View from Silicon Valley- IBM /Lenovo Part 1: The underlying market(s)
(c)
copyright View from Silicon Valley, 2004. All rights reserved.
Raise your hand if you remember Osborne Computers.
How about Commodore? Anyone ever own a Zenith PC? How many of you remember Honeywell was in the PC business in
the early-80's? Packard Bell? Eagle? DEC? Sinclair? Many well-known and sought-after early-80's
PC suppliers, not to mention those not so well-known, dropped out. Several no longer even exists.
During the
latter part of my five years with AMD, one of the few things I believed from Jerry Sanders was (roughly), "It's all about
winning and losing. If you're not gaining market share, you are losing." Sanders was referring to CPU shipments
but this clearly also applies to today's PC market.
When the Lenovo /IBM deal was announced, a wide range of adjectives
and verbs were used to describe the deal. Lenovo had one take, IBM produced another. Chinese newspapers described
the deal one way, the US papers another.
Stepping back from the "spin" it is useful to stop and study the underlying
PC market. Then maybe we can see if these various pronouncements ring true once the underlying reality is understood.
(We will study the pronouncements in "IBM/ Lenovo Part 2.")
You've heard it before but it bears repeating: over 100
railroad companies eventually condensed down to a handful today. Roughly 60 US automobile companies are now down to
only three. Over the last 20 years, the US PC market has shrunk from 50+ manufacturers, all begging Intel for
enough allocation to reach 10% market share, down to maybe a dozen.
Today, the top five or six PC suppliers account
for 65%+ of US demand. Based on the history of railroads and automobiles, the firms below the top tier would not seem
to have bright prospects for sales or profit growth, probably not even for survival...
According to Gartner, the recent
US PC market is: ------------------------------------ 2Q04
2Q204 Market Rank Vendor Shipments Share ------------------------------------- 1
Dell 4,396 32.9% 2
HPQ 2,574 19.3% 3 Gateway/eMachines
752 5.6% 4 IBM
750 5.6% 5 Apple
495 3.7% (Top 5 = 67.1%) Others
4,391 32.9%
Total
13,357 100.0% --------------------------------------
While the global market has a couple different
players, and is not as concentrated in the top five, Gartner shows a lot of similarity: -----------------------------------------
2Q04 Market Company Shipments
Share ------------------------------------------ 1 Dell
7,080 16.5% 2 HPQ
6,130 14.3% 3 IBM
2,535 5.9% 4 Fujitsu/Siemens 1,506
3.5% 5 Acer 1,302
3.0% (Top 5 = 43.2%) Others 24,249
56.7%
Total 42,802
100.0% ------------------------------------------ Note: All data includes desktop and mobile PCs plus X86-32 servers.
Add
NEC and Toshiba at just over 2% share each, Lenovo at 2% and Gateway/ eMachines at just under 2%, to bump up the total up
a little. After those, it falls off pretty fast.
As an aside, Apple Computer's global market share fell from 2.1% in
2Q04 to 1.8% 3Q04 (3.7% down to 3.2%/3Q04 in the U.S). Despite small, and declining, MAC market share, a lot of people
seem to think the iPOD will somehow insulate Apple from continued PC share and margin decline. This seems unlikely.
Particularly when an avalanche of new, lower-cost MP3 players starts to arrive from China in 2005.
Back to the original
point, the above market share data makes it hard to explain why an apparently small and little-known player like Lenovo was
able to cut a deal with IBM. Lenovo bought not only IBM's PC business, but also the "ThinkPad" brand?!?
It is
somewhat less-difficult to explain when you study the China PC market (also per Gartner): ------------------------------------------ 2003
2003 3Q04 Rank Company Shipments Share
Rank ------------------------------------------ 1 Lenovo 3.545M
27% 26.4% 2 Founder 1.314M 10% 10.3% 3
TongFang 995,000 8% 8.7% 4 Dell
860,000 7% 8.1% 5 IBM
642,000 5% 6.0% 6 HPQ
442,000 3% 5.2% (64.7%) 7 TCL
410,000 3% 8 Acer 215,000
2% 9 Hedy 200,000 2% 10 Great
Wall 172,000 1% (68%) ------------------------------------------ (Note: Annual China figures
are annual vs. US/global numbers use quarterly.)
A few comments:
Just like the US PC market 20 years ago, the
ranks of China PC suppliers are compressing. In 2003, you needed eight suppliers to reach 65% TAM. By 3Q04 it
was down to six. Now 2005 will be down to five with January, 2005 yet to actually arrive.
According to reports,
Dell gained share in China this year despite abandoning the lowest-priced portion of the market (where volume is high but
PCs ship with no operating system). Dell's mail order model has struggled in an environment where seeing and touching
something before buying is considered the only sure way to prevent being cheated.
HPQ (Hewlett-Packard/Compaq)
gained share, but reportedly on the back of aggressive price cuts. Assuming this is accurate, the results figure to
hit HPQ's bottom line in the very near future.
When you see Lenovo is actually 5.5x the size of IBM inside China, maybe
the deal is a little less surprising. When you learn IBM is first in notebooks while Lenovo is first in Desktops, synergy
is more apparent.
In Part 2, we will look at who "won" in this deal -- and who didn't...
