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Lenovo's transition to Dell and HP peer competitor should be measured in months rather than years


UPDATE: While this note was in development, the Committee on Foreign Investments in the United States (CFIUS) gave notice of review of Lenovo's purchase of IBM's PC unit on national security grounds over the "concern that Chinese operatives might use an IBM facility for industrial espionage." While that review may alter the timeline of Lenovo's international brand expansion, I do not think that it fundamentally alters the ability of Lenovo to quickly become a peer competitor to Dell and HP while it strengthens its market share in the Chinese and Asian market.

Market Assumption: The transition period between (1) Lenovo's purchase of IBM's PC group and (2) the appearance of robust Lenovo desktop and laptop products (products that challenge the likes of Dell and HP) is to be measured in terms of years.

Our Forecast: The transition period between Lenovo's purchase of IBM's PC group and the appearance of robust Lenovo products is far shorter than what the perceived wisdom (years) would indicate. The transition could easily be accomplished within twelve months, less with a more concerted effort, requiring little or no additional dependence on intellectual property (IP) diversion.

Rationale: Lenovo has already positioned itself to climb out at the top of the electronics supply chain. It lacks only in brand and distribution (both of which it believes it has purchased). Pricing pressures in the electronics industry are no less fierce than those between automotive manufacturers (OEMs) and their Tier One suppliers.  Dell, HP, and IBM, among others, have placed unrelenting pressure on their Taiwanese suppliers for price reductions.  It is understood in the sector, but seems not to have reached the level of actionable risk analysis, that this pricing pressure has driven much "Taiwanese" electronics to China with supplier badging remaining in Taiwan. (See activity location 2003 versus 2006.) 

Those same pricing pressures have forced Taiwanese producers to make the calculation as to when they will drop, or "go direct" in competition with, their US customers who are, in effect, increasingly reduced to marketing organizations.  Unlike the automotive industry, where Tier One suppliers do not have a ready substitute for the current OEM customers, the Taiwanese firms (with much of their manufacturing already located in China) will now have Lenovo as an option, a fact not lost on Lenovo in its acquisition of IBM's PC marketing arm.  This "onshore" Taiwanese production in concert with other industry trends allows Lenovo to emerge as a competitor to Dell or HP without a lengthy transition time.

History: Some terms are in order when examining the Taiwanese electronics manufacturing hierarchy, especially as the term "OEM" means something very different there. Their manufacturing sweep is broad: servers, PCs, laptops (notebooks), phones, MP3 devices (iPod included), calculators, spelling devices, language translators, calculators.

In increasing level of integration:

  • "Manufacturing engineering" of simplistic components or subassemblies.
  • "OEM," or Original Equipment Manufacturer, indicating that the vendor has design capacity but provides sub-system design for a client who owns the design and its intellectual property.
  • "ODM," or Original Design Manufacturer, who own their own intellectual property and designs and can resell them at will.
  • "IDM," or Integrated Design Manufacturer, an emerging term for a manufacturer producing turnkey product ready for market in their customer's trade dress.

Firms like Cisco, however, perceive the first three tiers are contract manufacturers who give away engineering design in order to get the manufacturing follow-on.  The two largest Taiwanese manufacturers are ODM Quanta and Inventec that sell their designs and equipment on to the likes of Dell and Gateway.  (There was an interesting case in which an almost identical PC occurred under both the Dell and Gateway badge, both provided by Quanta.) Quanta and Compal are the largest laptop producers, with Inventec third, while Inventec leads in servers. Certain Inventec suppliers market direct to end-users. Colleagues in the segment describe a marketing spin back in the US is which Dell and HP represent these designs as their own. While that occurs with some products in the higher ranges, much of Dell and a significant amount of HP product are actually Taiwanese designs.

Part 2

Globalization of knowledge work: Notebook PC design & development
Kenneth L. Kraemer, Jason Dedrick
Personal Computing Industry Center

Sloan Industry Studies Annual Meeting Sloan Industry Studies Annual Meeting

April 19, 2004

Taiwan's ODM/OEM Industry: A few snapshots
Jerome Fourel
22 Mar. 2004

IBM-Lenovo deal said to get national security review
By John G. Spooner
January 24, 2005

Lenovo: The making of a legend?
Mary Hennock
BBC News
8 December, 2004

Gordon Housworth

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