Wednesday, December 29, 2004

A definitive perspective on the IBM Lenovo deal

Much has been speculated about what will work and what will fail expectations in this deal, and much has been trying to find the silver lining on behalf of analysts on either side of the fence, those who lean towards big blue or those who feel it sinking. One perspective interests me and makes the deal in retrospect not at all interesting and very predictable indeed. Looking back at why Creative did not succeed at the digital music player business and why apple owns it today one can learn the lessons Lenovo learnt in it. Creative had the cheaper comparable product with similar quality. What it did not have is the marketing and brand name that apple had. To summarize what it lacked was management skills and not technical skills. Lenovo has a reasonable market share in the Chinese PC market share. It is only natural that it will lose some as the entry of foreign players becomes more and more viable to them economically. The PC market is one which tends to move toward a low entropy situation, where all players are similar and there isn't one big player as there is simply nothing one manufacturer can give that another can't. And since all end up giving the same thing switching and compatibility issues aren't there. The operating system make for instance is so strange that. Apart from Linux, which thrives on compatibility, every other system wants to trap users in it for eternity. if it hadn't been for the selfishness of predecessors of Steve Jobs and Sam Palmisiano things might have been different.
So coming back to Lenovo. No one doubts the Asian management on low cost and fairly reliable manufacturing and assembling. But their record at managing international companies is suspect with the exceptions of Toyota and Sony. Even Nissan, a phoenix of the auto sector, needed French eyes to see the obvious. Lenovo goes on to buy IBM's proven and newly resurgent managerial prowess in this deal and already has wasted no time in shifting its headquarters to new York. To find such foresight in a public sector undertaking of China should scare our Uncle Sam. The Chinese seem to be beating them at their own game. First you had American contractors hire Chinese labor to make the products cheap and sell them below par to get the market in America. So they ended up paying 30% of the cost to china. Now china buys the American manager's brain for a mere percentage of the cost and makes it cheap in china with no government problems of outsourcing to stop it and takes all the money back home. The only things stopping more of this is that not many companies have the kind of money Lenovo has. But isn't this a self catalytic process!

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