From Computer Business Review, a sister publication.
Early in September, trading in shares in Acer, the Taiwanese computer assembler, began to creep up on a remarkable rumor that, a few years ago, would have been considered quite ridiculous. IBM, the high quality computer manufacturer which lays claim to having created the world PC industry, was reported to be ready to subcontract a massive slice of its PC manufacturing to Acer, a competitor which it once derided for producing goods of insufficient quality. According to the detailed reports, IBM plans to buy between 70,000 to 80,000 low-end desktop PCs a month, almost twice Acer’s PC output from Taiwan. In addition, the two companies were said to be discussing plans for Acer to build IBM laptop computers. The deal would almost certainly be the largest order ever won by a Taiwanese company.
To date, the order has not been confirmed, and IBM has denied it is in discussions with Acer on a deal of this scale. Conversations have taken place but there is no outlook for this type of deal, said a senior executive in IBM’s PC Company. Newspapers and news agencies, meanwhile, have reported the deal with a degree of skepticism. Such reticence is unsurprising. IBM, is after all, a public company with a huge commitment to PC manufacturing in the US, Europe and Asia. If IBM was to buy PCs on this scale, it would signal lay-offs and closures at its Raleigh, North Carolina plant, and possibly at other PC sites around the world.
It would also signal to the competitors and shareholders that IBM, with all its advantages of scale and all its expertise, has found that the only way to make its PC business viable is to get someone else to manufacture its machines. If it has reach ed this conclusion – at least for the low- end desktops – it would not be at all surprising. There are several good, even compelling reasons why IBM should back away from its involvement at the low-end of the business. First, there is the evidence of IBM’s recent track record in PC manufacturing. For each of the last five years, IBM has either made heavy losses in PCs, or it has made only a small profit. In 1994, for example, forecasting problems resulted in a $700 million inventory write off. Recently it has attempted to overcome its repeated failure to accurately forecast sales and to match supply with demand by moving to wards a make-to-order manufacturing model. But this has proved difficult because of the scale of IBM’s operations and the size of its markets. Equally compelling is the evidence coming from other companies. Many PC makers – Digital Equipment, Olivetti, Packard Bell, Apple, Fujitsu- ICL – have been forced to retrench and reorganize. The inability to accurately gauge demand, coupled with the erosion of margins caused by falling prices, is a repeatedly cited problem. Recently, even Hewlett-Packard, a company widely admired for its manufacturing excellence and its forecasting and logistics expertise, admitted that it was struggling to make a profit from PCs, in spite of racing up the industry sales charts to the number four position. IBM, under the management of Lou Gerstner, has made it clear that it fully intends to remain and fight it out in the PC market, whatever it takes. But in the background, there has already been some cautious consolidation. T he company’s factory at Boca Raton, in Florida, for example, has been closed, while last year it gave a huge order – worth some $60 million – to the EliteGroup of Taiwan to supply pre-assembled motherboards for its PCs. Outsourcing the entire manufacturing of PCs to a massive supplier such as Acer would merely be taking it a step further. Other suppliers such as Compaq routinely give large manufacturing contracts to companies which have plants in countries such as Taiwan and the Philippines, where labor costs are low.
Stephen Greenhalgh of consultants Coopers & Lybrand, which has been studying the economics of PC manufacturing and logistics, thinks that many PC makers are now re-assessing their commitment to manufacturing. Companies manufacture for cost leadership, to manage complexity, to achieve high quality, to improve service, and to protect intellectual property, he says. But none of these reasons now hold up in what has become a relatively low-technology assembly industry. And, he notes, volume manufacturers, contrary to the popular view, may have no advantages other then volume purchasing discounts. The bigger you are, the more difficult it is to introduce and manage complexity. This is a problem that IBM has been trying to overcome for more than a decade.
