IBM Sheds PC, Thin-Client Production

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IBM on Tuesday provided concrete evidence that it will not let its bottom line be dragged down by PC production.

Instead, the vendor consolidated its operations by shedding most of the manufacturing of two low-profit hardware lines.

IBM executives said the company sold its NetVista desktop computer production facilities in Research Triangle Park, N.C., and Greenock, Scotland, to Sanmina-SCI, a contract manufacturer in San Jose, Calif.

The company also committed to a three-year, $5 billion outsourcing deal with Sanmina-SCI for the production of the desktop PCs, based on IBM designs.

The production line sale, terms of which were not disclosed, did not include desktop manufacturing facilities elsewhere.

IBM also said the company will stop production of its thin-client line and will resell thin clients manufactured by Neoware Systems, King of Prussia, Pa.

Under the second agreement, IBM will make Neoware-branded thin clients available to its business partners, including products based on Windows CE, NT Embedded and XP Embedded, and Linux, along with Neoware's security and management software.

Neoware, for its part, will license thin-client technology from IBM.

The NetVista desktop PC and the thin-client product lines are both part of the same division of IBM under the direction of Fran O'Sullivan, general manager for the company's PC products and services.

"It's the beginning of a new year," O'Sullivan said. "We feel we now have the right strategy, and we wanted to get our teams working on this early in the year."

O'Sullivan said IBM had a "miserable" year in PCs in 2001 and has for the past 18 months been looking for a way to become competitive. By outsourcing production to Sanmina-SCI, IBM can focus on its core competencies of design and sales, she said.

Sanmina-SCI will produce desktop PCs for IBM both as SKUs and on a configure-to-order basis, Sullivan said.

About 60 percent of IBM's desktop PCs are sold direct, she said. However, included in that figure are desktops sold via solution providers under the company's Partner Choice program. "The Sanmina-SCI deal is completely transparent to our channels and our customers," she said.

The Neoware deal means the end of thin-client production for IBM, Sullivan said. While Sullivan would not say thin-client sales were falling for IBM, she said predictions that thin-client sales would exceed PC sales never materialized. "It doesn't make sense for us to invest in this area anymore," she said. "We can capitalize on Neoware's portfolios."

While the bulk of Neoware's thin-client sales go through solution providers, the signing of IBM as a reseller will not affect Neoware's' channel sales, said Mike Kantrowitz, president and CEO of the company.

Kantrowitz called the deal a channel-friendly one. First, since IBM is selling the thin clients with the Neoware name, it is paying the same for the products as all Neoware's solution providers, not the special OEM prices competitors charge their large customers.

Furthermore, as part of the deal, Neoware's solution providers will now have access to IBM services and support, Kantrowitz said.

Neoware sells both directly to solution providers and via distributors such as Tech Data, Ingram Micro and Alternative Technology.

Neoware's thin-client sales grew about 60 percent in 2001, compared with 2000, Kantrowitz said. Part of that increase came from the acquisition of the Capio line from Boundless Technologies last year.

"With our agreement with IBM, there are now only two players in the thin-client market now--us and Wyse," he said.

Solution providers said IBM's moves should not have much of an impact on their businesses.

Jim Newman, network administrator at Cornerstone Systems, a Santa Ana, Calif.-based IBM solution provider, said the IBM desktop PC business has been sporadic. "If I bid IBM, Dell [Computer and Compaq [Computer always come in lower. . . . The only way IBM can come close to Dell and Compaq is in small quantities," he said.

Desktop PCs are a commodity business, and so it is hard for IBM to be successful in this market at any rate, said John Khoei, CEO of Advanced Computer Consulting, a Los Angeles-based solution provider. "Maybe that's why they made the decision," he said. "Customers aren't concerned by it."

Todd Barrett, networking sales manager at CPU Sales and Service, a Waltham, Mass.-based solution provider, said he hopes IBM has done its due diligence and has the right plan in place.

Barrett said he remembers that NEC did an outsourcing deal with SCI a few years ago and for a couple of months was unable to deliver laptop computers. "We lost two major customers as a result," he said.

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