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January 5, 2005

Lenovo: PC profitability battle ahead

Beijing, China-based Lenovo agreed to buy IBM's PC division in December for $1.75 billion. However Lenovo will face an uphill battle to generate a profit following its acquisition if the latest financial figures from IBM are any indication.

By CBR Staff Writer

Financial figures from IBM suggest its recently-sold PC business is currently making a loss.

Figures provided by IBM to the Securities and Exchange Commission at the turn of the year show that IBM’s PC Division made a loss of $139 million in the six months to June 30, 2004, on revenue of $5.2 billion.

That six-month loss alone would be enough to wipe out the $134 million income Lenovo generated in its full year ended March 31, 2004, on revenue of $2.97 billion, and IBM’s figures indicate that it is a long-term problem.

The PC division made a loss of $258 million for the year ended December 31, 2003, following up on a loss of $171 million in 2002, and $397 million in 2001. It is the first time that financial details of IBM’s PC business have been available, as they are usually rolled in to the figures for its Personal Systems Group.

The good news for Lenovo is that revenue for IBM’s PC business has risen in the past 18 months. Revenue fell 8.3% from $10.1 billion in 2001 to $9.2 billion in 2002, but then rose 3.6% to $9.6 billion in 2003. Revenue of $5.2 billion for the first half of 2004 was up 21.4% on the first half of 2003.

Nevertheless, Lenovo will have to reduce the costs of IBM’s PC division if it is to make a profit. The fact that most of the manufacturing of the ThinkPad notebooks, ThinkCenter desktops, and ThinkVision monitors has already been outsourced by IBM indicates how much of a battle this could prove to be.

The complexities of the acquisition are more than financial because Lenovo will also have to cope with the integration of 10,000 IBM employees, and a move to a new US-based management team and headquarters.

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With the Think brand enjoying considerable potential, and a hugely lucrative global PC market there to exploit, the results could be worth it, but Lenovo will have to invest to ensure that these potential returns can be realized.

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