IBM Focuses On Services, Outsourcing Units

exit from the personal computer business

Armonk, N.Y.-based IBM helped bring personal computing to everyday users with its introduction of the IBM PC in 1981. But as prices fell and competition mounted from the likes of Dell and Hewlett-Packard, IBM started selling its factories in the late 1990s.

And in 2003, it sold the last PC plants it owned alone -- a factory in Scotland and the lease on a plant in Mexico. IBM contracted with other companies like Sanmina and Great Wall Technology to assemble the PCs and ThinkPad laptops carrying the IBM name.

The company's new focus is its services and outsourcing businesses, which it calls Business Transformation Services, a market IBM CEO Sam Palmisano says is worth $500 billion a year. For example, it signed a $300 million, 10-year technology outsourcing deal with the government of British Columbia Friday. Under the deal, 170 provincial employees will be offered jobs at IBM.

The New York Times reported Friday that IBM is in serious discussions with the Lenovo Group, China's biggest maker of personal computers, and at least one other unidentified prospective buyer for a sale that could bring between $1 billion and $2 billion. Other possible buyers could include Japan's Toshiba, analysts said.

The newspaper cited anonymous sources close to the negotiations. The Wall Street Journal online also reported the company was in talks with Lenovo, and Chinese papers had reported the story as early as June.

IBM spokesman John Bukovinsky refused to comment Friday. Spokesmen at Lenovo's Beijing headquarters and Hong Kong offices did not return calls Friday.

In the wake of the reports, IBM shares rose $1.32, or 1.4 percent, to close at $97.08 Friday on the New York Stock Exchange.

Before the introduction of PCs, only hulking mainframes could complete computer-level computations. The machines were so expensive, only the biggest companies and wealthiest universities could afford one. But as personal computers shrunk in size and price over the last two decades, they have become fixtures on the desks of everyone from college students to rocket scientists.

The pressure is on for prices to go even lower. To the executives in charge of corporate technology, "PCs are beginning to look more like pencils," said Eric Johnson, director of the Center for Digital Strategies at Dartmouth University's Tuck School of Business. "They are just a commodity appliance," he said.

As prices have dropped, PCs have become a less important part of IBM's business.

PC sales account for about 10 percent of IBM's total sales, and PC profits have been slim. Morgan Stanley estimates that the PC business contributed less than 1 percent of the company's earnings per share.

This year has been a strong one for IBM's PC business, with sales from personal computers, printers and point-of-sale terminals increasing 17 percent in the first nine months of the year, driven by strong sales of ThinkPad laptops.

But 2003 was tougher. Excluding a lift from the weak dollar, sales fell 2.5 percent, pushed down by the price declines.

Behind the lower prices are components that consistently become smaller and more powerful, making the actual production of computers a less-skilled job than it was decades ago.

"PC manufacturing has sunk to the point of low-end apparel," Johnson said. "In skill level, there's probably less skill [involved] than someone working at a sewing machine."

As a result, companies that are household names, such as Microsoft, Motorola, Dell and Xerox have decided manufacturing wasn't worth their while and shifted some or all of their production to companies most people have never heard of, including Flextronics International Ltd., which has deals with all of them.

Flextronics, based in Singapore, had sales of $14.5 billion in its 2004 fiscal year, which ended March 31.

Another reason the big guns got out: Even as manufacturing has become simpler, it isn't always profitable. Flextronics has lost money in each of the last four years.

IBM headed for the factory exits, too. While it designs all its PCs, even its best-known products, such as the ThinkPad, are made by outside vendors, such as a Chinese company called Great Wall Technology Ltd.

IBM also has deals with equipment makers Solectron, Sanmina, Wistron and Quanta Computer.

For a buyer, the most attractive part of the business might be IBM's brand name, which "is arguably a greater asset than its market share," Morgan Stanley analyst Rebecca Runkle wrote in a research note.

IBM ranks third behind Dell, Round Rock, Texas, and Hewlett-Packard, Palo Alto, Calif., in personal computer unit sales, according to Gartner, a Stamford, Conn.-based provider of research and analysis on the information technology industry.

If IBM sells the business, one company that may feel pressure is competitor Hewlett-Packard, whose CEO, Carly Fiorina, has been "defending their PC business for years," Dartmouth's Johnson said.

"The argument has been that you need that branded white box to stay on the top of mind of Fortune 500 chief information officers," he said. "What IBM is saying is that's not so important anymore."

AP business writers Skip Wollenberg in New York and Elaine Kurtenbach in Shanghai contributed to this report.

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