Mohan-san...a must read -->
> Name of Media: Nikkei Sangyo Shimbun
> Issue Date: March 30, 1999, morning
> Circulation: 225,000 copies
> Page: 32
> Filed by: Ikuo Saijo (New York)
>
> Will IBM PCs Disappear?
> PC Operations Show a $1 Billion Deficit for 1998
> IBM Shifts to Parts Supply
> "Era of PCs Is Coming to an End," says CEO
>
> New York, by Ikuo Saijo -- US-based IBM's PC business is beginning to
> become a burden to the company. Last year, only the PC-related operations
> showed a deficit - of $1 billion - while the company as a whole showed
> favorable growth. This clearly shows that its PC business is pulling IBM
> down. On the other hand, its OEM business of providing competitive
> companies like Dell Computer with parts and components such as HDDs and
> displays is growing quickly. The emphasis of the PC business is being
> shifted from "completed products" to "parts." Many observers are calling
> for IBM's withdrawal from the PC market. IBM - the "parent of PCs,"
> together with Apple, has reached a turning point.
>
> What does the alliance really mean?
>
> On March 4, IBM employees received an e-mail from David Thomas, senior
> vice president administrating IBM's PC business, in which he noted that
> the most important thing to users is not the parts used to build PCs but
> the degree of value that can be actualized by using those PCs.
>
> On the same day, IBM announced an alliance with Dell Computer to provide a
> total of $16 billion in parts. The stock market received this news
> favorably, such that IBM stock rose. On the other hand, the Personal
> Systems (PS) department, responsible for IBM's PC business, was shocked
> because they felt that supplying parts to Dell, a competitor, was akin
> providing the enemy with too great an opportunity. To suppress
> dissatisfaction in the PS department, as well as a general air of unease,
> David Thomas went on to emphasize that it is "not the individual parts but
> the total value of the product" that is important.
>
> The environment in which IBM is selling PCs is severe. In the profit and
> loss statements for each department, dating from fiscal 1998, the PS
> department showed a pre-tax deficit of $992 million. Although 1998 sales
> of the PS department reached $12.8 billion, that is, 14% of IBM's total
> sales, the deficit is increasing quickly. Although it is said that
> earnings have been improving since the end of 1998, due to a drastic
> clearance sale of stock in the first half of the year, the extent to which
> earnings will improve is unclear, given continued price competition.
>
> Withdrawal with honor
>
> The slump in IBM's PC business is not temporary. The PC business was in
> the red in 1996 and 1997, albeit marginally, when the market expanded
> quickly. Thus, any analyst would question why IBM continues to offer PCs.
> Although IBM occupies second place (after Compaq Computer) in terms of
> worldwide sales, it ranks fourth in the US market, having been overtaken
> by Dell Computer and Gateway 2000.
>
> The key to making a profit in the PC business is minimizing inventory.
> IBM has been wrestling with improvements in this area by imitating Dell
> Computer, said to be the most efficient manufacturer. There seems to be a
> limit, however, to the degree of improvement that IBM can achieve.
> Compared with Dell Computer, that holds absolutely no stock of completed
> products and which relies on direct sales, "IBM cannot easily reduce its
> stock levels because the company sells mostly through retail outlets.
> This is, therefore, a poignant example of a new company starting from zero
> and gaining an edge over existing companies with links to the past.
>
> Carl Hau, an analyst with US-based research company, Forrester Research,
> Inc. recommends "a withdrawal with honor from the PC market by setting up
> an alliance with Dell Computer." IBM is quickly expanding its OEM
> business to supply Dell Computer, Compaq, Apple, etc. with main parts such
> as HDDs and displays.
>
> In 1998, sales of IBM's OEM business increased by 18% over the previous
> year to $6.6 billion. If this pace continues, the sales of the parts
> business will exceed those of PCs by the year 2002, reversing the balance
> of power within the company. Currently, no manufacturer has a clear lead
> in terms of compact HDD technology, such that compact HDDs must be much
> more attractive than the PC business, which is dictated by the so-called
> Wintel standard. Hau says, "IBM should sell off its PC business to Dell
> Computer or, if necessary, consign OEM production to Dell."
>
> IBM itself is trying to get out of the traditional PC business. Lou
> Gerstner, CEO of IBM emphasized his ideas in a letter recently sent to
> stockholders, saying "IBM's PC era is coming to an end." With the arrival
> of the network era, the functions of the PC itself have decreased.
> Instead, a variety of terminals, such as digital household electrical
> apparatus, are expected to appear. "Network" links with communication
> circuits and central mainframes are planned.
>
> The departments that can best exploit this scenario are the service
> business for network construction for corporate customers, and advanced
> parts that are incorporated into variety of terminals including PCs. A
> time may soon come when a PC becomes merely a kind of terminal connecting
> to the network. This would greatly lessen the importance of PC production
> for IBM. In such a case, a PC product would better be procured from
> another manufacturer for incorporation into the system. Thus, a time may
> come when "IBM is no longer a PC manufacturer."
>
> Gerstner was installed as CEO in 1993 and displayed his skills at
> rebuilding the giant, when IBM was having problems brought about by
> downsizing. For the past few years, however, a slowdown in the reform has
> been noticeable, with US-based Business Week magazine going as far as to
> say, "Gerstner avoids risks too much in his company management and his
> lineups of so many businesses are like some boring investment trust."
>
> Affects on IBM Japan
>
> Investors take a dim view of IBM's loss-making PC business. If IBM
> decides to restructure its PC business, it will inevitably affect IBM
> Japan, which is central to the development and production of notebook PCs.
> Compaq, which develops, produces, and sells notebook PCs independently
> like IBM, will not be able to disregard IBM's abandoning the building of
> its own machines, and may be forced to follow suit.
>
> An IBM executive says, "Gerstner's target is to maximize profits. He has
> no taboos so far as attaining his target is concerned." Gerstner is said
> to attack while guarding. It is no exaggeration to say that the decision
> that Gerstner will make regarding his company's PC business is one of the
> greatest concerns of the US high-tech industry in 1999.
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