Bachman,
Dell is the first in making deal with IBM. Others to follow? Imitation is the highest form of flattery.
Paul
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Dell Deal Just The Start? Big Blue's Big
Parts Plan
Date: 3/18/99
Author: Doug Tsuruoka
IBM Corp. thinks the sum of its parts could make a pretty good whole.
So the world's largest computer company is taking its parts lines and
creating a business strategy from them - and it isn't afraid to sell to its own
rivals in big-ticket hardware.
Emboldened by a recent $16 billion deal to sell parts for PCs and large
computing devices to Dell Computer Corp., IBM is lining up similar deals
with a number of major firms.
''Dell was the coming-out party,'' said Dave Ernsberger, an IBM senior
vice president of component sales to hardware makers. ''It's the first of
what we hope will be many of these relationships.''
Ernsberger declined to identify other potential customers. But a source
close to IBM says deals are in the works with U.S. firms Compaq
Computer Corp., EMC Corp., Hewlett-Packard Co. and Sun
Microsystems Inc. Potential overseas partners include Taiwan's Acer Inc.
and Germany's Siemens AG, the source says.
Focusing on computer parts is forming the third pillar of a three-way
growth strategy for IBM being pursued by Chairman and Chief Executive
Louis V. Gerstner, company executives say.
Just as IBM put its weight behind nontraditional areas such as software and
computing services in recent years, Gerstner wants to make supplying parts
IBM's third big area of focus, Ernsberger said.
Some analysts question how important the new strategy will be for IBM in
the long run. But they add IBM - traditionally a maker of hardware such as
mainframe computers - will benefit increasingly from newer areas such as
services and parts-making in coming years.
IBM won't say if future parts deals will be as big as its pact with Dell,
which was announced March 4. But such sales are expected to swell
IBM's bottom line.
Executives at Big Blue say the Dell pact -which involves the sale of chips,
displays and disk drives over seven years - realigns IBM and allies such as
Dell in a new, Internet-based computer market. IBM is selling
Internet-related parts to Dell that give computers better capabilities in
electronic-business applications. Products include storage devices, switches
and chip boards.
Customer demand also is playing a role in Big Blue's move. IBM's clients
say they want better access to the company's parts and an integrated
approach in acquiring such items as Big Blue's e-business technology. IBM
created a new parts-oriented technology group in August to handle this
business, Ernsberger says.
IBM first started selling parts to other computer makers in 1993. Company
officials say parts sales have been growing by 40% a year.
Although it's selling to competitors, IBM says it gets benefits from allowing
Dell and other firms to use its technology. In addition to customer sales and
better relationships with a variety of industry players, IBM gets key
experience in supplying parts to clients.
IBM officials add that technologies are starting to converge, and products
such as cameras will use more computer parts. The company expects to
sell display panels and tiny disk drives to Japanese and U.S. camera
makers.
''IBM will not just sell parts to PC or (information technology) companies.
The world's changing,'' Ernsberger said. ''You will see new customers
-including camera companies like Canon and Kodak.''
IBM is ensuring its technology remains dominant by integrating its parts in
the products of big companies like Dell, says Jeffrey Maxick, analyst with
Madison Securities Inc. in Chicago. This is especially true in Web-related
parts.
''The overwhelming idea is that IBM has the best technology out there,''
Maxick said. ''It's most important for these other companies to develop a
relationship with the premier technology vendor.''
Analysts applaud the recent Dell deal but are skeptical about how much the
new strategy changes IBM's prospects. Most agree the Dell deal will have
a positive effect on the company's long-term performance, but it won't have
an immediate effect on earnings.
A big concern is that even with a new parts strategy, it takes a lot of sales
to bring about dramatic changes in a company the size of IBM, which had
$81.7 billion in 1998 revenue. IBM tends to grow earnings a step at a time
rather than by leaps and bounds. Analysts doubt the Dell deal or others like
it will do much to alter Big Blue's performance.
''It's good for IBM and it's good for Dell,'' said Gary Helmig, analyst at
SoundView Technology Group Inc. ''This is not the remaking of IBM.''
IBM says its $16 billion parts pact with Dell is new business and doesn't
include the roughly $500 million a year in parts it already sells to Dell.
Some analysts are skeptical, saying the figure includes parts IBM already
sells to Dell.
''It's not $16 billion. Only a portion of that figure is incremental business,''
said Chuck Jones, analyst with Salomon Smith Barney Inc.
IBM insists the Dell deal consists of all new business. The company adds
the final tally is expected to be well over $16 billion.
But SoundView's Helmig says IBM will add a few billion dollars in annual
revenue only if it strikes more parts deals. That's still a relative drop in the
bucket for a company of IBM's size, he adds.
Money from parts sales also takes time to work its way into IBM. That's
one reason Helmig hasn't revised his estimate of $87.6 billion in revenue for
IBM in fiscal 1999. Helmig also questions how far IBM can use its new
parts strategy to reap profits from the Web.
''How many deals in e-business are you going to do? Everybody wants to
be part of e-business solutions,'' he said. ''And how much of e-business is
going to be incremental to the rest of (IBM's) sales?''
(C) Copyright 1999 Investors Business Daily, Inc.
Metadata: IBM DELL CPQ EMC HWP SUNW ACEFF SMAWY I/3572 I/3578 E |
