News analysis: Lenovo's initiation begins
By Amy Wang, Beijing
my-esm
(12/27/2004 9:26 AM EST)
The snake swallowed the elephant. Now it must digest the beast.
IBM Corp.'s personal computer business is the elephant, the snake is Lenovo Group, which has agreed to pay $1.75 billion for Big Blue's PC division in a bid to establish itself as a global player in the increasingly margin-challenged market.
How well Lenovo does in its efforts to integrate the former IBM unit and become a global business will be largely deternined by how quickly and effectively it integrates the two companies' supply chain, according to analysts.
The first indications are that the company might be starting well. By relocating its worldwide headquarters to New York, instead of staying in China, the new Lenovo signals it is ready to become a global enterprise. More importantly, the company will avoid alienating IBM PCs old hands and hopefully tap their supply chain expertise.
Many in the electronics industry will be watching Lenovo's transition closely as the IBM-Lenovo merger could be the first of numerous trans-Pacific transactions involving Chinese and North American businesses.
Lenovo executives said steps to integrate the two companies will be conducted over a period of three years. In the first 18 months, Lenovo will migrate to IBM supply chain; the second 18 months will witness efforts to streamline the products of the two companies.
The new Lenovo also aims to cut operating costs although industry observers said this goal may be more difficult to achieve due to wide disparity in the compensation packages of IBM and Lenovo employees.
"Lenovo will be certainly challenged because the two companies are so different. IBM is a big country style company and people are very expensive. Lenovo is more like an army style," said P.S. Lin, a former IBMer and deputy director of business development at Taiwan Semiconductor Manufacturing Co. Ltd. "Lenovo can survive if the company can well integrate IBM's brand name and Lenovo's operational cost into the new company, and run the company by international practices."
Yuanqing Yang, chairman of the new Lenovo, believes the company's operating costs could be considerably lowered but acknowledged this may not be noticeable for a couple of years because he needs to continuously spend the same amount of money or more to keep 10,000 IBM staff on the payroll.
Analysts said Yang had already spent a big amount on what they termed "comfort fees" to IBM's senior employees following the announcement of the transaction.
When Lenovo and IBM executives work shoulder to shoulder, the gap in their compensations packages would become more apparent and problematic, they said.
"To balance compensation between Lenovo and IBM staff, I believe a good way is to choose something in between," said Fisher Liu, an analyst at SMIC, "Yang has to make a decision if/how to increase compensation of his executives." William Lee, general manager of Asia Pacific of Jazz Semiconductor, showed more concerns from the management side and productivity.
"Lenovo needs to improve its productivity to compete against Dell and HP," said Lee. "Lenovo needs 22-days turn-around time to produce one computer while Dell needs only 4 days."
"To improve work efficiency, Lenovo needs to establish some big supply centers to allow for timely supply of components and materials," said Liu of SMIC. "It may take 3-5 years for Lenovo to improve its work process."
Lenovo's Yang believes the company can do even better. By flexing its new purchasing muscle and consolidating supply base, the company can lower its components costs. In 2003, IBM's PC unit posted sales of $9.56 billion and Lenovo $2.97 billion. Combined, the two companies could squeeze significant savings from their suppliers, Yang noted.
Optimizing the supply chain is a different matter though. Lenovo must now sort through its own supplier list and the one it is inheriting from IBM and decide which component makers, logistics firms and manufacturing sites to keep.
Some analysts wonder if the dilution of the IBM franchise in North America could trip up the company since Lenovo is practically unknown to many customers. In China, though, Lenovo will be able to leverage the high-level quality associated with IBM over the five years it is allowed to use the ThinkPad name.
There are other advantages for Lenovo. Gaixuan Meng, chief engineer of TCL Corp Research Centre, said the deal would allow Lenovo to learn many advanced supply chain management practices from IBM.
Lenovo executives said they expect the company to increase its market share in China due to closer government relationship and improved technical innovation.
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