago Hewlett-Packard paid $25 billion for Compaq Computer. Okay, IBM wasn’t making a profit, but HP is actively developing their PC business, and with the IBM brand name, and $9 billion in additional annual sales, they could make the computers their way so as to control prices, and build their business substantially.
Robert X. Cringely writes weekly on technology. His widely-read columns are on the PBS web site. I’ve been a regular reader of his for years. (In fact, a suggestion of mine became the subject of two columns of his in 2001.) He writes:
Okay, so IBM didn’t want to make HP an even bigger competitor, then why not sell to a big Japanese player like NEC, which after all paid more than $1.8 billion for Packard Bell, of all things. The dollar is down, the yen is up, and the cost of corporate borrowing in Japan is almost free, so why didn’t IBM sell to a Japanese company? Or a European one? Or even another American company? Gateway paid more cash for e-Machines than Lenovo is paying for IBM; Wouldn’t Ted Waitt have ponied-up big bucks for the use of the IBM brand? Of course he would have.
So what’s the explanation? China. Population 1,295,000,000 (in 2000). Vast new market for information technology products. Cringely continues:
What is absolutely key to this deal is that the buyer is Lenovo, the largest Chinese PC manufacturer. Yes, the division was unprofitable and IBM would have eventually had to do something about it, but Sam Palmisano wanted a Chinese buyer and was willing to accept far less cash than he might have received elsewhere just to get the buyer he wanted.
IBM got rid of a headache and in doing so, gained unique access to what will shortly be the world’s largest IT market. This deal is all about China, not the U.S.
Doing business in China always requires having a partner. You don’t just set up an IBM China and start selling stuff. You find a local partner company and move into the market together. Now IBM’s partner will be Lenovo, the biggest, baddest PC maker in China, which is a good partner to have. IBM not only has its Chinese partner, it has a substantial equity position in that partner as a result of this transaction. That’s unique as far as I know. Chinese-U.S. corporate partnerships aren’t always the easiest marriages, but in this one, IBM actually has a vote. It also got Lenovo to move its global headquarters to the U.S. and accept an American CEO and 10,000 U.S. employees, which will have to change the way Lenovo runs its global business.
In any other U.S.-China corporate partnership, a top-level meeting requires a 20-hour plane ride, but the top guys at IBM and Lenovo can meet for lunch at Denny’s. All this is nothing but good for IBM. Look for this partnership to expand inside China to cover much more than just personal computers as IBM tries to become the number one or two player in every segment of Chinese IT.
And that’s how that works. What appears in most press accounts to be a head-scratcher, or a debacle for a great American company, is in fact a work of profound global strategic business insight.
