Taiwan's Computer Industry Suffers Blow With Lenovo's IBM Buyout

The recent acquisition of IBM's personal-computer business by mainland China's Lenovo is deeply worrying to Taiwan's homegrown brand-name computer manufacturers and its IBM-contracted retailers and computer suppliers.

The US$1.7 billion deal, announced in Beijing on Dec. 8, will propel Lenovo, now China's top computer maker and eighth in the world, to third place globally. Lenovo's revenues will more than triple to US$10 billion, from US$3 billion now, and its share of the worldwide computer market will shoot up from 3% to 8%.

With its new acquisition, Lenovo will be able to use the Big Blue brand on all its notebook and desktop computers everywhere in the world, for five years. The Chinese computer giant will ship a total of 15 million computers annually, trailing only Dell with 33 million and HP with 30 million.

Taiwanese manufacturers expect to lose some of the business they formerly conducted with IBM, since Lenovo is likely to look for more competitive—that is, cheaper—contract suppliers. The huge orders that Lenovo will place will give it added clout in forcing prices down. Local long-term IBM contract suppliers, including Wistron Corp. and Quanta Computer, now worry about a further shaving of their profit margins.

Things could become even worse if Lenovo boosts its self-content ratio. Both Lenovo and IBM, industry analysts note, have large assembly plants in the mainland.

For Taiwanese brand-name suppliers, especially Acer Inc., the continued rise of Lenovo is a bigger threat than that faced from any Western suppliers. With the advantages of the low costs in its home-base area and access to the famous IBM brand, Lenovo will become even more fiercely competitive in the world market.

Acer Feels the Pain

Acer will feel the additional pressure with acute pain. It is the No. 1 computer brand in Europe and has set a goal of becoming No. 3 in the world by 2007. To achieve that goal it has been vigorously developing the China market, where Lenovo earns most of its revenues.

The IBM acquisition will allow Lenovo to expand its overseas PC sales, which now account for only 10% of its total revenues, more rapidly. Yang Yuanqing, Lenovo's newly appointed chairman, vowed recently that his company would seek to become No. 1 in the world.

Both Acer and Lenovo are using experienced and well-connected foreign executives in their struggle for position. Acer has promoted the general manager of its Italian branch, Gianfranco Lanci, as president of its global operations. Lenovo has taken on IBM's senior vice president, Stephen M. Ward, as its CEO.

In response to the Lenovo-IBM deal, Acer executives say that their company will make all-out efforts to win the competition just as it did when HP acquired Compaq, which presented a similar situation. The earlier merger took no heavy toll on Acer, they insist, thanks to open competition in the world computer market. The key to success, they stress, is a good marketing strategy and Acer has done everything that needs to be done.

The recent deal has sparked a dispute between IBM's Taiwan branch and its local distributors. Contract retailers say that they will sell other brands if IBM is not forthcoming with a guarantee that their bonus rates will not change and that all of their products are made by IBM.

Some domestic retailers point out that IBM-made notebook computers cost at least 10% more than other brands in the Taiwan market. The extra cost is justified by the quality and reliability of IBM products, and the retailers fear that loyalty to the IBM brand will be eroded by the participation of Lenovo, whose image is far inferior to IBM's.

Many retailers say that they will no longer stock IBM computers but will import them only to fill orders until a clearer picture of Lenovo's PC business emerges.

Executives at Synnex Technology International Corp., IBM's biggest contract dealer in Taiwan, say that they do not expect Lenovo to change the strategy set by IBM in the local market for six months at least. Nor do they expect IBM Taiwan to order them to sell Lenovo products. The executives say, however, that they would consider selling Lenovo products if they are profitable.

Squeezing Taiwan's Room for Survival

H.N. Huang, a former general manager of HP Taiwan and one-time director general of Taiwan's government-backed Institute for Information Industry (III), believes that Lenovo will now put a further squeeze on the room that Taiwanese brands have to survive in the mainland market. He suggests that Taiwanese brand suppliers, including Asustek Computer and BenQ as well as Acer, should pinpoint important regional markets in mainland China instead of going head-to-head with Lenovo all over the country there.

Chairman J.S. Hu of the Cabinet-level Council for Economic Planning and Development thinks that Lenovo's acquisition of the IBM unit will not have much of an effect on Taiwan's computer suppliers, since they already control more than 80% of global PC production. He suggests, nevertheless, that local suppliers should learn from European countries like Finland in creating advantages in terms of distribution channels and technological leadership instead of concentrating on manufacturing alone.

IBM is seen as the big winner in the deal with Lenovo. It has acquired 18.9% of Lenovo's stock, assuring it an expanding share of the mainland Chinese market for servers. Lenovo's solid connections with the government are also a guarantee of smooth operations in the mainland.

In addition, on Dec. 12 IBM decided to team up with another mainland Chinese supplier, Great Wall Computer, to tap the Asia-Pacific market for servers—a market estimated to be worth US$1 billion annually. Cooperation with Great Wall will help IBM make its servers more competitive by manufacturing them in the mainland.