Analysis: IBM adjusts to harsh PC market

IDG News Service - Perhaps it isn't quite as surprising as if Ford suddenly decided to sell its Mustang sports car brand to Hyundai. But IBM's decision to sell its PC business to China's Lenovo Group Ltd. underscores the challenges that manufacturers face in the modern PC business, even for a company synonymous with the product.
As expected, the companies announced a deal this morning in China that calls for Lenovo to pay $1.25 billion in cash and equity for IBM's PC business, and for IBM to take an 18.9% stake in Lenovo.
In terms of PC shipments, IBM has ranked a distant third among vendors worldwide for several quarters, behind Dell Inc. and Hewlett-Packard Co.. However, its ThinkPad notebooks enjoy a strong reputation among corporate customers, who are impressed by the security and reliability features built into the product family. Also, IBM's historical role in the development of the PC also gives it some extra cachet among certain customers.
With all those factors in its favor, why would IBM seek a gradual exit from the PC business? Quite simply, it's just too difficult for most companies to generate steady profits selling PCs, said Roger Kay, vice president of client computing at market research firm IDC in Framingham, Mass.
Among top-tier PC vendors, Kay said, only Dell's direct sales model and vigorous inventory management have allowed it to consistently post profits.
Components such as memory and displays are subject to wild fluctuations in price. PCs are also harder than ever to differentiate, given that most PC vendors employ many of the same contract design and manufacturing firms in China and Taiwan. Dell manufactures some PCs in the U.S., but most other vendors have given up on domestic manufacturing.
Traditional hardware companies have spent much of the past few years looking for opportunities to grow their revenue outside of a rapidly maturing PC market.
Dell and HP have developed consumer electronics divisions, but IBM has spent more time boosting its high-end server and software businesses, as well as dramatically expanding its already huge services arm with the 2002 purchase of PricewaterhouseCoopers Consulting. IBM has cut costs in its PC division by outsourcing production and dumping its hard-drive business, but financial analysts looking for better margins have long called for IBM to sell off its PC operation.
The deal with Lenovo gives IBM almost a decade's worth of cash earnings from the PC business in a single deal, Kay said. At the same time, IBM will still be able to retain its important enterprise customers that