IBM sought a China partnership, not just a sale

IBM sought a China partnership, not just a sale | CNET News.com

In July 2003, Sam Palmisano, the chief executive of IBM, traveled to Beijing to explore the sale of the company's personal computer business. But he did not start by making the usual visit with executives of IBM's preferred partner, Lenovo, China's largest personal computer maker.

Instead, Palmisano first engaged in a bit of old-fashioned courtship. Before formally approaching Lenovo, he sought permission from the parents, by meeting privately with a senior Chinese government official in charge of economic and technology policy.

IBM was not merely looking to sell its PC business, Palmisano told the official, but had bigger aspirations of creating a global enterprise, with IBM contributing technology, management, marketing and distribution

he idea, Palmisano explained, would be to build a modern and truly international Chinese-owned corporation. The move, he added, would demonstrate China's desire to take that next step toward economic maturity by investing abroad instead of merely serving as a manufacturing hub for the rest of the world.

The senior Chinese government official, Palmisano recalled, responded, "That is the future model for where we see China headed."

"There were simpler transactions we could have done," Palmisano said, adding, "What we wanted was not a divestiture, but this strategic relationship with Lenovo and China."

The sale of IBM's personal computer business to Lenovo for $1.75 billion, announced last Tuesday, is "a three-dimensional deal," Palmisano said. The sale provides IBM with a path to leave a business that is large but not profitable. It is also the latest step in IBM's shift toward services, software and specialized hardware technology from mainframes to microprocessors for computer game consoles, all of which promise higher profits than the fiercely competitive PC business.

Yet the most intriguing, and potentially most important, dimension of the deal for the company is that it is IBM's China card. The new Lenovo, folding in the IBM personal computer business, will be China's fifth-largest company, with $12.5 billion in sales in 2003, and the Chinese government will remain a big shareholder. IBM is eager to help China with its industrial policy of moving up the economic ladder, by building the high-technology engine rooms to power modern corporations and government institutions with IBM services and software.

The pact could give IBM "an extremely important leg up in China," Laura Conigliaro, an analyst with Goldman, Sachs, whose investment banking arm advised Lenovo, wrote in a report last week. "Ultimately, this is the single most valuable benefit to IBM from this transaction."

The payoff for IBM, if any, will come gradually. The Lenovo deal, in which IBM will take an 18.9 percent stake in the Chinese company, is a sign of IBM's commitment to China. IBM is placing 10,000 of its employees, its brand for five years and some its prestige in Lenovo's hands. There is a lot more at stake than the $1.25 billion in cash and stock Lenovo is paying, and $500 million in debt obligations it will assume.

In China, IBM is using a variation of the globalization formula that has worked well for it in Japan, Europe and elsewhere. IBM patiently nurtures close ties with the government and becomes a premier employer and a stellar corporate citizen--so much so that it is eventually regarded more like a local company than an outsider.

"We don't have any special deal with the Chinese government or any other government really," Palmisano explained last week over lunch at IBM headquarters. "It's a much more subtle, more sophisticated approach. It is that if you become ingrained in their agenda and become truly local and help them advance, then your opportunities are enlarged.

"You become part of their strategy," he added.

IBM is no newcomer to China. It set up a business there 20 years ago, and there are now 4,200 IBM employees in China. In 1995, the company opened a research laboratory, which now employs 150 Chinese scientists. Five years ago, IBM established a Chinese software development lab, which today has 500 engineers working on Linux projects alone. (IBM is the leading corporate supporter of Linux, a free operating system that is an alternative to Microsoft Windows.)

With the Lenovo deal, IBM is forging even closer links with China. While there were other offers for its PC business, Palmisano pushed hard for this deal--more a bridge to another economy than a simple sell-off.