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TECHNICAL FOWL

February 9 is the start of Chinese New Year 4702, variously known as the Year of the Rooster or the Year of the Green Chicken (or Green Hen).  For computer buffs, however, a more suitable name might be the Year of the Big Blue Double Duck Out, which followed the At Least Five Years of the Ostrich.  IBM will be selling its PC business, which has been consistently losing money for the past five years, to a Chinese company.  Additionally, IBM will shift manufacturing of some Intel, AMD and some Power servers to a joint venture with another Chinese firm.

The proud new owner of IBM's PC business will be Lenovo, China's largest PC maker.  Lenovo is paying about $1.25 billion for the ailing IBM division.  This seems like a lot of money to pay for a business that, it turns out, has been consistent in only one way for at last the past five years: making losses.  IBM had buried the figures in prior financial statements by lumping PCs with other operations for reporting purposes and then apparently trying to ignore its mendacity and self-delusion.  But in a disclosure Form 8-K filed in December, IBM finally sketched out the $826 million in losses made by the division in the years 2001 through 2003 and said that another $138 million had gone down the drain during the first half of 2004.

One reason why the IBM PC business didn't do so well was that the machines didn't hold up very well.  Warranty costs hit IBM's PC business for $452 million in 2001, for $430 million in 2002, and $586 million in 2003.  During the first half of 2004, IBM laid out $365 million fixing faulty machines under warranty.  There is no reason to think IBM's experience during the second half of last year was much different from its reported results for the first half.

The original PC
Original IBM PC
It sold like hotcakes; it was downhill from there

To put the numbers in perspective, one might want to know that IBM's PC revenue from sales to the outside world was $9.745 billion in 2001, $8.962 billion in 2002, $9.288 billion in 2003, and $5.003 billion during the first half of 2004.  In other words, IBM's PC warranty costs came to roughly $46 per $1,000 in sales during 2001, $48 per $1,000 in sales during 2002, $63 per $1,000 in sales during 2003, and $73 per $1,000 in sales during the first half of 2004.  The trend is pretty clear, and it does not bode well for any company trying to sell computers into corporate environments where the cost of support when a PC fails may well exceed the vendor's cost of repair, and where the cost in lost worker productivity when a PC breaks down can exceed either.

What makes the picture even more alarming is the widely held belief, neither confirmed nor contradicted by IBM's SEC filing, that IBM's laptop computers are much better products than its desktop machines.  In the absence of more detailed information, it's a safe bet that IBM's competitors, particularly Dell, will be able to make some gains at the expense of the IBM brand, which Lenovo will be able to use for a while, if it wants to.

Chinese astrologers might well warn Lenovo and prospective buyers of IBM brand PCs that the Year of the Rooster promises to be interesting.  This Rooster business — in case you just happen not to have studied Chinese astrology — suggests that the coming year will involve a bit of adventure and daring, and can well include what the Greeks, without astrology, called hubris and tragedy.  Like the cocky rooster whose dawn crowing is both a boast and a signal to potential predators that there's a chicken dinner waking up, people who wish to heed the advice of Eastern soothsayers are advised to be alert to the risks as well as the rewards of boldness.  For even more detail, however, followers of the ancient beliefs have to delve deeper than the basic Rooster classification of the New Year.

Green chicken
Green Chicken
Creature of the year in Chinese tradition

The Chinese naming of years in a 12-year cycle is only a starting point for serious astrologers.  The 12-year cycles occur within another five-part cycle tied to what the ancients called elements.  This New Year is in the Wood group, and is associated with the color green.  That's why some references to the Chinese New Year refer to it as the Year of the Rooster while others say it is the Year of the Green Hen (as the chicken the astrologers refer to is a yin, or feminine, creature).  There's a lot more to this stuff, which we won't delve into.  We got as far as discovering that the New Year will see a continuation of the conflicts that occurred during the Old Year of the Monkey, something that seems more than apparent from the news.  The astrological twist is that, as bad as some of last year's conflicts may have seemed, the Year of the Monkey actually had in it an ameliorating element that we won't have during the Year of the Rooster.  If we don't work extra hard to reduce conflict, the astrologers suggest, we're dumb clucks about to go from the frying pan into the fire.

We don't expect the savvy executives of Lenovo, of IBM, or of Great Wall, the company that is IBM's joint venture partner in the low-end server business for the Asian markets, to pay too much heed to anything said by astrologers.  These captains of industry usually prefer the pronouncements of econometricians, market forecasters, financial analysts, and their own sturdy egos to the prognostications of shamans and pundits.  It would be terribly unfair to suggest that the people running IBM's PC business might have done better and hardly could have done worse if they had planned their business using the concepts of feng shui and not the notions of Ivy League business schools, so we won't dare suggest any such thing.  We won't point out that if IBM's PC people, early on, had made their biggest make-versus-buy decisions by flipping coins, the odds would have been that IBM would today have either its own PC operating system or its own PC processor family.

iPod
The Fruit of Apple
Expensive but wildly popular toy

Instead, we would like to focus on the most important immediate byproduct of IBM's decisions to jettison its PC business and to lead the high volume part of its server business to the edge of the deck like a horse aboard a becalmed sailing ship: silly questions raised by hack writers trying to say something interesting about the deals.

One question posed by many otherwise intelligent industry commentators was, "Is IBM going to buy Apple once it is rid of the old PC business?" The answer turns out to be another question: "Who in the world would want to buy an IBM-Pod?" As for the Mac business that's based on Power chips, well, chances are IBM would be happier if Apple quit that racket or switched to Intel chips if its CPU manufacturing operations bear any fiscal resemblance to its PC business, which is very possibly the case.

[Editor's Note: TPM still intends to send HW a check for this story, and contends that he wrote the aforementioned article "Crazy Idea Number 527: Should IBM Buy Apple?" on a day when there was no news and he was indeed wondering out loud about the possibilities.  Freedom of the press cuts both ways: to speak one's mind, one must let others speak their minds.]

Then there were the scaremongers, who wondered when IBM would offload the rest of its manufacturing to other Chinese companies.  The answer is obviously, "As soon as it can." Some of these people have also been watching IBM shift software and support operations to India, so it can learn how to do as well as Infosys, and suggesting that IBM doesn't particularly want any more employees in the USA.  That is not true.  Many people in IBM and many outside companies that work with IBM prefer American employees.  In particular, IBM's legal department and its outside law firms would be hard pressed to keep busy were it not for all the pension litigation instigated by American IBMers, and these diligent folk just hate having nothing to do.

The third question considered by the people who like to express the silliest notions, the people called industry observers, was this: "Why doesn't IBM buy Amazon and eBay so it can get rid of its decadent and obsolete sales force?" Actually, that's a very good question.  The answer is that IBM doesn't have enough money to do this now, but if it could sell off a few more chunks of its hardware, software, and services operations, and if the stock market then tanked in another dot-com fiasco, it just might be able to do this.

— Hesh Wiener January 2005


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