OEM business becomes both a blessing and a curse to other IBM divisions

IBM's push to become a leading component supplier presents some interesting challenges to—and opportunities for—the company's other product groups.Divisions such as the Personal Systems Group, which for years tried to leverage IBM technology to differentiate itself from other PC makers, now must sit back and watch the IBM Technology Group share its crown jewels with bitter rivals such as Dell Computer Corp.

IBM's push to become a leading component supplier presents some interesting challenges to—and opportunities for—the company's other product groups.

Divisions such as the Personal Systems Group, which for years tried to leverage IBM technology to differentiate itself from other PC makers, now must sit back and watch the IBM Technology Group share its crown jewels with bitter rivals such as Dell Computer Corp.

"For the first few months, there was tension between PSG and ITG," said an IBM official who requested anonymity. "But everyone realizes that there's a whole cultural shift [where] the Technology Group doesn't have to placate [IBM's] other divisions anymore."

Jim Vanderslice, ITG senior vice president and group executive, makes no apologies for the group's emphasis on outside partnerships. PSG, Vanderslice said, will have to be more creative, "differentiating their products in other ways, like price, inventory turns or manageability."

That's the goal of PSG, which within the next month plans to announce robust data security and physical security initiatives and features for its PCs.

"Most competitors are not investing in any of this stuff," said Anne Gardner, general manager of commercial desktops at IBM.

IBM scoffs at speculation that it will exit the PC business, as many observers speculated when the Armonk, N.Y., company signed its $16 billion deal with Dell, of Round Rock, Texas.

"We are absolutely committed to the PC business," Gardner said. "The fact of the matter is that PCs are an integral part of the business. E-business runs from the client to the back office and everywhere in between."

IBM is, however, using its increased emphasis on the OEM business to exit some product markets, with the prime example being the sale of its fledgling routing and switching business to Cisco Systems Inc. Earlier this year, it also sold its stake in a dynamic RAM joint venture back to Toshiba Ltd. But the PC business is a different animal, one analyst said.

"PCs are central to their brand image," said Roger Kay of International Data Corp., in Framingham, Mass. "They can't really give them up, even though IBM has had the slowest growth" of the major PC makers, Kay said.

While addressing the challenges ITG poses, IBM hardware groups could reap the benefits of the group's deals as well. IBM can work sales of other products and services into its third-party deals to keep revenues flowing into other divisions.

Case in point: A portion of the $2 billion Cisco agreed to spend over five years on IBM components will be used to purchase IBM PCs, said Selby Wellman, senior vice president of the Interworks Business Division at Cisco, in San Jose, Calif.

"IBM was not our leading PC vendor," Wellman said, "but they will become one."

It could turn out to be an effective way to stop the bleeding at PSG, which has lost a total of about $1.1 billion in the past 18 months.

Another example is Taiwan's Acer Group. Eager to give its e-business wares an international presence, Acer agreed to implement IBM's e-business solutions to automate its business-to-business transactions in Asia, according to Acer Chairman Stan Shih.

ITG hopes to bring IBM software into the deals as well, though it hasn't accomplished that goal just yet.

"We'd love to have [Lotus Development Corp.'s] Notes installed on every Dell desktop," said Tony Baker, director of business development at IBM.

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