Lenovo's IBM server deal mimics multi-market growth strategy used by Samsung and others

Entering new markets helps expand scale -- and profits

Lenovo Group's deal announced Thursday to buy IBM's x86 server business for $2.3 billion gives the Beijing company another tech segment where it can expand beyond PCs, smartphones, tablets and smart TVs.

Entering new markets in tech has in recent years become a preferred way for many large companies to grow, and that seems especially true for companies in Asia. Others who have followed the same tack include Samsung of Seoul, South Korea, and Huawei in Shenzhen, China. Samsung makes a staggering variety of products -- from chips to tablet displays, washing machines to smartwatches -- that Lenovo so far does not.

"Huawei, Samsung and Lenovo all realize they need to become a platform play and have a robust product portfolio with attractive cost structures to gain share," Brian Marshall, an analyst at ISI International Strategy and Investment Group, said in an email interview. "That's part of the global play book."

Marshall credits Lenovo, the world's largest PC vendor, for keeping PC costs low and gaining market share. "Their stock has done great as a result of solid execution in a challenging market," Marshall added. "Now, they are trying to do the same thing in servers, and perhaps networking and storage will be next."

Marshall said in a note to investors that he doesn't believe there will be significant regulatory hurdles to the IBM-Lenovo server deal from either the U.S. or China.

Lenovo bought IBM's ThinkPad division in 2005, helping it expand into the business PC market. But PCs are declining in popularity as more people move to tablets and other devices. Meanwhile, Lenovo has produced Android smartphones for sale mainly in China, including the S720, A800, S890 and K860, as well as IdeaTab tablets.

Lenovo's success with the x86 servers will come from "walking a fine line between low cost, high quality and differentiation" from competitors, said Patrick Moorhead, an analyst at Moor Insights & Strategy. Those qualities have worked well for Lenovo with ThinkPad notebooks and small business servers, "but not as well in consumer PCs and phones."

Still, Moorhead said the kind of "mega-growth" that Lenovo is undertaking in various markets is designed to increase its overall production scale.

"Increased scale means increased buying power, lower costs and the ability provide a lower price than competitors," he said. Samsung also has increased scale tremendously in the past decade, although it focuses more on vertical integration of products from chips to displays for consumers, while Lenovo focuses on a horizontal strategy that covers commercial and consumer markets, Moorhead noted.

Samsung also has emerged in the last year as a mobile management provider for businesses with the Knox security software in its newer smartphones and tablets.

The emerging landscape for some of the largest Asian tech companies is about enlarging control of their computer component supply chain in nearby cities to boost profits. It's something few U.S. and Canadian companies are doing profitably, said Jack Gold, an analyst at J. Gold Associates.

"Even Apple outsourced its supply chain to Foxconn," Gold said. "BlackBerry is doing the same thing. IBM did that with PCs and now with servers. The Far East supplier network can control the entire components supply and make their products closer to the component suppliers for a lower cost, which means high profits.

"You really can't make consumer-based products in local, country-specific factories anymore, as the economics of scale will kill you on profit marginsthat's the bigger lesson of Lenovo's move," he said.

Unlike Samsung, Lenovo is unlikely to expand to make washers and dryers, Gold said.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at  @matthamblen or subscribe to Matt's RSS feed. His email address is mhamblen@computerworld.com.

See more by Matt Hamblen on Computerworld.com.

Copyright © 2014 IDG Communications, Inc.

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